HISTORY

http://www.sjsu.edu/faculty/watkins/germany.html
(Meron ditong Model ng concept, not sure kung para saan di ko masyado binasa
haha PAKIHIWALAY NA LANG PO. SALAMUCH)

THE ECONOMIC HISTORY OF GERMANY

 The Industrial Revolution of Germany

The Industrial Revolution began about a century later in Germany than it did in
England. Germany did not exist as a political unit until the latter part of the
nineteenth century. First came the Zollverein (Toll Union) in 1833 that, by
abolishing tolls between the various German principalities, made Germany into a
common market. For a period of decades, until about 1860's, there were attempts
at imitating in Germany the industrialization that had taken place elsewhere in
Europe. This imitation was only moderately successful. In 1870 the modern German
nation was created and thereafter major industries were founded that led to the full-
fledged industrialization of Germany.

The southern side of the Rhine Valley of Germany was incorporated into France
by Napoleon. At that time France was, despite its economic shortcomings with
respect to England and Belgium, quite a bit more advanced than Germany. This
period of forced integration with France stimulated economic change in the Rhine
Valley. In 1815 this area became independent of France but retained some of the
economic and institutional reforms of the Napoleonic period. Serfdom and the guilds
were abolished. Other remnants of feudalism were ended which restricted
commerce and industry.

Prussia initiated the concept of a common market in 1818 and in 1833 a treaty
extended the Zollverein to the larger states of Germany, although Austria, by
Prussian design was excluded.
A rail system for Germany developed rapidly under the promotion of the German
state governments. The rail system increased the demand for steel and coal. The
coalfields in the Ruhr Valley were fully developed and made Germany into the
foremost coal producer in Europe. A steel industry also developed and the stimulus
of the coal and steel development expanded the banking and capital markets
available to Germany. This helped other industries such as the chemical and
electrical industries develop in the latter part of the nineteenth century. The
German chemical industry became the most advanced in the world.

 The Weimar Republic of Germany

The German Imperial government made many errors of judgment in connection
with World War I. It first assumed that there would be a limited war between the
Austro-Hungarian Empire and Serbia. When the Russian Empire decided to support
Serbia the situation changed completely. The German Empire decided to support its
Austro-Hungarian ally. But it knewn that France was committed by treaty to support
Russia so Germany aiding Austria-Hungary would put it at war with France.
Germany thought it could win by quickly striking France through an invasion across
Belgium. A quick defeat of France would enable it to later deal with the gargantuan
but lethargic Russian army. But in the west the war turned into four years of soul-
searing trench warfare. Eventually the Russian army collapsed in the east while the
western front held firm.
The German government, expecting a short, victorious war, did not make provision
for covering the cost. It borrowed funds instead of raising taxes because it thought
it would be able to impose the cost of the war on the losers as reparation payments.
Even with the Russian Army taken out of the war and German forces
concentrated on the west the western front not only held against German offensives
but the Allied counteroffensives pushed German forces back. The Gernan general,
Ludendorf, recommended that Germany seek peace. Popular uprisings and a mutiny
in the navy made ending the war critical. It appeared that a revolution within
Germany was breaking out. The Kaiser abdicated and a Republic was proclaimed.
By 1918 there was general disillusionment with the conduct of the war and it
showed up in terms of the political composition of the national legislature, the
National Assembly. In the election of January 1919 the composition of the vote was
as follows:

Composition of the Vote for the National Assembly in Germany in January 1919
Political Party Acronym Orientation
Proportion of Vote
Social Democratic Party of Germany SPD Socialist 38%
German Democratic Party DDP Socialist 38%
Center Party DDP Centrist
German National People's Party DNVP Conservative Nationalist 10%
German People's Party DVP Conservative Nationalist
Independent Social Democratic
Party of Germany ISPD Socialist 8%
Other Parties 6%

The vote reflected a general support for armistice and for socialism for the peace-
time economy. It also reflected a polarization with 10 percent or more of the vote
for strongly nationalistic conservative parties.

If the advocates of peace in Germany expected some leniency in the terms of peace
on the basis that Germany sued for peace without being actually militarily defeated
then they were sorely disappointed because the Allied Powers imposed draconian
terms. The Treaty of Versailles signed in June of 1919 called for:
 Demilitarization of the Rhineland and its occupation by Allied military for
fifteen years
 The surrender of Alsace-Lorraine
 The surrender of norther portion of Schleswig-Holstein
 The surrender of territory for the Polish Corridor (which included the German
city of Dantzig)
 The surrender of all overseas colonies
 The limitation of the German army to 100,000
 The acceptance of responsibility for the war
 The payment of reparations
 The name Weimar Republic comes from the name of the city in which the
constitution was formulated.
Germany experienced hyperinflation in 1923 and chronic high unemployment
throughout the 1920's as a result of the inability of the government to cope with the
problems of Germany effectively. When the unemployment rate jumped in 1930 as
a result of the onset of the Great Depression the support for the Weimar Republic
drained away.

(To be continued.)

 National Socialist Germany

Walter Eucken was a professor of economics at the University of Freiburg, Germany

and an architect of the economic reforms that led to the Economic Miracle. In this
article Eucken wanted to explain the problems and weaknesses of centrally
administered economies such as that of National Socialist (Nazi) Germany and the
Soviet Union.

The Nazi economic system developed unintentionally. The initial objective in 1932-
33 of its economic policy was just to reduce the high unemployment associated with
the Great Depression. This involved public works, expansion of credit, easy
monetary policy and manipulation of exchange rates. Generally Centrally
Administered Economies (CAE's) have little trouble eliminating unemployment
because they can create large public works projects and people are put to work
regardless of whether or not their productivity exceeds their wage cost. Nazi
Germany was successful in solving the unemployment problem, but after a few
years the expansion of the money supply was threatening to create inflation.

The Nazi Government reacted to the threat of inflation by declaring a general price
freeze in 1936. From that action the Nazi Government was driven to expand the role
of the government in directing the economy and reducing the role played by market
forces. Although private property was not nationalized, its use was more and more
determined by the government rather than the owners.

Eucken uses the case of the leather industry. An individual leather factory produces
at the direction of the Leather Control Office. This Control Office arranged for the
factory to get the hides and other supplies it needed to produce leather. The output
of leather was disposed of according to the dictates of the Leather Control Office.
The Control Offices set their directives through a process involving four stages:

1. The collection of statistical information by a Statistical Section. The Statistical

Section tried to assemble all the important data on past production, equipment,
storage facilities and raw material requirements.
2. The planning of production taking into account the requirements of leather by
other industries in their plans; e.g. the needs of the Shoe Control Office for supplies
of leather. The available supply of hides limited the production of leather. There had
to be a balancing of supply and demand. The result of the planning of all the control
offices was a Balance Sheet. There was some effort at creating some system for
solving the planning, such as production being limited by the narrowest bottleneck,
but in practice the planning ended up being simply scaling up past production and
planning figures.
3. The issuing of production orders to the individual factories.
4. Checking up on compliance with the planning orders.
In practice the authorities of the control offices often intervened and there was
continual negotiation and political battles as the users of products tried to use
political influence to improve their allocations. The prices of 1936 made little
economic sense, particularly after Germany was at war. So there economic
calculations using the official prices were meaningless. In particular, the profitability
of a product was of no significance in determining whether it should be produced or
not. Losses did not result in a factory ceasing production; the control offices made
sure that it got the raw materials and that the workers got rations of necessities.

At the beginning of the war the Government established a priorities list for
allocating scarse resources. Activities associated with the war got top priority and
consumer goods production was near the bottom of the list. If two users wanted
gasoline any available stocks went to the user with the highest priority. This seems
reasonable but, in fact, it led to major problems. Suppose one use of gasoline is for
trucks to haul raw materials to factories. If the Government always gives the
available gasoline to the Army then the truckers cannot deliver supplies to the
factories and they shut down and eventually other factories dependent upon them
also shut down. At first the Government tried to handle the problem by revising the
priorities list and moving up uses such as gasoline for trucks. But whatever uses got
put at the bottom eventually created bottlenecks. In the middle of the war the
Government abolished the priority list. It was an unworkable system.

The problem with making production decisions without reference to relevant prices
is that the control offices may dictate the production of goods which are of less
value to the economy than the opportunity costs of the resources that go into their
production.

Because of the mistakes and failures of Centrally Administered Economies there are
often black markets operating. Although the authorities typically persecute people
for dealing in these markets the reality is that such markets are essential for
preventing a collapse of the Centrally Administered Economy.

Production decisions may be made on political criteria that are economically foolish,
such as locating a factory in a region to benefit the supporters of some political
figure. Even aside from such corruption of the decision process the centrally
administered economy suffers from major weaknesses. The centrally administered
economy can mobilize resourts quickly for big investment projects but there is no
guarantee that there will be a balance of investments. For example, there may be
big programs to build railroads but not enough trains to make use of those
railroads.

