Until the 1850s, France lacked the markets and the governments suitable for industrial acceleration. Her markets had been compromised by the destruction of French overseas trade in the wartime years before 1815 and by the British export domination of Europe in the peacetime years after Waterloo. French governments between 1815 and 1848 consisted of restored monarchies afraid of every socio-economic shadow. These regimes saw in the preceding Revolutionary and Bonapartist phases sufficient social change to last many lifetimes and they were deeply averse to any more. This encouraged them to regard any attempt at financial innovation as an unprovoked assault on the Bastille of the Bank of France and any railway project of economical scale as the spawning ground of monster capitalism. At mid-century, the main constraints on revived industrial activity in France were capital shortage and the lack of a sensible transport policy.
The Second Empire of Napoleon III (1850-71), authoritarian in its domestic policy and vainglorious in its foreign policy, was not the most obvious source of economic reform. But whatever his shortcomings in diplomatic vision and political substance, this Bonaparte had a clear view of what France needed for greater industrial prowess. A firm push from imperial government was required to achieve it: Napoleon III’s autocratic regime did more to promote economic advance in nineteenth-century France than the weak monarchies that preceded it or the weak republic that succeeded it. However, this was achieved less by the active gapfilling policies which are associated with state campaigns against chronic backwardness than by the removal of the bureaucratic obstacles to economic capabilities that already existed.
Rationalization of the railway policy owed much to imperial initiative. Rejecting the cautious concessions and nit-picking administrative controls of the previous two decades, the new government advocated operation by network or by region and threw itself ‘full-steam into long concessions’. Plenty of capitalist interests were ready to respond. Trunk-line construction in the three decades after 1855-64 exceeded the building of the previous three decades by 700 per cent and of the succeeding three by over 20 per cent. The decade after 1855 saw the peak of French rail construction in the nineteenth century, at 7.2 per cent of gross industrial product. This boom saw the construction of many important lines, from Paris to Marseilles and to the German, Spanish, and Italian frontiers, from Bordeaux on the Atlantic to Sete on the Mediterranean.
However, willing as the private sector was to respond to these new transport opportunities, it needed capital to do so. Railway ventures of the scale of the Chemin de Fer du Nord had taxed the limited French market before 1848, and the vast requirements of the Midi line outran the resources of the merchant bankers and even of the Rothschilds. Yet France had been allowed to develop few financial institutions which could do the job. Once more, the key innovation which made good this deficiency, the Credit Mobilier of 1852, was launched under the personal imprimatur of Louis Napoleon. Designed as a counterbalance to the Bank of France, and the next largest financial institution in the country, the Credit provided a real alternative to the restrictive investment policies of the preceding three decades. It became a European exemplar for the growthconscious bank, stocking its coffers with scarce investment resources and opening them to adventurous capitalists, although pre-eminently to railway capitalists. By the mid-1860s, mobilier-type institutions had been established in French provincial centres such as Lille, Lyons, and Marseilles and large-scale metropolitan banks like the Credit Industriel et Commercial (1859), the Credit Lyonnais (1863), and the Societe Generale (1864) had followed the lead set by the innovating Credit Mobilier. Although it was eventually driven under by an unforgiving Bank of France in the financial crisis of 1867, it had — with a little help from the emperor—achieved the necessary liberation of French finance.
The effect upon heavy industry of these major adjustments in transport and banking was profound. The three decades from 1840 saw the replacement in France of the textile industries by a new leading sector of capital-intensive industries such as iron and steel manufacture, metal fabrication, and coalmining. Steel was a rare metal in 1850 but an industrial staple by 1870, and French advances here were nicely timed for the development of the Bessemer process. This, the first method for mass-producing steel, was invented in 1856 by Henry Bessemer, resident in Britain but the son of a French engineer, and became available just as the French metal industries entered their phase of modern growth.
The France of the Second Empire did thus exploit the opportunities and institutions of medium backwardness, but not to the same extent as the German states. The French borrowed, or borrowed back, the Bessemer process from the industrial leader, Britain. The Germans initiated little but they devised highly original ways of borrowing from all other initiators, including the French. The French used investment banks well in the 1850s and 1860s, but, noticeably, they did not utilize them far beyond the railway tracks. No major financial institution specializing in credit for manufacturing was created until the foundation of the Banque de Paris et de Pays Bas in 1872 and the establishment of the Banque de l’Union Parisienne even later in 1904. The big bank flotations of the 1860s, especially the Credit Lyonnais and the Societe Generale, summed up French financial inclinations during the last third of the century by drifting away from domestic lending altogether into huge foreign investment operations. By contrast, the German states from 1850, and the Kaiserreich from 1871, became the classic exponents of bank-led industrial growth, and the masters of good practice for those who wished to imitate them.
