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The Political Economy of Public Finance and the Industrialization of Prussia, 1815–1866

Published online by Cambridge University Press:  03 February 2011

Richard Tilly
Richard Tilly
Affiliation:
Yale University and University of Münster
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Extract

At the close of the Napoleonic Wars in 1815 Prussia was an industrial backwater. By the mid 1860's Prussia had achieved a considerable degree of industrialization. In a sense, her economy had “taken off.” The turning point dates from around 1840 and was closely related to railroad building. Before 1840 industrial investment grew haltingly. The combination of inadequate markets and the lack of supporting enterprise made industrial investment—particularly in those lines in which Europe's industrial leader, England, was already specialized—too risky and/or its anticipated yields too low for most potential investors, who preferred to invest in real estate, commerce, and in foreign government bonds. As leading Prussian entrepreneurs argued, the country's industrial development required public investment in river improvements, roads, canals, railroads, banks, and other facilities which would generate external economies and make private investment, for example in metalworking enterprise, more profitable. Theoretically, such public investment could have been financed by curtailing other governmental expenditures, by taxing unproductive consumption, and/or by borrowing. The technical proficiency required by such investments was either domestically available or could be readily borrowed from abroad. Even Prussian political economy, through its interpretation of the Classicists, reflected these conditions and called for state assistance. The will, the means, and a rationale for a program of public investment were at hand: one could truly speak of an abundance of “advantages of backwardness” in Prussia after 1815.

Type
Articles
Information
The Journal of Economic History , Volume 26 , Issue 4 , December 1966 , pp. 484 - 497
Copyright
Copyright © The Economic History Association 1966

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References

1 “A Sociological Approach to Problems of Public Finance,” in Musgrave, Richard A. and Peacock, Alan T., eds., Classics in the Theory of Public Finance (New York: Macmillan, 1958), p. 211.CrossRefGoogle Scholar

2 For statistical support of this periodization, see Hoffmann, Walter, “The Takeoff in Germany,” in Rostow, W. W., ed., The Economics of Take-off into Sustained Growth (New York: St. Martin's, 1963)Google Scholar , and Spiethoff, Arthur A., Die wirtschaft-lichen Wechsellagen (2 vols.; Tubingen: Mohr, 1955), I, 113–17Google Scholar ; II, tables 13 and 20.

3 Evidence on Prussian investor preferences is plentiful; for example, Giilich, Gustav von, Geschichtliche Darstettung des Handels, der Gewerbe und des Ackerbaus (5 vols.; Jena, 1830–1845), II, 436Google Scholar ; Brockhage, Bernhard, Zur Entwicklung des preus-sisch-deutschen Kapitalexports (Leipzig: Duncker and Humblot, 1910), esp. 71–77Google Scholar . See also the summary of sources by Borchhardt, Knut, “Zur Frage des Kapitalmangels in der ersten Hälfte des 19. Jahrhundert in Deutschland,” Jahrbücher fur Nationalo-konomie und Statistik, CLXXIII (1961), 404–21Google Scholar . Contemporary studies comparing British and German production costs further suggest the underlying rationality of such preference patterns.

4 For the views of contemporary entrepreneurs, see Eichholtz, Dietrich, Junker und Bourgeoisie vor 1848 in der preussischen Eisenbahngeschichte (Berlin: Aka-demie-Verlag, 1962), esp. p. 30Google Scholar ; Hansen, Joseph, ed., Rheinische Briefe und Akten zur Geschichte der politischen Bewegung, 1830-1850 (2 vols.; Essen, 1919-1942), I, 185–93Google Scholar ; idem, Gustav von Mevissen (2 vols.; Berlin, 1906), I, 148-49. For excerpts from early Prussian political economists, see Roscher, Wilhelm, Geschichte der Nationalokonomie in Deutschland (Munich, 1874), pp. 596Google Scholar and ff. See also Treue, Wilhelm, Wirtschaftszustdnde und Wirtschaftspolitik in Preussen, 1815-1825 (Stuttgart: W. Kohlhammer, 1937), esp. p. 146Google Scholar , for a contrary view.

5 One thinks, for example, of the government's restrictive regulatory machinery in mining or of its restrictive incorporation procedures.

