Banks in Germany during Industrialization

Germany's Industrial Growth in the Nineteenth Century

Germany has been cited as a prime example of a country that experienced significant bank-driven industrial growth in the nineteenth century. The country saw significant industrialisation in the second part of the twentieth century, propelling it to become Europe's main economic power. Throughout the period, the country experienced 2.4% annual GNP growth, which was higher than the continent's 1.9% average growth (Edwards 1996, p. 429). Significantly, the country's industrial capacity increased year after year, especially in the heavy and textile industries. The period was also marked by tremendous expansion of the railway system, as well as the production of coal and iron. This paper will focus on the various roles played by the German banks including the participation in supervisory boards, provision of credit, and railway construction which facilitated the country’s rapid industrial revolution.

Railway Construction

The construction of the railway lines in the country played a very vital role in its industrialization. Before the 1850s, the railway system in the country was not adequately developed due to the massive capital necessary for its construction. Railways were in great demand to allow for the transportation of the outputs from the heavy industries as well as cutting the transport costs. The earliest German railways were constructed by various joint-stock companies. The banks played a significant role in financing the construction of railways. For example, Rhenish Railway Company remained afloat with the help of Rhenish bankers who assisted it with security issues and provided for current account advances (Burhop 2006, p.42). The support to the railway companies by the banks played a major role in facilitating industrial take off.

Banks Participation in Supervisory Boards

German banks had a unique feature of representation on the supervisory boards of the various joint-stock companies. In 1870, the country’s law demanded that each joint-stock company establish a supervisory board which oversaw the operations of the senior company managers (Bolton, Da Rin and Hellmann 2002, p. 369). Therefore, the German banks were represented on the boards due to their control of the equity voting rights. The equity voting rights were as a result of banks owning the shares in a company or through the representation of the shareholders. The equity also triggered the banks to participate in the process of value creation through the mobilization of the critical mass. The representations of the banks in the supervisory boards of companies made it easier for them to acquire information and control over the top managers. The close relationship allowed the banks to be in a position of limiting the risk associated with the issuance of huge amounts of money. Thus, the supervisory role and availability of information on the performance of a company made the banks more willing to provide more investment capital to the company. The industrial structure was rationalized by establishing cartels and mergers which made it easy for the companies to realize more profits. Therefore, the mergers and cartels made it attractive for the banks to offer more investment capital. With the provision of low-cost investment loans, some companies were willing to invest in different and new high-risk projects (Fohlin 1997, p.205).

Provision of Credit

The banks in the country provided capital to the companies through current account credit and securities. The advances in the current accounts advances were normally short term, but the companies were allowed to renew them and as a result, acquire long-term finances (Bolton, Da Rin and Hellmann 2002, p. 372). The securities in the stock market acted as the chief source of long-term investment capital. Also, the banks facilitated the issuance of debentures and shares. Notably, the companies were not in a position to issue securities in the stock market without the help of banks. The various transactions in a company’s current account provided the banks with sound information on its suitability in launching a security issue. Importantly, although industrialization started in Britain, its banking sector did not lend long-term loans to the various industries. The investors in Britain preferred relying on the traditional sources of start-up capital and only borrowed bank loans to handle the short-term crisis. Also, despite Germany lagging behind Belgium, France, and Britain before the 1850s, the assistance of the banks provided in the second part of the century saw the country advance tremendously (Edwards 1996, p. 433). Not only did the universal banks in the country offer initial capital to the newly established industries, but they also helped in guiding them through the first years of business.

Moving forward, the works of Gerschenkron (1962) and Schumpeter (1939) portrayed the banks as the main source of economic growth during the industrial revolution. However, the works of the above economists differ in various ways with the contemporary banking theories. The modern banking theories underline how the drive for growth and development is generated in the real economy, and although the banks provide various important services, they are auxiliary (Burhop 2006, p.44). Despite the downplayed role of the banks in the contemporary world, the works of Gerschenkron among other theorists place the banking sector as a major catalyst. Gerschenkron pointed out that the creative role of the banks, especially towards the catch-up problem, facilitated growth in Germany. The main argument is that most European countries failed to achieve growth in the 19th century due to poor banking coordination in industrial operations. After Britain had started the industrialization, other European countries failed to catch up as it was tough to raise the necessary resources.

Nonetheless, for the banks to play a significant role in triggering industrialization, they had to have massive capital and adequate market power to be ready to sustain the coordination costs. Countries like Spain and Russia failed to industrialize because their banks did not experience the proper conditions to allow for coordination like in Germany. For example, the industrial credit banks in the Soviet Union were dispersed over the big country, remained small, and developed slowly. The Russian government also upheld tight control of the economic activities and limited the growth of banks. Hence, the failure of Italy, Russia, and Spain to industrialize until the late 1890s is related to the poor financial structure in the countries that did not allow for coordination (Fohlin 1997, p.207).


To sum up, despite the modern view of banks as secondary in triggering economic growth, they played a central role in initiating industrialization, especially in Germany. As argued by various economists, including Gerschenkron and Schumpeter, the banks in Germany played a major role in triggering its industrial revolution. Notably, the banks aided in the construction of railway lines which were a major driver of industrialization. Further, through the representation of the German banks in the supervisory boards, the banks were in a position to control the top managers. The close relationship between the banks and various companies made it easier for the banks to issue large amounts of investment capital as well as closely track the various investments. As a result, the unique relationship between banks and companies in Germany significantly activated the growth of industries.


Bolton, P., Da Rin, M., & Hellmann, T. (2002). Banks as Catalysts for Industrialization. Journal of Financial Intermediation. 11, 366-397.

Burhop, C. (2006). Did banks cause the German industrialization? Explorations in Economic History. 43, 39-63.

Edwards, J. (1996). Universal banks and german industrialization: a reappraisal. The Economic History Review (London). 49, 427-446.

Fohlin, C. (1997). Universal banking networks in pre-war Germany: new evidence from company financial data. Research in Economics. 51, 201-225.

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