After its mid-century growth surge, the French economy of 1871-1905 was both prone to accident and wasteful of opportunity. Defeat by the Prussians in 1871 cost France the province of Alsace-Lorraine. This was more than a matter of pride and territory. The region contained France’s most important textile centres, most of her machine-building industry, and 80 per cent of the country’s known iron-ore reserves, with their attendant blast furnaces and steelworks. While war savaged French industry, disease blighted French agriculture. From the late 1860s to the 1890s, the most unsporting of all pests, the corpulent aphid, phylloxera vastatrix, munched its way through the vines of France. Government was scarecely more helpful. Within the unstable democracy of the Third Republic, law-making proceeded by faction fight and lacked the economic resolve of the Second Empire. The bankers preferred to cast their nets overseas. And the industrial bureaucracy of the Corps des Mines made worse what was already bad: the ironmasters trying to exploit the Briey basin were subjected to an unremitting stream of discouraging advice. Some of this was pure bad luck. Some of the rest makes the point that institutional devices, just like any items of technology, are only as good as the people who direct them.
Those who directed the German investment banks were more determined. As in France, the capital requirement for railway construction in Saxony, Silesia, and, above all, the Rhineland, drove the bankers of Leipzig, Breslau, and pre-eminently Cologne, into new forms of lending from the 1830s and 1840s onwards. The first German investment bank, the Schaaffhausen’scher Bankverein, was founded in Cologne in 1848, and, between that year and 1856, a tight cohort of institutions, which were to become known as the German great banks, were launched into the railway and industrial markets.
Differences with French experience were twofold. From the beginning, these German banks not only floated share issues for their railway clients; they also bought packets of these shares for themselves; built up an equity interest; and placed their officials as directors on the boards of railway companies. When railway demand for capital waned from the late 1860s, the German bankers did not go in search of foreign pastures; they went in search of German industrial flotations. They purchased slices of these for themselves; they pursued the industrial equity interest; and they infiltrated their directors on to the boards of industrial companies.
In one sense this was simple prudence. The bankers were being asked, or were choosing, to extend long-term credit to risky ventures; one way of controlling the risk was an ownership interest and a voice in the management. In another sense, it gave the bankers a remarkable perspective across, and influence over, the industrial sector. By 1914, a mere sixteen of Germany’s top bankers controlled between them 437 industrial directorships. Between 1885 and 1900 the leading banks, and mainly the Big Six, placed some ?1,200 million worth of industrial securities in the market.
These bank-industry connections could be used for a variety of purposes. Bankers could push industrial clients towards best-practice technologies, thus influencing the demand as well as the supply for capital. Industrial debtors, afraid for their overdrafts, could be bullied by bank managers into joining cartel associations — where prices were fixed, profits more secure, and the debt safer. Or, as in the great mining-industrial region of Rhine-Ruhr in the 1890s, industrialists in one industry, such as coal, could find themselves led by a financial hand into marriage with industrialists in related fields, such as iron or steel. The very high levels of such vertical integration in German industry by 1914 derived in many cases from pressure applied by the bankers. From the bank manager’s viewpoint, a coalmine with a guaranteed outlet for its coal, or a steel mill with an assured supply of cheap fuel, was a safer coalmine or a safer steel mill.
It is clear then that the German banks, unlike their British, or even French, counterparts, were a central design influence upon the German industrial economy. They financed its new technology; by promoting cartellization, they helped select its market context; by fostering vertical integration, they influenced its patterns of ownership and control. It was only with a small measure of exaggeration that W. F. Bruck concluded that ‘These banks created the German industrial state’. Fittingly, the term used to describe this kind of financial entrepreneurship is German: Bankinitiative.