Although Centrally Administered Economies may appear to be efficient and effective

initially their errors and inefficiencies accumulate and eventually result in
stagnation if not collapse. Often the apparent successes of such economies are just
illusions. Outsiders who do not know how such economies really work are often
fooled by these illusions.

Centrally Administered Economies (CAE's)

I. Strengths
A. Can easily eliminate unemployment with large investment projects. This is
because a CAE does not consider whether the benefits of investment projects
exceed their costs.
B. Resources can be mobilized quickly.
II. Weaknesses
A. Decisions are often made on noneconomic basis
B. Resources are not used productively or efficiently
C. Investment is often unbalanced so much is ineffected
For a contrast, see the theory of the decentralized market economy as described by
Friedrich von Hayek .

 Post-World War II Collapse and Recovery

The Occupation
The Occupation Authorities in the American, British and French Zones kept the
economic policies of the Nazis in place. There were price controls, rent controls,
wage controls and extensive general regulation of the economy. The net result was
an economic disaster and the creation of near-famine conditions. But the loosening
up of controls brought up the problem of the past excessive expansion of the
money supply. Inflation had been suppressed during the Nazi years by price
controls. With the removal of price controls came inflation.

 The Currency Reform of June 1948

The long-anticipated currency reform came in June of 1948. The old Reichsmark was
replaced with the new Deutschemark. The conversion was as follows:

TYPE OF ACCOUNT AMOUNT CONVERSION RATE

Individuals 600 Reichsmarks 1 Reichsmark: 1 Deutsche Mark
Individuals exceeding 600 Reichsmark 10 Reichsmark: 1 Deutsche
Mark
Companies 60 Reichsmarks
per employee 1 Reichsmark: 1
Deutsche Mark
Public Authorities One month's revenue 1 Reichsmark: 1
Deutsche Mark
All others 10 Reichsmark: 1 Deutsche
Mark

Notes:

Balances exceeding 600 Reichsmarks:

Supposedly converted at 10 Reichsmarks: 1 Deutsche Mark but the method of
payment resulted in the conversion being actually 10 Reichsmarks: 0.65 Deutsche
Mark or 15.4 Reichsmarks: 1 Deutsche Mark.

Debts were converted at the 10:1 ratio.

Official prices and pension payments were converted at a 1:1 ratio.
The Reichsmark balances and Reichsmark bond holdings of commercial banks were
wiped out but these banks recieved "equalization claims" equal to 4% of debt (25:1
conversion ratio) and deposits with the central bank of West Germany equal to 15%
of demand deposits and 7.5% of time and savings deposits. The required reseverve
ratios were 7.5% for demand deposits and 3.75% for time and savings deposits so
the banks had excess reserves to support lending.
The central bank of West Germany was called the Bank Deutscher Lander until 1957
when its name was changed to Bundesbank (Buba).

1948-1960 Spontaneous Growth: The Miracle Economy

The monetary, economic and institutional reforms of June 1948 were followed by
about 18 months of consolidation with stable to slightly falling prices.

Industrial production increased by 24% in 1949 and 12% in the first half of 1950.
Over the period the average annual growth rate was 15% per year.

The employment growth picture was mixed. Labor requirements reflect not only the
level of production but also the level of labor productivity. Labor productivity was
increasing dramatically in the recovery period. In 1948 there were 600,000 new jobs
but a loss of 370,000 old jobs for a new gain of 230,000. But in 1949 the were only
260,000 new jobs and a loss of 410,00 old jobs for a net loss of 150,000 jobs.

On top of this mixed picture on job creation there was an influx of 9 million refugees
(expellees and immigrants).

The major problem was the capital shortage. Not only was there the problem of the
war destruction of capital but the reparation confiscations of capital equipment
depleted the capital stock and made entrepreneurs afraid to invest because of the
possibility that their investments might be confiscated in the future.

Profitability was increasing because wage rates were not increasing as fast as prices
and productivity. In other words, unit labor costs were declining.

The prescription for dealing with the capital shortage problem by the Keynesian
economic advisers to the government was three-fold:

1. expansionary monetary policy

2. tax incentives for saving
3. investment planning by the government
William Ropke, an economist whom Americans would call conservative but in
European terminology is called liberal, recommended increasing the interest rate to
encourage savings.

The Tax Law Adjustment Acts of June 1948 and April 1949 created tax breaks for
capital creation. West Germany had a high, graduated income tax imposed by the
Allied Occupation Force after World War II modeled upon the New Deal income tax
of the U.S.

There were income tax reforms over the period 1948 to 1955 to reduce the severity
of the income tax program.

The West German government was directed involved in investment planning in the
"bottleneck sectors" of mining, steel and energy.
West Germany retained the rent control program created during the days of the
Weimar Republic, continued by the Nazis and later by the Occupation. There was
thus a chronic shortage of housing which the government tried to alleviate with
construction subsidies and public housing.

German foreign trade recovered dramatically despite the loss of Eastern European
markets. Foreign trade increased 84.4% per year over the two year period 1948-
1950. Throughout the 1950s it increased 16% per year in real terms. Thus West
Germany very quickly wiped out its trade deficit and commenced running a trade
surplus. Initial exports were raw materials such as coke from coal and scrap metal
but by the end of the 1950s exports were mainly manufactured goods. Also by the
end of the 1950s Western Europe had become the major customer and major
supplier for West Germany.

Towards Managed Growth

The 1960s and 1970s:

Full or overutilization of capital

Labor Force fully utilized. Unemployment rate approximately 1 percent.
Undervalued currency.
Influx of Gastarbeiter.
The Role of the Gastarbeiter (Guest worker). (To be continued.)

Demand Management to Control Inflation and Establish External Balance

In the mid-1960's the German parliament created an independent five-person panel
called The Council of Economic Experts. Karl Schiller, who was Minister of
Economics from 1966 to 1972, carried on an extensive debate with the Council.

The Recession 1967. (To be continued.)

Growth rates declined from miracle economy levels to normal levels for modern
industrial economy. The Harrod-Domar growth model gives some insights into the
dynamics of growth. See

The Harrod-Domar Growth Model.

Let Y be GDP and S be savings. The level of savings is a function of the level of GDP,
say S = sY. The level of capital K needed to produce an output Y is given by the
equation K = pY where p is called the capital-output ratio. Investment I represents
an important component of the demand for the output of an economy as well as the
increase in capital stock. Thus ΔK = pΔY. For equilibrium there must be a balance
between supply and demand for a nation's output. In simple case this equilibrium
condition reduces to I = S. Thus,

I = ΔK = pΔY
and I = S = sY
Therefore ΔY/Y = s/p

The equilibrium growth rate of output is equal to the marginal propensity to save to
the ratio of the capital-output ratio.
1973-1989 Facing the Slowdown
A. Persistent unemployment (nature of unemployment, slack growth)
B. Adjustment to external challenges (Protectionist temptations, current account
debate, international monetary coordination)
Unification
For material on German reunification go to this site.
(To be continued.)

Sources:

Herbert Giersch, Karl-Heinz Paque and Holger Schmieding, The Fading Miracle: Four
Decades of Market Economy in Germany, Cambridge University Press, 1994
Walter Eucken, "On the Theory of the Centrally Administered Economy: An Analysis
of the German Experiment,"
https://en.m.wikipedia.org/wiki/Economy_of_Germany#:~:text=The%20economy
%20of%20Germany%20is,fifth%20by%20GDP%20(PPP).&text=The%20service
%20sector%20contributes%20around,%25%2C%20and%20agriculture%200.9%25.

History
Main article: Economic history of Germany
Age of Industrialization Edit
The Industrial Revolution in Germany got underway approximately a century later
than in the United Kingdom, France, and Belgium, partly because Germany only
became a unified country in 1871.[41]

Train factory of August Borsig in 1847.