6 On the U.S., see Goodrich, Carter, “American Development Policy: The Case of Internal Improvements,” The Journal of Economic History, XVI (1956)Google Scholar ; for Belgium, P. Scholler, “La transformation economique de la Belgique de 1832 a 1849,” Bulletin de Vlnstitut de Recherches tconomiques et Societies, Universitd de Louvain XIV (1948), 525–96Google Scholar.

7 On this, see Benaerts, Pierre, Les origines de la grande Industrie allemande (Paris: F. H. Turot, 1933), pp. 456 ff.Google Scholar ; also Cameron, Rondo, France and the Economic Development of Europe, 1800-1914 (Princeton, N.J.: Princeton University Press, 1961), pp. 369 ffGoogle Scholar . For the boom of the 1850's, see. Blumberg, Horst, “Die Finan-zierung der Neugriindungen und Erweiterungeh von Industriebetrieben in Form der Aktiengesellschaften wahrend der fiinfziger Jahre des 19. Jahrhunderts,” in Mottek, Hans and others, eds., Studien zur Geschichte der Industriellen Revolution in Deutschland (Berlin: Akademie-Verlag, 1960)Google Scholar.

8 Compare the approach of Henderson, W. O., The State and the Industrial Revolution in Prussia, 1740-1870 (Liverpool: Liverpool University Press, 1958)Google Scholar ; see also Ritter, Ulrich, Die Rolle des Staates in den Friihstadien der preussischen Indus-trialisierung (Berlin, 1961)Google Scholar.

9 A point made by Myrdal, Gunnar, The Political Element in the Development of Economic Theory (London: Routledge and Paul, 1953), pp. 180, 185.Google Scholar

10 Business leaders frequently complained about this Junker predominance in government; Eichholtz, ch. ii, pp. 124-25, and sources cited there.

11 Interest in increased revenues (partly through the reduction of smuggling) also played an important role; Bergius, Carl, Grundsdtze der Finanzwissenschaft, mit besonderer Beziehung auf den preussischen Stoat (Berlin, 1865), pp. 385–86Google Scholar ; see also Fischer, Wolfram, “The German Zollverein: A Case Study in Customs Union,” Kyklos, XIII (1960), 65–89CrossRefGoogle Scholar ; and Hamerow, Theodore S., Restoration, Revolution, Reaction: Economics and Politics in Germany, 1815-1871 (Princeton, N. J.: Princeton University Press, 1958), p. 11CrossRefGoogle Scholar , and sources cited there.

12 For the roots and expressions of Prussia's reluctant railroad policy, see , Eich-holtz; for a critique of Prussian monetary and banking policies, my Financial Institutions and Industrialization in the Rhineland, 1815-1870 (Madison: University of Wisconsin, 1966), esp. pp. 13–15Google Scholar and chs. iii and vii; and for a brief review of restrictive mining policies, Fischer, Wolfram, “Die Beudetung der preussischen Ber-grechtsreform fiir den industriellen Ausbau des Ruhrgebiets,” Vortragsreihe der Gesellschaft für Westfa'lische Wirtschaftsgeschichte, IX (1961)Google Scholar.

13 Brockhage, pp. 102 8.; also Arndt, Adolf, “Der Anteil der Stande an der Ges-etzgebung in Preussen von 1823-1848,” Archiv fiir offentliches Recht, XVII (1902), 570–88.Google Scholar

14 Contemporaries believed in the “inherent inelasticity” of indirect taxes, so that a measure excluding them did not promise to permit expansion of governmental spending without constitutional reforms.

15 On this, see letters of David Hansemann to Prince Sahn-Dyck, May 28, 1845, and Hansemann to H. von Beckerath, May 28, 1845, in Hansen (cited in n. 4), I, 885-86, 889.

16 The advent of Frederick William IV in 1840, the industrial success of Belgium, and the increasing recognition by Junker landowners of the advantages of an enlarged German market for their agricultural produce were among the leading factors underlying the change in attitude.

17 Eichholtz, pp. 41-42; Schwartz, Otto and Strutz, G., Der Staatshaushalt und die Finanzen Preussens (3 vols.; Berlin, 1901-1904), I, Book 3, 570.Google Scholar

18 , Hansen, Gustav von Mevissen, I, 312Google Scholar, 467ff.; Eichholtz, pp. 119-24; Schwartz and Strutz, I, Book 3, 580-83.