If high-pressure capital formation, pumped into heavy industry, was one dominant characteristic of German industrialization, it was not the only one. Perhaps the next most striking feature, especially after 1885, was the organized incorporation of scientific knowledge into industrial practice. This was not only a matter of technical education, although that process was conspicuously well handled in Germany. Some German states, notably Saxony, had possessed advanced educational systems from the eighteenth century, but the second third of the nineteenth century saw widespread adjustments across many states. By 1905, the Kaiserreich could offer a system of education which matched a technical-school capability to virtually every rung of the conventional educational ladder. Between 1872 and 1914 educational expenditure added as much to the national budget as the imperial army and navy.
This commitment produced a useful array of carefully designed human capital but it did not ensure that the relevant science got into industry. Of course, few other countries ensured this. The British lacked both the human capital and the science-industry connections. The French made successful initiatives in theoretical science but could not master the business of application. Their industrialists were the first to introduce trained chemists into factories but they could not persuade managers to take any notice of them. The French defined many of the ground rules for chemical manufacturing, yet made the poorest explosives in Europe.
Nevertheless, French science and engineering won some notable rosettes. Precocious discoveries in dyestuffs, particularly artificial fuschine, came from French laboratories; the first recognizably modern ‘inside drive’ automobile was the 1899
Renault; and electrical engineering and specialist metal industries were prominent in the French industrial revival after 1900. Indeed, in the key sector of motor cars, the French dominated the European trade of the pre-1914 years. Car factories, which were huge by average French industrial standards, generated continental exports which outstripped American exports to Europe in 1911 and 1912, and produced a total output more than twice that of the British car industry.
Yet it remained a hit-and-miss matter whether a French technological breakthrough ever penetrated as far as the production line, and, if it did, in which country the production line might be. By contrast, in Germany very little from anywhere went to waste. Many of the country’s industrial achievements followed less from initial discovery than from the rapid application of methods pioneered elsewhere. Processes central to Germany’s late nineteenth-century successes — aniline dye manufacture, the generation and conveyance of electrical power, the Gilchrist-Thomas process in steel production—were French and British, not German, discoveries. The essential link in Germany between discovery, wherever it took place, and application was an institution: the research team. Whereas French industry was the first to receive trained chemists, German industry was the first to incorporate entire laboratories.
Aniline dyes came from Britain, fuschine from France, but it was the industrial laboratories of Frankfurt and Mannheim which perfected them for mass manufacture and converted them into world-leading exports. By 1900, German chemical firms were deploying research teams of up to fifty to seventy scientists, allowing them to follow their noses, and expecting to discard 90 per cent of the results. But the outcome could be, as it was at BASF’s Ludwigshafen factory after seventeen years of research, the priceless reward of artificial indigo. In industries like metals and engineering, the pattern was the same. The Westphalian steelmasters made none of the new process discoveries but were quicker than any foreign rivals in applying them. Again, the research laboratory stole the march. At Essen, behind Krupp’s excellence in armament manufacture, there lay, in the words of a British competitor, ‘an immense physical and chemical laboratory. . . such as is possessed by no university in the world’.
Germany’s onslaught on the automobile industry, which was a pioneering initiative, began in the same way. The Swabian gunsmith Gottlieb Daimler set up a research laboratory with Wilhelm Maybach in 1883, before developing his lightweight petrol engine the following year. Daimler first used his engine in a car in 1886, while his rival, Karl Benz, produced the world’s first standard production model in 1894. By 1896 Daimler was promoting the Daimler Wagonette in the British market and in 1901 offered the first technically advanced Mercedes to an appreciative world. By 1914, the Mercedes Grand Prix racer had shaken off the dust of its pottering antecedents of the 1880s and 1890s: it could reach 112 m. p.h.
The German approach to science-in-industry did not spread especially widely outside Germany before 1914. But the German Bankinitiative was copied by others in the last decades of peace. In the 1890s, the Italian economy turned away from French-style mobilier banking and deliberately adopted German-style investment banks, as well as attracting German overseas investment and German bank officials to help run them. Similarly, when the Russian economy emerged from the state-dominated growth phase of the 1890s, and sought relevant institutions for the next era of growth, it found that the traditional English-style banks of Moscow were not adequate for the purpose. Instead, in the 1900s, St Petersburg was developed as an investment banking centre modelled closely on German prototypes. In these countries, and in its homeland, the investment bank proved itself one of the most powerful development aids of the pre-1914 world.
World History