The invention of the automobile. Karl Benz with his wife, Bertha Benz, in a Benz
Viktoria, model 1894.
The establishment of the Deutscher Zollverein (German Customs Union) in 1834
and the expansion of railway systems were the main drivers of Germany's industrial
development and political union. From 1834, tariff barriers between increasing
numbers of the Kleindeutschland German states were eliminated.[citation needed]
In 1835 the first German railway linked the Franconian cities of Nuremberg and
Fürth – it proved so successful that the decade of the 1840s saw "railway mania" in
all the German states. Between 1845 and 1870, 8,000 kilometres (5,000 mi) of rail
had been built and in 1850 Germany was building its own locomotives. Over time,
other German states joined the customs union and started linking their railroads,
which began to connect the corners of Germany together. The growth of free trade
and of a rail system across Germany intensified economic development which
opened up new markets for local products, created a pool of middle managers,
[clarification needed] increased the demand for engineers, architects and skilled
machinists, and stimulated investments in coal and iron.[42]

Another factor which propelled German industry forward was the unification of the
monetary system, made possible in part by political unification. The Deutsche Mark,
a new monetary coinage system backed by gold, was introduced[by whom?] in
1871. However, this system did not fully come into use as silver coins retained their
value until 1907.[43]

The invention of the cruise ship. Albert Ballin's SS Auguste Viktoria in 1890.
The victory of Prussia and her allies over Napoleon III of France in the Franco-
Prussian War of 1870-1871 marked the end of French hegemony in Europe and
resulted in the proclamation of the German Empire in 1871. The establishment of
the empire inherently presented Europe with the reality of a new populous and
industrializing polity possessing a considerable, and undeniably increasing,
economic and diplomatic presence. The influence of French economic principles
produced important institutional reforms in Germany, including the abolition of
feudal restrictions on the sale of large landed estates, the reduction of the power of
the guilds in the cities, and the introduction of a new, more efficient commercial
law. Nonetheless, political decisions about the economy of the empire were still
largely controlled by a coalition of "rye and iron", that is the Prussian Junker
landowners of the east and the Ruhr heavy industry of the west.[44]
Regarding politics and society, between 1881 and 1889 Chancellor Otto von
Bismarck promoted laws that provided social insurance and improved working
conditions. He instituted the world's first welfare state. Germany was the first to
introduce social insurance programs including universal healthcare, compulsory
education, sickness insurance, accident insurance, disability insurance, and a
retirement pension. Moreover, the government's universal education policy bore
fruit with Germany achieving[when?] the highest literacy rate in the world – 99% –
education levels that provided the nation with more people good at handling
numbers, more engineers, chemists, opticians, skilled workers for its factories,
skilled managers, knowledgeable farmers and skilled military personnel.[45]

By 1900 Germany surpassed Britain and the United States in steel production. The
German economic miracle was also intensified by an unprecedented population
growth from 35 million in 1850 to 67 million in 1913. From 1895 to 1907, the
number of workers engaged in machine building doubled from half a million to well
over a million. Only 40 percent of Germans lived in rural areas by 1910, a drop from
67% at the birth of the Empire. Industry accounted for 60 percent of the gross
national product in 1913.[46] The German chemical industry became the most
advanced in the world, and by 1914 the country was producing half the world's
electrical equipment.

The rapid advance to industrial maturity led to a drastic shift in Germany's

economic situation – from a rural economy into a major exporter of finished goods.
The ratio of finished product to total exports jumped from 38% in 1872 to 63% in
1912. By 1913 Germany had come to dominate all the European markets. By 1914
Germany had become one of the biggest exporters in the world.[47]

Weimar Republic and Third Reich Edit

Main article: Economy of Nazi Germany

Gross national product and GNP deflator, year on year change in %, 1926 to 1939,
in Germany. Via google to Pdf-file of German publication.
The Nazis rose to power while unemployment was very high,[48] but achieved full
employment later thanks to massive public works programs such as the
Reichsbahn, Reichspost and the Reichsautobahn projects.[49] In 1935 rearmament
in contravention of the Treaty of Versailles added to the economy.[48]

Weimar and Nazi Germany By Stephen J. Lee[50]

The post 1931 financial crisis economic policies of expansionary fiscal policies (as
Germany was off the gold standard) was advised by their non-Nazi Minister of
Economics, Hjalmar Schacht,[48] who in 1933 became the president of the central
bank. Hjalmar Schacht later abdicated from the post in 1938 and was replaced by
Hermann Göring.

The trading policies of the Third Reich aimed at self sufficiency but with a lack of
raw materials Germany would have to maintain trade links but on bilateral
preferences, foreign exchange controls, import quotas and export subsidies under
what was called the "New Plan"(Neuer Plan) of 19 September 1934.[51] The "New
Plan" was based on trade with less developed countries who would trade raw
materials for German industrial goods saving currency.[52] Southern Europe was
preferable to Western Europe and North America as there could be no trade
blockades.[53] This policy became known as the Grosswirtschaftsraum ("greater
economic area") policy.

Eventually, the Nazi party developed strong relationships with big business[54] and
abolished trade unions in 1933 in order to form the National Labor Service (RAD),
German Labor Front (DAF) to set working hours, Beauty of Labour (SDA) which set
working conditions and Strength through Joy (KDF) to ensure sports clubs for
workers.[55]

West Germany Edit

See also: Wirtschaftswunder

The Volkswagen Beetle was an icon of West German reconstruction.

Beginning with the replacement of the Reichsmark with the Deutsche Mark as legal
tender, a lasting period of low inflation and rapid industrial growth was overseen by
the government led by German Chancellor Konrad Adenauer and his minister of
economics, Ludwig Erhard, raising West Germany from total wartime devastation to
one of the most developed nations in modern Europe.

In 1953 it was decided that Germany was to repay $1.1 billion of the aid it had
received. The last repayment was made in June 1971.

Apart from these factors, hard work and long hours at full capacity among the
population in the 1950s, 1960s and early 1970s and extra labor supplied by
thousands of Gastarbeiter ("guest workers") provided a vital base for the economic
upturn.

East Germany Edit

Main article: Economy of the German Democratic Republic
By the early 1950s the Soviet Union had seized reparations in the form of
agricultural and industrial products and demanded further heavy reparation
payments.[56] Silesia with the Upper Silesian Coal Basin, and Stettin, a prominent
natural port, were lost to Poland.

Exports from West Germany exceeded $323 billion in 1988. In the same year, East
Germany exported $30.7 billion worth of goods; 65% to other communist states.
[57] East Germany had zero unemployment.[57]

In 1976 the average annual GDP growth was roughly 5.9%.[58]

Federal Republic Edit

As of 2013, Germany is the third largest exporter and third largest importer in the
world, producing the largest trade surplus as a national economy.
The German economy practically stagnated in the beginning of the 2000s. The
worst growth figures were achieved in 2002 (+1.4%), in 2003 (+1.0%) and in 2005
(+1.4%).[59] Unemployment was also chronically high.[60] Due to these problems,
together with Germany's aging population, the welfare system came under
considerable strain. This led the government to push through a wide-ranging
program of belt-tightening reforms, Agenda 2010, including the labor market
reforms known as Hartz I - IV.[60]

In the later part of the first decade of 2000 the world economy experienced high
growth, from which Germany as a leading exporter also profited. Some credit the
Hartz reforms with achieving high growth and declining unemployment but others
contend that they resulted in a massive decrease in standards of living, and that its
effects are limited and temporary.[60]

The nominal GDP of Germany contracted in the second and third quarters of 2008,
putting the country in a technical recession following a global and European
recession cycle.[61] German industrial output dropped to 3.6% in September vis-à-
vis August.[62][63] In January 2009 the German government under Angela Merkel
approved a €50 billion ($70 billion) economic stimulus plan to protect several
sectors from a downturn and a subsequent rise in unemployment rates.[64]
Germany exited the recession in the second and third quarters of 2009, mostly due
to rebounding manufacturing orders and exports - primarily from outside the Euro
Zone - and relatively steady consumer demand.[60]

Germany is a founding member of the EU, the G8 and the G20, and was the world's
largest exporter from 2003 to 2008. In 2011 it remained the third largest
exporter[65] and third largest importer.[66] Most of the country's exports are in
engineering, especially machinery, automobiles, chemical goods and metals.[67]
Germany is a leading producer of wind turbines and solar-power technology.[68]
Annual trade fairs and congresses are held in cities throughout Germany.[69] 2011
was a record-breaking year for the German economy. German companies exported
goods worth over €1 trillion ($1.3 trillion), the highest figure in history. The number
of people in work has risen to 41.6 million, the highest recorded figure.[70]

Through 2012, Germany's economy continued to be stronger relative to local

neighboring nations.[71]
https://en.m.wikipedia.org/wiki/Economic_history_of_Germany
Economic history of Germany
Until the early 19th century Germany, a federation of numerous states of varying
size and development, retained its pre-industrial character, where trade centered
around a number of free imperial cities. After the extensive development of the
railway network during the 1840s, rapid economic growth and modernisation
sparked the process of industrialisation.[1] The largest economy in Europe by 1900,
Germany had established a primary position in several key sectors, like the
Chemical industry and steel production.[2][3][4] High production capacity,
permanent competitiveness and subsequent protectionist policies fought out with
the USA and Britain were essential factors for Germany's entry into the World Wars.
By the end of World War II, the country's economic infrastructure was completely
destroyed. West Germany embarked in its program of reconstruction with financial
support provided by the Marshall Plan and, guided by the economic principles of the
Minister of Economics Ludwig Erhard excelled in the economic miracle during the
1950s and 1960s. East Germany's last remaining economic facilities were
dismantled by the Soviet occupation force as one of the first steps of the war
reparations plan.[5] The country was embedded in the Eastern Bloc system of
socialist planned economy. Contemporary Germany employs a highly skilled work
force in the largest national economy as the largest exporter of high quality goods
in Europe, like cars, machinery, pharmaceutics, chemical and electrical products
with a GDP of 3.67 trillion USD in 2017.[6][7][8][9][10]