19 In an 1849 session of the Prussian lower house, a Representative Carl delivered a perceptive analysis of th e shift in fiscal policy associated with constitutional controls: “The previous administration perhaps failed through stingily refusing to provide the sums necessary to develop th e country. However, we now stand at the government's side and will always approve the fund s necessary for the promotion of improved transport and for the support of commerce, industry and agriculture, even if the government budget is thereby enlarged; after all, these employments represent an investment which yields abundant returns”; Verhandlungen des preussischen Land-tags, Haus der Abgeordneten, 23 03 1849, p. 250.Google Scholar

20 See Zunkel, Friedrich, Der rheinisch-westfalische Untemehmer, 1834-1879 (Cologne: Westdeutscher-Verlag, 1962), pp. 184–86CrossRefGoogle Scholar , for excerpts of entrepreneurial support of the state's economic policies; and ibid., pp. 205-19, for its criticism of the military spending of the 1860's.

21 The government's contingency fund (Staatsschatz) earned unreported income which remained the object of constitutional disput e from the 1840's int o the 1860's; Bergius, Carl, Preussische Zustände (Munster, 1844), pp. 188–89Google Scholar ; and idem, Grund-sätze (cited in n. 11), pp. 421-22 and ff.

22 That is, actual ex ante revenue s were larger than reported ex ante revenues by more than 60 per cent of the latter; Reden, Von, Allgemeine vergleichende Finanz Statistik (3 vols.; Darmstadt, 1852-1856), I, Book 3, 96–99.Google Scholar

23 , Bergius, Grundsätze, p. 58Google Scholar ; Richter, Eugen, Das preussische Staatsschulden-wesen und die preussische Staatspapiere (Breslau, 1869), chs. iii-vi, pp. 92–99Google Scholar.

24 Schmoller, Gustav, “Die Epochen der preussischen Finanzpolitik bis zur Griin-dung des deutschen Reiches,” Umrisse und Untersuchungen zur Verfassungs-, Ver-waltungs- und Wirtschaftsgeschichte (Leipzig, 1898), pp. 198Google Scholar , 215-16 ; , Bergius, Gründsatze, p. 58Google Scholar . The relative growth of non-tax revenues after 1849 was largely attributable to the railways and railway shares owned by the states.

25 , Bergius, Grundsätze, p. 354Google Scholar ; Beckerath, Erwin von, Die preussische Klassen-steuer und die Geschichte inter Reform bis 1851 (Munich and Leipzig, 1912), p. 33Google Scholar.

26 Representatives of the older provinces fought tax reform consistently; ibid., pp. 43 and ff. The potency of the land tax as a political issue can be seen in the fact that the liberal Hansemann ministry of 1848 was replaced by the Crown, owing in large part to its insistence on a redistribution of the tax's burden. See Hamerow (cited in n. 11), p. 177; Croon, Gustav, Der rheinische Provinziallandtae bis ziim Jahr 1874 (Düsseldorf, 1918), p. 182.Google Scholar

27 Von Beckerath, pp. 93, 96.

28 Ibid., p. 93; Wagner, Adolph, Finanzwissenschaft (Leipzig: C. F. Winter, 1910) IV, 47.Google Scholar

29 It is interesting to observe that the decline in funded debt in the 1840's was ot some extent offset by the increase in unfunded debt. Perhaps this reflected a desire to conceal spending activities. The great growth in unbacked bank note circulation afte r 1855 invites a variety of interpretations.

30 At least they were entitled “railroad loans” and were earmarked for particular railroad projects; , Bergius, Grundsätze, p. 445Google Scholar ; Schwartz and Strutz, I, Book 3, 1023-25. Railroad loans to the amount of 83.2 million thalers were made between 1849 and 1855.

31 See Brockhage, pp. 102, 104-5, 124ff., for a sketch of the quantitative evidence.

32 Cologne Chamber of Commerce Report for 1846 (Cologne, 1847).Google Scholar

33 This quasi-quantitative sketch derives from a cursory examination of the English, French, and Prussian governmental bond yield and of Berlin discount-rate behavior over the perio d in question; tables in Spiethoff (cited in n. 2), tables 11 and 12. A more rigorous comparative analysis along these lines might prove rewarding.