Medieval Germany Edit

Medieval Germany, lying on the open Northern European Plain, was divided into
hundreds of contending kingdoms, principalities, dukedoms/duchyes,
bishoprics/dioceses, and free cities. Economic prosperity did not mean geographical
expansion; it required collaboration with some, competition with others, and an
intimate understanding among government, commerce, and production. A desire to
save was also born in the German experience of political, military, and economic
uncertainty.[11]

Towns and cities Edit

Lübeck, 15th century

Cologne around 1411

Total population estimates of the German territories range around 5 to 6 million by
the end of Henry III's reign in 1056 and about 7 to 8 million after Friedrich
Barabarossa's rule in 1190.[12][13] The vast majority were farmers, typically in a
state of serfdom under the control of nobles and monasteries.[14] Towns gradually
emerged and in the 12th century many new cities were founded along the trading
routes and near imperial strongholds and castles. The towns were subjected to the
municipal legal system. Cities such as Cologne, that had acquired the status of
Imperial Free Cities, were no longer answerable to the local landlords or bishops,
but immediate subjects of the Emperor and enjoyed greater commercial and legal
liberties.[15] The towns were ruled by a council of the - usually mercantile - elite,
the patricians. Craftsmen formed guilds, governed by strict rules, which sought to
obtain control of the towns; a few were open to women. Society had diversified, but
was divided into sharply demarcated classes of the clergy, physicians, merchants,
various guilds of artisans, unskilled day labourers and peasants. Full citizenship was
not available to paupers. Political tensions arose from issues of taxation, public
spending, regulation of business, and market supervision, as well as the limits of
corporate autonomy.[16]Cologne's central location on the Rhine river placed it at
the intersection of the major trade routes between east and west and was the basis
of Cologne's growth.[17] The economic structures of medieval and early modern
Cologne were characterized by the city's status as a major harbor and transport hub
upon the Rhine. It was governed by its burghers.[18]

Hanseatic League Edit

Main article: Hanseatic League

Main trading routes of the Hanseatic League

The Hanseatic League was a commercial and defensive alliance of the merchant
guilds of towns and cities in northern and central Europe, that dominated marine
trade in the Baltic Sea, the North Sea and along the connected navigable rivers
during the Late Middle Ages ( 12th to 15th centuries ). Each of the affiliated cities
retained the legal system of its sovereign and, with the exception of the Free
imperial cities, had only a limited degree of political autonomy.[19] Beginning with
an agreement of the cities of Lübeck and Hamburg, guilds cooperated in order to
strengthen and combine their economic assets, like securing trading routes and tax
privileges, to control prices and better protect and market their local commodities.
Important centers of commerce within the empire, such as Cologne on the Rhine
river and Bremen on the North Sea joined the union, which resulted in greater
diplomatic esteem.[20] Recognized by the various regional princes for the great
economic potential, favorable charters for, often exclusive, commercial operations
were granted.[21] During its zenith the alliance maintained trading posts and
kontors in virtually all cities between London and Edinburgh in the west to Novgorod
in the east and Bergen in Norway. By the late 14th century the powerful league
enforced its interests with military means, if necessary. This culminated in a war
with the sovereign Kingdom of Denmark from 1361 to 1370. Principal city of the
Hanseatic League remained Lübeck, where in 1356 the first general diet was held
and its official structure was announced. The league declined after 1450 due to a
number of factors, such as the 15th-century crisis, the territorial lords' shifting
policies towards greater commercial control, the silver crisis and marginalization in
the wider Eurasian trade network, among others.[22][23]

Early Modern Germany Edit

Thirty Years War Edit
The Thirty Years' War (1618–1648) was ruinous to the twenty million civilians and
set back the economy for generations, as marauding armies burned and destroyed
what they could not seize. The fighting often was out of control, with marauding
bands of hundreds or thousands of starving soldiers spreading plague, plunder, and
murder. The armies that were under control moved back and forth across the
countryside year after year, levying heavy taxes on cities, and seizing the animals
and food stocks of the peasants without payment. The enormous social disruption
over three decades caused a dramatic decline in population because of killings,
disease, crop failures, declining birth rates and random destruction, and the
emigration of terrified people. One estimate shows a 38% drop from 16 million
people in 1618 to 10 million by 1650, while another shows "only" a 20% drop from
20 million to 16 million. The Altmark and Württemberg regions were especially hard
hit. It took generations for Germany to fully recover.[24]

According to John Gagliardo, the recovery period lasted for about fifty years until
the end of the century and was over by the 1700s. At that time, Germany probably
had reached its pre-war population (though this is disputed). Then, there was a
period of steady though quite slow growth to the 1740s. Afterward came a period of
rapid but not exceptional economic expansion, that mainly occurred in the great
states in the east (Austria, Saxony, Prussia) rather than in the small states of central
or south Germany.[25]

Peasants and rural life Edit

Peasants continued to center their lives in the village, where they were members of
a corporate body and help manage the community resources and monitor the
community life. Across Germany and especially in the east, they were serfs who
were bound permanently to parcels of land.[26] In most of Germany, farming was
handled by tenant farmers who paid rents and obligatory services to the landlord,
who was typically a nobleman.[27] Peasant leaders supervised the fields and
ditches and grazing rights, maintained public order and morals, and supported a
village court which handled minor offenses. Inside the family the patriarch made all
the decisions, and tried to arrange advantageous marriages for his children. Much
of the villages' communal life centered around church services and holy days. In
Prussia, the peasants drew lots to choose conscription required by the army. The
noblemen handled external relationships and politics for the villages under their
control, and were not typically involved in daily activities or decisions.[28][29]

The emancipation of the serfs came in 1770-1830, beginning with then Danish
Schleswig in 1780. Prussia abolished serfdom with the October Edict of 1807, which
upgraded the personal legal status of the peasantry and gave them the chance to
purchase for cash part of the lands they were working. They could also sell the land
they already owned. The edict applied to all peasants whose holdings were above a
certain size, and included both Crown lands and noble estates. The peasants were
freed from the obligation of personal services to the lord and annual dues. A bank
was set up so that landowner could borrow government money to buy land from
peasants (the peasants were not allowed to use it to borrow money to buy land until
1850). The result was that the large landowners obtained larger estates, and many
peasant became landless tenants, or moved to the cities or to America. The other
German states imitated Prussia after 1815. In sharp contrast to the violence that
characterized land reform in the French Revolution, Germany handled it peacefully.
In Schleswig the peasants, who had been influenced by the Enlightenment, played
an active role; elsewhere they were largely passive. Indeed, for most peasants,
customs and traditions continued largely unchanged, including the old habits of
deference to the nobles whose legal authority remained quite strong over the
villagers. Although the peasants were no longer tied to the same land like serfs had
been, the old paternalistic relationship in East Prussia lasted into the 20th century.
[30]

Industrial Revolution Edit

Before 1850 Germany lagged behind the leaders in industrial development, United
Kingdom, France and Belgium. However, the country had considerable assets : a
highly skilled labor force, a good educational system, a strong work ethic, good
standards of living and a sound protectionist strategy based on the Zollverein. By
mid-century, the German states were catching up, and by 1900 Germany was a
world leader in industrialization, along with Britain and the United States. In 1800,
Germany's social structure was poorly suited to any kind of social or industrial
development. Domination by modernizing France during the era of the French
Revolution (1790s to 1815) produced important institutional reforms, including the
abolition of feudal restrictions on the sale of large landed estates, the reduction of
the power of the guilds in the cities, and the introduction of a new, more efficient
commercial law. Nevertheless, traditionalism remained strong in most of Germany.
Until mid-century, the guilds, the landed aristocracy, the churches, and the
government bureaucracies had so many rules and restrictions that
entrepreneurship was held in low esteem, and given little opportunity to develop.
[31]

From the 1830s and 1840s, Prussia, Saxony, and other states reorganized
agriculture, introducing sugar beets, turnips, and potatoes, yielding a higher level of
food production that enabled a surplus rural population to move to industrial areas.
The beginning of the industrial revolution in Germany came in the textile industry,
and was facilitated by eliminating tariff barriers through the Zollverein, starting in
1834. The takeoff stage of economic development came with the railroad revolution
in the 1840s, which opened up new markets for local products, created a pool of
middle managers, increased the demand for engineers, architects and skilled
machinists, and stimulated investments in coal and iron.[32] The political decisions
about the economy of Prussia (and after 1871, all of Germany) were largely
controlled by a coalition of "rye and iron", that is the Junker landowners of the east
and the heavy industry of the west.[33]

Regions Edit
The north German states were for the most part richer in natural resources than the
southern states. They had vast agricultural tracts from Schleswig-Holstein in the
west through Prussia in the east. They also had coal and iron in the Ruhr Valley.
Through the practice of primogeniture, widely followed in northern Germany, large
estates and fortunes grew. So did close relations between the owners and local as
well as national governments.

The south German states were relatively poor in natural resources and those
Germans therefore engaged more often in small economic enterprises. They also
had no primogeniture rule but subdivided the land among several offspring, leading
those offspring to remain in their native towns but not fully able to support
themselves from their small parcels of land. The south German states, therefore,
fostered cottage industries, crafts, and a more independent and self-reliant spirit
less closely linked to the government.

Coal Edit

Historical coalfields of Western Germany, Belgium, The Netherlands and Northern

France
The first important mines appeared in the 1750s, in the valleys of the rivers Ruhr,
Inde and Wurm where coal seams outcropped and horizontal adit mining was
possible. In 1782 the Krupp family began operations near Essen. After 1815
entrepreneurs in the Ruhr Area, which then became part of Prussia, took advantage
of the tariff zone (Zollverein) to open new mines and associated iron smelters. New
railroads were built by British engineers around 1850. Numerous small industrial
centres sprang up, focused on ironworks, using local coal. The iron and steel works
typically bought mines and erected coking ovens to supply their own requirements
in coke and gas. These integrated coal-iron firms ("Huettenzechen") became
numerous after 1854; after 1900 they became mixed firms called "Konzern."

The output of an average mine in 1850 was about 8,500 short tons; its employment
about 64. By 1900, this output had risen to 280,000 and employment to about
1,400.[34] Total Ruhr coal output rose from 2.0 million short tons in 1850 to 22 in
1880, 60 in 1900, and 114 in 1913, on the verge of war. In 1932 output was down to
73 million short tons, growing to 130 in 1940. Output peaked in 1957 (at 123
million), declining to 78 million short tons in 1974.[35] By the end of 2010, only five
coal mines were producing in Germany.

The miners in the Ruhr region were divided by ethnicity (Germans and Poles) and
religion (Protestants and Catholics). Mobility in and out of the mining camps to
nearby industrial areas was high. The miners split into several unions, with an
affiliation to a political party. As a result, the socialist union (affiliated with the
Social Democratic Party) competed with Catholic and Communist unions until 1933,
when the Nazis took over all of them. After 1945 the socialists came to the fore.[36]

Banks and cartels Edit

German banks played central roles in financing German industry. Different banks
formed cartels in different industries. Cartel contracts were accepted as legal and
binding by German courts although they were held to be illegal in Britain and the
United States.

The process of cartelization began slowly, but the cartel movement took hold after
1873 in the economic depression that followed the postunification speculative
bubble. It began in heavy industry and spread throughout other industries. By 1900
there were 275 cartels in operation; by 1908, over 500. By some estimates,
different cartel arrangements may have numbered in the thousands at different
times, but many German companies stayed outside the cartels because they did not
welcome the restrictions that membership imposed.

The government played a powerful role in the industrialization of the German

Empire founded by Otto von Bismarck in 1871 during a period known as the Second
Industrial Revolution. It supported not only heavy industry but also crafts and trades
because it wanted to maintain prosperity in all parts of the empire. Even where the
national government did not act, the highly autonomous regional and local
governments supported their own industries. Each state tried to be as self-sufficient
as possible. The beginning of rapid industrialization also gave rise to the period of
“integration”, in the Foreign Direct Investment made by the German companies.
One of the main justifications was the growing competition among local enterprises,
especially in the newly emerging industries.[37]
Despite the several ups and downs of prosperity and depression that marked the
first decades of the German Empire, the ultimate wealth of the empire proved
immense. German aristocrats, landowners, bankers, and producers created what
might be termed the first German economic miracle, the turn-of-the-century surge
in German industry and commerce during which bankers, industrialists,
mercantilists, the military, and the monarchy joined forces.

Class and the welfare state Edit

Germany's middle class, based in the cities, grew exponentially, but it never gained
the political power it had in France, Britain or the United States. The Association of
German Women's Organizations (BDF) was established in 1894 to encompass the
proliferating women's organizations that had sprung up since the 1860s. From the
beginning the BDF was a bourgeois organization, its members working toward
equality with men in such areas as education, financial opportunities, and political
life. Working-class women were not welcome; they were organized by the Socialists.
[38]

Bismarck built on a tradition of welfare programs in Prussia and Saxony that began
as early as in the 1840s. In the 1880s he introduced old age pensions, accident
insurance, medical care and unemployment insurance that formed the basis of the
modern European welfare state. His paternalistic programs won the support of
German industry because its goals were to win the support of the working classes
for the Empire and reduce the outflow of immigrants to America, where wages were
higher, but welfare did not exist.[39] Bismarck further won the support of both
industry and skilled workers by his high tariff policies, which protected profits and
wages from American competition, although they alienated the liberal intellectuals
who wanted free trade.[40]

Railways Edit
Main article: History of rail transport in Germany
Political disunity of three dozen states and a pervasive conservatism made it
difficult to build railways in the 1830s. However, by the 1840s, trunk lines did link
the major cities; each German state was responsible for the lines within its own
borders. Economist Friedrich List summed up the advantages to be derived from the
development of the railway system in 1841:

as a means of national defence, it facilitates the concentration, distribution and

direction of the army.
It is a means to the improvement of the culture of the nation…. It brings talent,
knowledge and skill of every kind readily to market.
It secures the community against dearth and famine, and against excessive
fluctuation in the prices of the necessaries of life.
It promotes the spirit of the nation, as it has a tendency to destroy the Philistine
spirit arising from isolation and provincial prejudice and vanity. It binds nations by
ligaments, and promotes an interchange of food and of commodities, thus making it
feel to be a unit. The iron rails become a nerve system, which, on the one hand,
strengthens public opinion, and, on the other hand, strengthens the power of the
state for police and governmental purposes.[41]
Lacking a technological base at first, the Germans imported their engineering and
hardware from Britain, but quickly learned the skills needed to operate and expand
the railways. In many cities, the new railway shops were the centres of
technological awareness and training, so that by 1850, Germany was self-sufficient
in meeting the demands of railroad construction, and the railways were a major
impetus for the growth of the new steel industry. Observers found that even as late
as 1890, their engineering was inferior to Britain’s. However, German unification in
1870 stimulated consolidation, nationalisation into state-owned companies, and
further rapid growth. Unlike the situation in France, the goal was support of
industrialisation, and so heavy lines crisscrossed the Ruhr and other industrial
districts, and provided good connections to the major ports of Hamburg and
Bremen. By 1880, Germany had 9,400 locomotives pulling 43,000 passengers and
30,000 tons of freight, and pulled ahead of France.[42][43]

Agriculture Edit
Perkins (1981) argues that more important than Bismarck's new tariff on imported
grain was the introduction of the sugar beet as a primary crop. Farmers quickly
abandoned traditional, inefficient practices for modern new methods, including use
of new fertilizers and new tools. The knowledge and tools gained from the intensive
farming of sugar and other root crops made Germany the most efficient agricultural
producer in Europe by 1914.[44] Even so, farms were small in size, and women did
much of the field work. An unintended consequence was the increased dependence
on migratory workers, especially from German's Polish districts.[45]

Chemicals Edit

The BASF-chemical factories in Ludwigshafen, Germany, 1881

The economy continued to industrialize and urbanize, with heavy industry (coal and
steel especially) becoming important in the Ruhr, and manufacturing growing in the
cities, the Ruhr, and Silesia.[46] Based on its leadership in chemical research in the
universities and industrial laboratories, Germany became dominant in the world's
chemical industry in the late 19th century. Big businesses such as BASF and Bayer
led the way in their production and distribution of artificial dyes and
pharmaceuticals during the Wilhelmine era, leading to the German monopolisation
of the global chemicals market at 90 percent of the entire share of international
volumes of trade in chemical products by 1914.[47]

Steel Edit
Germany became Europe's leading steel-producing country in the late-19th century,
thanks in large part to the protection from American and British competition
afforded by tariffs and to cartels.[48] The leading firm was "Friedrich Krupp AG
Hoesch-Krupp" run by the Krupp family.[49] The "German Steel Federation" was
established in 1874.[50]

Foreign Direct InvestmentEdit

The end of the 19th and the beginning of the 20th century associates with the time
of expansion in demand, the growth of the production capacity and the rise of
exports to Germany. This in its turn stimulated the foreign direct investments (FDI)
into the economics. Ten countries were considered the major investors, namely:
Austria-Hungary, the UK, followed by France, USA, Italy, Russia, Poland (was a part
of neighbouring empires), Switzerland, Netherlands, and Czechoslovakia (as a part
of Austria-Hungary). Their aim was to get via FDI the access to raw material, and to
get involved into the production and sales. The preferred methods of investments
were via equity stakes, mergers and Greenfield investments. In order to implement
the destination analysis of the FDI during this time frame mostly knowledge-capital
model is used due to the predominant role of horizontal investments (or market-
driven FDI). Moreover, there were found some evidence of the vertical investment
structure (known as cost-driven FDI). To be more precise, when there were the
wage differences between countries the FDI flows were higher to the low-wage
ones. Major factors that influenced FDI were market environment (e.g. tariffs and
market opening) and company size. Interestingly, cultural differences or distance
between countries did not have major influence on FDI.[51]

Early 20th century Edit

The merger of four major firms into the Vereinigte Stahlwerke (United Steel Works)
in 1926 was modeled on the U.S. Steel corporation in the U.S. The goal was to move
beyond the limitations of the old cartel system by incorporating advances
simultaneously inside a single corporation. The new company emphasized
rationalization of management structures and modernization of the technology; it
employed a multi-divisional structure and used return on investment as its measure
of success.[52]

Whereas Britain's share of world trade had declined between 1880 and 1913 from
38.2 per cent to 30.2 per cent, Germany's share had increased in the same period
from 17.2 per cent to 26.6 per cent.[53] Between 1890 and 1913 German exports
tripled and by 1913 Germany's share of world manufacturing production was 14.8
per cent, ahead of Britain's 13.6 per cent.[54] By 1913 American and German
exports dominated the world steel market, as Britain slipped to third place.[55] In
1914 German steel output was 17.6 million tons, larger than the combined output of
Britain, France and Russia.[54] Germany's coal production reached 277 million tons
in 1914, not far behind Britain's 292 million tons and far ahead of Austria-Hungary's
47 million tons, France's 40 million tons and Russia's 36 million tons.[54]

In machinery, iron and steel and other industries, German firms avoided cut-throat
competition and instead relied on trade associations. Germany was a world leader
because of its prevailing "corporatist mentality", its strong bureaucratic tradition,
and the encouragement of the government. These associations regulated
competition and allowed small firms to function in the shadow of much larger
companies.[56]

World War I Edit

Unexpectedly Germany plunged into World War I (1914–1918). It rapidly mobilized
its civilian economy for the war effort. The economy suffered under the British
blockade, which cut off supplies.[57] The impact of the blockade was gradual, with
relatively little impact on German industry in the first couple of years.[58]
Mobilization and armament caused a short-lived but dramatic economic shock at
the beginning of the conflict: unemployment spiked from 2.7% in July 1914 to 22.7%
in September.[59] The unemployment level thereafter fell dramatically, as war
industry and recruitment placed a massive demand on manpower. Intervention by
the government in the economy was also moderate at the beginning, because the
war was anticipated to be brief. Securing materials for armaments production and
the control of food markets were two areas where the German government was
involved from the start of the conflict. Private corporations were created under the
supervision of the government to oversee specified industries and manage the
supply and distribution of foodstuffs. This began in November 1914 with the
establishment of a wheat corporation.[60] There were around 200 of these
corporations by the end of the war, representing an unprecedented level of
cooperation between government and the private sector.

The insatiable demands on manpower led to yet more government intervention and
triggered a massive redistribution of the workforce from "peacetime" industries to
war industries and the military. High levels of conscription into the army threatened
to deprive the armaments industry of workers, with the result that by 1916 the
German government began exempting large numbers of otherwise eligible men
from military service so they could remain as workers. Overall this balance between
conscription and industry was handled efficiently, with Germany's industrial
workforce shrinking by only 10%. About 1.2 million men were exempted in 1916,
740,000 of whom were fit to serve; by 1918 2.2 million men had been exempted
from service, 1.3 million of whom were fit to serve.[59] There was an exodus of
workers from "peacetime" industries and agriculture into the better-paid war
industries, which claimed 45% of the work force by 1918. The result was that
"peacetime" industry declined by about 43% over the course of the war, claiming
only 20% of the workforce by 1918.[59]

Germany exploited her own natural resources and those of her occupied territories
to fill the import gap caused by the British blockade, while neutral neighbors like the
Netherlands and the Scandinavian nations exported crucial foodstuffs like wheat to
keep the German population fed. There were some commodities, like rubber,
cotton, and nitrates (Saltpeter), which Germany could not easily substitute from
within, and which she could not obtain from her neutral trading partners because of
strict Allied restrictions. The loss of nitrate imports, vital for the production of both
explosives and fertilizers, proved disastrous for German agriculture. German
chemical firms turned to producing synthetic nitrates, but output was only high
enough to sustain the explosives industry. Without fertilizer, agricultural
productivity declined dramatically. The freezing 'Turnip Winter' of 1916-17 only
compounded the growing subsistence problem; wheat and potato crops failed and
Germans had to turn to turnips to satisfy their nutritional needs, a vegetable
previously used for livestock feed.[61]

The cumulative impact of the First World War on the German economy was
disastrous. The Germany economy shrank by approximately one-third during the
war, with overall industrial production down by 40% compared to pre-war levels.
[59]

Weimar Republic Edit

See also: Hyperinflation in the Weimar Republic
British economist John Maynard Keynes denounced the 1919 Treaty of Versailles as
ruinous to German and global prosperity. In his book The Economic Consequences
of the Peace.[62] Keynes said the Treaty was a "Carthaginian peace", a misguided
attempt to destroy Germany on behalf of French revanchism, rather than to follow
the fairer principles for a lasting peace set out in President Woodrow Wilson's
Fourteen Points, which Germany had accepted at the armistice. Keynes argued the
sums being asked of Germany in reparations were many times more than it was
possible for Germany to pay, and that these would produce drastic instability.[63]
French economist Étienne Mantoux disputed that analysis in The Carthaginian
Peace, or the Economic Consequences of Mr. Keynes (1946). More recently
economists have argued that the restriction of Germany to a small army in the
1920s saved it so much money it could afford the reparations payments.[64]

In reality, the total German Reparation payments actually made were far smaller
than anyone expected. The total came to 20 billion German gold marks, worth
about $5 billion US dollars or £1 billion British pounds. German reparations
payments ended in 1931.[65]

The war and the treaty were followed by the Hyper-inflation of the early 1920s that
wreaked havoc on Germany's social structure and political stability. During that
inflation, the value of the nation's currency, the Papiermark, collapsed from 8.9 per
US$1 in 1918 to 4.2 trillion per US$1 by November 1923.

Prosperity reigned 1923–29, supported by large bank loans from New York. By 1929
GDP per capita was 12 per cent higher than in 1913 and between 1924 and 1929
exports doubled.[66] Net investment reached a high average figure of nearly 12 per
cent.[67] However, unemployment was over two millions by the winter of 1928–29.
[67]

The Great Depression struck Germany hard, starting already in the last months of
1927 .[68] Foreign lending, especially by New York banks, ceased around 1930.
Unemployment soared, especially in larger cities, fueling extremism and violence on
the far right and far left, as the centre of the political spectrum weakened. Capital
flows finally reversed in 1931 and a currency crisis ensued.[69] At the same time as
Germany was hit by a banking crisis, when the second largest German bank, the
Danat-Bank, failed. At the peak of the crisis the United States, with the Hoover
Moratorium, unilaterally declared a one-year moratorium on all reparations and war
debts. Germany had paid about one-eighth of its war reparations when they were
suspended in 1932 by the Lausanne Conference of 1932. The failure of major banks
in Germany and Austria in 1931 worsened the worldwide banking crisis.[70]

Germany was among the countries most severely affected by the great depression
because its recovery and rationalization of major industries was financed by
unsustainable foreign lending. War reparation obligations reduced investment
propensity and, perhaps most importantly, the government implemented a rigid
austerity policy that resulted in deflation.[71][72]

As unemployment reached very high levels, the national socialists accumulated

government power and began to pursue their inhuman policies against the Jewish
minority, political leftists and many other groups. After being elected, the national
socialists undertook a series of rapid steps to abolish democracy. Their trade policy
in Germany consisted of an autarkic policy regime that aimed to cancel all imports,
such as foodstuffs, that could be replaced with domestic substitutes or raw
materials for the consumer-oriented industries. Only imports of iron ore and similar
items were considered necessary because a main aim of the government was to
strengthen the production capacity of military products. Both the persecuted and
non-persecuted German groups suffered from these autarkic and trade-restraining
policies.[73]

Nazi economy Edit

IG Farben factory in Monowitz (near Auschwitz) 1941.

Main article: Economy of Nazi Germany
During the Hitler era (1933–45), the economy developed a hothouse prosperity,
supported with high government subsidies to those sectors that tended to give
Germany military power and economic autarky, that is, economic independence
from the global economy.[74] During the war itself the German economy was
sustained by the exploitation of conquered territories and people. "The economic
recovery in the Third Reich, as measured by GDP, is well documented; real GDP
grew by some 55% between 1933 and 1937.”[75]

File:SFP 186 - Flug ueber Berlin.ogvPlay media

US Air Force photographs the destruction in central Berlin in July 1945
Physical capital in the occupied territories was destroyed by the war, insufficient
reinvestment and maintenance, whereas the industrial capacity of Germany
increased substantially until the end of the war despite heavy bombing. (However,
much of this capacity was useless after the war because it specialized in armament
production.) [76]

With the loss of the war, the country entered into the period known as Stunde Null
("Zero Hour"), when Germany lay in ruins and the society had to be rebuilt from
scratch.

Post-World War II Edit

Further information: World War II reparations
The first several years after World War II were years of bitter penury for the
Germans. Seven million forced laborers left for their own land, but about 14 million
Germans came in from the East, living for years in dismal camps. It took nearly a
decade for all the German POWs to return. In the West, farm production fell, food
supplies were cut off from eastern Germany (controlled by the Soviets) and food
shipments extorted from conquered lands ended. The standard of living fell to levels
not seen in a century, and food was always in short supply. High inflation made
savings (and debts) lose 99% of their value, while the black market distorted the
economy. In the East, the Soviets crushed dissent and imposed another police state,
often employing ex-Nazis in the dreaded Stasi.[77] The Soviets extracted about
23% of the East German GNP for reparations, while in the West reparations were a
minor factor.[78]

The man who took full advantage of Germany's postwar opportunity was Ludwig
Erhard, who was determined to shape a new and different kind of German economy.
He was given his chance by United States officials, who found him working in
Nuremberg and who saw that many of his ideas coincided with their own.

Erhard abolished the Reichsmark and then created a new currency, the Deutsche
Mark, on 21 June 1948, with the concurrence of the Western Allies but also taking
advantage of the opportunity to abolish most Nazi and occupation rules and
regulations. It established the foundations of the West German economy and of the
West German state.

Productivity improves Edit

After 1950, Germany overtook Britain in comparative productivity levels for the
whole economy, primarily as a result of trends in services rather than trends in
industry. The Marshall Plan was eagerly adopted in west Germany as a way to
modernize business procedures and utilize the best practices, while these changes
were resisted in Britain.[79] Britain's historic lead in productivity of its services
sector was based on external economies of scale in a highly urbanized economy
with an international orientation. On the other hand, the low productivity in
Germany was caused by the underdevelopment of services generally, especially in
rural areas that comprised a much larger sector. As German farm employment
declined sharply after 1950 thanks to mechanization, catching-up occurred in
services. This process was aided by a sharp increase in human and physical capital
accumulation, a pro-growth government policy, and the effective utilization of the
education sector to create a more productive work force.[80]

Social market economy Edit

The German economy self-defines as a "soziale Marktwirtschaft," or "social market
economy," to emphasize that the system as it has developed after World War II has
both a material and a social—or human—dimension. The term "market" is of
significance, as free enterprise is considered to be main driving force fora healthy
economy. The state was to play only a minor role in the new West German
economy, such as the protection of the competitive environment from monopolistic
or oligopolistic tendencies—including its own. The term "social" is stressed because
West Germans wanted an economy that would not only help the wealthy but also
care for the workers and others who might not prove able to cope with the
strenuous competitive demands of a market economy. The term "social" was
chosen rather than "socialist" to distinguish their system from those in which the
state claimed the right to direct the economy or to intervene in it.

Beyond these principles of the social market economy, but linked to it, comes a
more traditional German concept, that of Ordnung, which can be directly translated
to mean order but which really means an economy, society, and policy that are
structured but not dictatorial. The founders of the social market economy insisted
that Denken in Ordnungen—to think in terms of systems of order—was essential.
They also spoke of Ordoliberalism because the essence of the concept is that this
must be a freely chosen order, not a command order.

Over time, the term "social" in the social market economy began to take on a life of
its own. It moved the West German economy toward an extensive social welfare
system that has become one of the most expensive in the world. Moreover, the
West German federal government and the states (Länder ; sing., Land ) began to
compensate for irregularities in economic cycles and for shifts in world production
by beginning to shelter and support some sectors and industries. In an even greater
departure from the Erhard tradition, the government became an instrument for the
preservation of existing industries rather than a force for renewal.[81] In the 1970s,
the state assumed an ever more important role in the economy. During the 1980s,
Chancellor Helmut Kohl tried to reduce that state role, and he succeeded in part,
but German unification again compelled the German government to assume a
stronger role in the economy. Thus, the contradiction between the terms "social"
and "market" has remained an element for debate in Germany.

Given the internal contradiction in its philosophy, the German economy is both
conservative and dynamic. It is conservative in the sense that it draws on the part
of the German tradition that envisages some state role in the economy and a
cautious attitude toward investment and risk-taking.[81] It is dynamic in the sense
that it is directed toward growth—even if that growth may be slow and steady
rather than spectacular. It tries to combine the virtues of a market system with the
virtues of a social welfare system.

Economic miracle and beyond Edit

See also: Wirtschaftswunder
The economic reforms and the new West German system received powerful support
from a number of sources: investment funds under the European Recovery
Program, more commonly known as the Marshall Plan; the stimulus to German
industry provided by the diversion of other Western resources for Korean War
production; and the German readiness to work hard for low wages until productivity
had risen. But the essential component of success was the revival of confidence
brought on by Erhard's reforms and by the new currency.

The West German boom that began in 1950 was truly memorable. The growth rate
of industrial production was 25.0 percent in 1950 and 18.1 percent in 1951. Growth
continued at a high rate for most of the 1950s, despite occasional slowdowns. By
1960 industrial production had risen to two-and-one-half times the level of 1950 and
far beyond any that the Nazis had reached during the 1930s in all of Germany. GDP
rose by two-thirds during the same decade. The number of persons employed rose
from 13.8 million in 1950 to 19.8 million in 1960, and the unemployment rate fell
from 10.3 percent to 1.2 percent.[82]

Labor also benefited in due course from the boom. Although wage demands and
pay increases had been modest at first, wages and salaries rose over 80 percent
between 1949 and 1955, catching up with growth. West German social programs
were given a considerable boost in 1957, just before a national election, when the
government decided to initiate a number of social programs and to expand others.

In 1957 West Germany gained a new central bank, the Deutsche Bundesbank,
generally called simply the Bundesbank, which succeeded the Bank deutscher
Länder and was given much more authority over monetary policy. That year also
saw the establishment of the Bundeskartellamt (Federal Cartel Office), designed to
prevent the return of German monopolies and cartels. Six years later, in 1963, the
Bundestag, the lower house of Germany's parliament, at Erhard's urging established
the Council of Economic Experts to provide objective evaluations on which to base
German economic policy.

The West German economy did not grow as fast or as consistently in the 1960s as it
had during the 1950s, in part because such a torrid pace could not be sustained, in
part because the supply of fresh labor from East Germany was cut off by the Berlin
Wall, built in 1961, and in part because the Bundesbank became disturbed about
potential overheating and moved several times to slow the pace of growth. Erhard,
who had succeeded Konrad Adenauer as chancellor, was voted out of office in
December 1966, largely—although not entirely—because of the economic problems
of the Federal Republic. He was replaced by the Grand Coalition consisting of the
Christian Democratic Union (Christlich Demokratische Union—CDU), its sister party
the Christian Social Union (Christlich-Soziale Union—CSU), and the Social
Democratic Party of Germany (Sozialdemokratische Partei Deutschlands—SPD)
under Chancellor Kurt Georg Kiesinger of the CDU.

Under the pressure of the slowdown, the new West German Grand Coalition
government abandoned Erhard's broad laissez-faire orientation. The new minister
for economics, Karl Schiller, argued strongly for legislation that would give the
federal government and his ministry greater authority to guide economic policy. In
1967 the Bundestag passed the Law for Promoting Stability and Growth, known as
the Magna Carta of medium-term economic management. That law, which remains
in effect although never again applied as energetically as in Schiller's time, provided
for coordination of federal, Land, and local budget plans in order to give fiscal policy
a stronger impact. The law also set a number of optimistic targets for the four basic
standards by which West German economic success was henceforth to be
measured: currency stability, economic growth, employment levels, and trade
balance. Those standards became popularly known as the magisches Viereck, the
"magic rectangle" or the "magic polygon."

Schiller followed a different concept from Erhard's. He was one of the rare German
Keynesians, and he brought to his new tasks the unshakable conviction that
government had both the obligation and the capacity to shape economic trends and
to smooth out and even eliminate the business cycle. Schiller's chosen formula was
Globalsteuerung, or global guidance, a process by which government would not
intervene in the details of the economy but would establish broad guidelines that
would foster uninterrupted noninflationary growth.

Schiller's success in the Grand Coalition helped to give the SPD an electoral victory
in 1969 and a chance to form a new coalition government with the Free Democratic
Party (Freie Demokratische Partei—FDP) under Willy Brandt. The SPD-FDP coalition
expanded the West German social security system, substantially increasing the size
and cost of the social budget. Social program costs grew by over 10 percent a year
during much of the 1970s, introducing into the budget an unalterable obligation
that reduced fiscal flexibility (although Schiller and other Keynesians believed that it
would have an anticyclical effect). This came back to haunt Schiller as well as every
German government since then. Schiller himself had to resign in 1972 when the
West German and global economies were in a downturn and when all his ideas did
not seem able to revive West German prosperity. Willy Brandt himself resigned two
years later.

Helmut Schmidt, Brandt's successor, was intensely interested in economics but also
faced great problems, including the dramatic upsurge in oil prices of 1973-74. West
Germany's GDP in 1975 fell by 1.4 percent (in constant prices), the first time since
the founding of the FRG that it had fallen so sharply. The West German trade
balance also fell as global demand declined and as the terms of trade deteriorated
because of the rise in petroleum prices.
By 1976 the worst was over. West German growth resumed, and the inflation rate
began to decline. Although neither reached the favorable levels that had come to be
taken for granted during the 1950s and early 1960s, they were accepted as
tolerable after the turbulence of the previous years. Schmidt began to be known as
a Macher (achiever), and the government won reelection in 1976. Schmidt's success
led him and his party to claim that they had built Modell Deutschland (the German
model).

But the economy again turned down and, despite efforts to stimulate growth by
government deficits, failed to revive quickly. It was only by mid-1978 that Schmidt
and the Bundesbank were able to bring the economy into balance. After that, the
economy continued expanding through 1979 and much of 1980, helping Schmidt
win reelection in 1980. But the upturn proved to be uneven and unrewarding, as the
problems of the mid-1970s rapidly returned. By early 1981, Schmidt faced the worst
possible situation: growth fell and unemployment rose, but inflation did not abate.

By late 1982, Schmidt's coalition government collapsed as the FDP withdrew to join
a coalition led by Helmut Kohl, the leader of the CDU/CSU. He began to direct what
was termed the Wende (West Germany) [de] (turning or reversal). The government
proceeded to implement new policies to reduce the government role in the
economy and within a year won a popular vote in support of the new course.

Within its broad policy, the new government had several main objectives: to reduce
the federal deficit by cutting expenditures as well as taxes, to reduce government
restrictions and regulations, and to improve the flexibility and performance of the
labor market. The government also carried through a series of privatization
measures, selling almost DM10 billion (for value of the deutsche mark—see
Glossary) in shares of such diverse state-owned institutions as VEBA, VIAG,
Volkswagen, Lufthansa, and Salzgitter. Through all these steps, the state role in the
West German economy declined from 52 percent to 46 percent of GDP between
1982 and 1990, according to Bundesbank statistics.

Although the policies of the Wende changed the mood of the West German
economy and reinstalled a measure of confidence, progress came unevenly and
haltingly. During most of the 1980s, the figures on growth and inflation improved
but slowly, and the figures on unemployment barely moved at all. There was little
job growth until the end of the decade. When the statistics did change, however,
even modestly, it was at least in the right direction.

Nonetheless, it also remained true that West German growth did not again reach
the levels that it had attained in the early years of the Federal Republic. There had
been a decline in the growth rate since the 1950s, an upturn in unemployment
since the 1960s, and a gradual increase in inflation except during or after a severe
downturn.

Global economic statistics also showed a decline in West German output and
vitality. They showed that the West German share of total world production had
grown from 6.6 percent in 1965 to 7.9 percent by 1975. Twelve years later, in 1987,
however, it had fallen to 7.4 percent, largely because of the more rapid growth of
Japan and other Asian states. Even adding the estimated GDP of the former East
Germany at its peak before unification would not have brought the all-German
share above 8.2 percent by 1989 and would leave all of Germany with barely a
greater share of world production than West Germany alone had reached fifteen
years earlier.

It was only in the late 1980s that West Germany's economy finally began to grow
more rapidly. The growth rate for West German GDP rose to 3.7 percent in 1988
and 3.6 percent in 1989, the highest levels of the decade. The unemployment rate
also fell to 7.6 percent in 1989, despite an influx of workers from abroad. Thus, the
results of the late 1980s appeared to vindicate the West German supply-side
revolution. Tax rate reductions had led to greater vitality and revenues. Although
the cumulative public-sector deficit had gone above the DM1 trillion level, the public
sector was growing more slowly than before.

The year 1989 was the last year of the West German economy as a separate and
separable institution. From 1990 the positive and negative distortions generated by
German reunification set in, and the West German economy began to reorient itself
toward economic and political union with what had been East Germany. The
economy turned gradually and massively from its primarily West European and
global orientation toward an increasingly intense concentration on the requirements
and the opportunities of unification.

German reunification and its aftermath Edit

Main article: Economic history of the German reunification
Germany invested over 2 trillion marks in the rehabilitation of the former East
Germany, helping it to transition to a market economy and cleaning up the
environmental degradation. By 2011 the results were mixed, with slow economic
development in the East, in sharp contrast to the rapid economic growth in both
west and southern Germany. Unemployment was much higher in the East, often
over 15%. Economists Snower and Merkl (2006) suggest that the malaise was
prolonged by all the social and economic help from the German government,
pointing especially to bargaining by proxy, high unemployment benefits and welfare
entitlements, and generous job-security provisions.[83]

The old industrial centers of the Rhineland and North Germany lagged as well, as
the coal and steel industries faded in importance. The economic policies were
heavily oriented toward the world market, and the export sector continued to be
very strong.[84]
http://marcuse.faculty.history.ucsb.edu/classes/33d/projects/1920s/Econ20s.
htm
German Economy in the 1920s

By Daniel Castillo (author page), Dec. 2003

There were several characteristics which Germany possessed after the First
World War which made them vulnerable to being manipulated by someone like
Adolf Hitler. As in most nations, the economic factors of the time play a significant
role in determining how a society will behave. Germany was economically
devastated after a draining defeat in World War I. Due to the Versailles treaty,
Germany was forced to pay incredibly sizeable reparations to France and Great
Britain. In addition, the Versailles treaty, which many agreed was far too harsh,
forced Germany to give up thirteen percent of its land.

Lines would build up filled with people who wanted to buy the few items left in
stores (source)

Stacks of German Marks, which were practically worthless due to super inflation
(source)
At first Germany tried to recover from the war by way of social spending.
Germany began creating transportation projects, modernization of power plants and
gas works. These were all used to battle the increasing unemployment rate. Social
spending was rising at an unbelievable rate. In 1913 the government was spending
approximately 20.5 per resident; by 1925 it had risen to almost 65 marks per
resident and finally in 1929 it reached over one hundred marks per resident. The
elevating amounts of money which were used for social spending combined with
plummeting revenues caused continuing deficits. Eventually the municipal finance
collapsed in 1930. Although it seemed as if the collapse was due to debt, in
actuality ordinary budgets were the reason for the initial collapse. Municipal officials
and politicians were unable to restore order to the budgets. Further adding to
Germany's economic problems, the revenue from income tax began to fall. In 1913,
over fifty three percent of all tax revenues was from income, but in 1925, it dropped
down to 28%. As the returns on income taxes decreased, the government began to
depend much more on state trade and property tax. The government also became
highly dependent on the profits made from municipal utilities, such as electric
power plants.

Even with all of Germany's economic shortcomings, it could have still been
possible to make reparation payments if foreign countries had not placed protective
tariffs on Germany's goods. With the income Germany could have gained by selling
goods in foreign countries, for relatively low prices, reparation payments could have
become feasible. The protective tariffs made this idea impossible and further
depressed the German economy. Faced with reparation payments they could not
afford, Germany began printing exaggerated amounts of money. This threw
Germany into a state of super inflation. Inflation reached the point where millions of
marks were worthless. Cartoons of the time depicted people with wheelbarrows full
of money who could not buy a loaf of bread. "With the approach of world crisis
foreign lenders withdrew capital and markets further closed against German
imports" (Sweezy 8). The United States was an extremely significant example of
this. When the U.S. was hit by the great depression they immediately sought to get
the loans, which they had made to German, paid back. This, in addition to all of
Germany's other problems, practically caused the German economy to collapse.

With Germany at its weakest and most vulnerable point, Hitler took the
opportunity to begin his ascent to power. Even to this date, in a country as diverse
and liberally minded as the United States, when the economy is down people desire
somewhere to place the blame. For example, the current use of illegal immigrants
from Mexico as scapegoats for economic hardships. In Germany, Hitler used the
Jewish people as a scapegoat for all of Germany's problems. With disproportional
numbers of wealthy Jewish business owners, Hitler convinced much of Germany that
the Jews were to blame for the poor economic state.

Hitler had two significant ideas that helped launch him in to power. He had
someone to blame for the economy and he had a plan for a swift economic
recovery. Hitler outlined a plan where in four years he would completely eliminate
unemployment throughout Germany. Even though his plan was a plan that would
not raise the level of income for the enrichment of the people but an economic plan
for military strength and victory the German people were eager to see any
economic success. Hitler used an extremely detail and well-organized plan for
economic revitalization. Through his method, Hitler was able to keep his promise of
economic growth and begin his climb to power.