Caroline Fohlin. Finance Capitalism and Germany's Rise to Industrial Power. Cambridge: Cambridge University Press, 2007. 392 S. $85.00 (cloth), ISBN 978-0-521-81020-3.
Reviewed by Elaine Glovka Spencer (Department of History, Northern Illinois University)
Published on H-German (March, 2008)
Universal Banks and German Industry
Assessing the role of Germany's great banks in the country's industrial development is a difficult, complex undertaking. Economic historians who have attempted it have reached a range of conclusions supporting, qualifying, or challenging the characterization of universal banks as a driving force of German industrialization. Beginning with a series of articles in the 1990s, Caroline Fohlin has laid the groundwork for a major reexamination of what she terms the "orthodox paradigm" laid out by Alexander Gerschenkron and like-minded scholars. In this work, Fohlin presents the results of her ambitious, painstaking investigations into the relationship between universal banks and German industry.
Fohlin's book joins a long tradition of political comment and scholarly research. During the Wilhelmine era, Germany's flourishing industrial development prompted domestic and foreign observers to seek explanations for the country's success. One element that attracted particular attention was the prominence of large joint-stock universal banks and their links with some of Germany's most important industrial corporations. Particularly notable among the very largest of the country's enterprises were the large "D-banks" founded in the third quarter of the nineteenth century. Universal banks offered their corporate customers a full range of commercial, investment, and brokerage services and were suspected of playing a role beyond the mobilization of financial support in the councils of industry. Admirers of these banks gave them a lasting reputation as effective engines of industrial growth, though they were not without liberal and socialist detractors. Critics such as Austrian socialist Rudolf Hilferding emphasized the potential in such institutions for misuse of the economic power at their disposal. Over the past century, questions about the nature, extent, and consequences of the exercise of financial power by Germany's great banks have served as a recurring focus for comment. Particularly influential, especially in the English-speaking world, has been the work of Gerschenkron, who contended that banks played an especially crucial role in facilitating industrialization in "moderately backward" economies. The nineteenth-century economies he had in mind were those of the German states and their central European neighbors.
To accomplish her re-examination against this background, Fohlin brings together recent economic theory and empirical research on financial institutions with the results of historical research focused on the German experience. She devises testable hypotheses and gathers data as varied and complete as possible in order to verify or discard such hypotheses. The first three chapters of the work provide background information and context for what follows. The first chapter comments on the contributions and limitations of prior scholarly efforts to evaluate the role of Germany's great banks in fostering industrialization. The second provides a chronological overview of German economic development, concentrating on the period of mature industrialization in the late nineteenth and early twentieth centuries. The third offers a survey of economic theories relating to the role of banks, provided for readers unfamiliar with such theories. Fohlin offers no equivalent tutorial for readers unfamiliar with the complexities of the multivariate analyses on which much of her account relies. Although portions of Fohlin's volume may not be fully comprehensible for those without the necessary statistical training, this should not deter readers. Even for those who find some of her terminology and the content of her many charts difficult to comprehend, much can be learned about Germany's economic development from the questions she raises, the qualitative and quantitative information she musters, and the conclusions she draws.
Chapters 4 through 7 constitute the core of Fohlin's study. The fourth chapter treats the development of Germany's universal banks. Here, the author stresses the relatively late advent of large joint-stock banks in the process of industrialization. Such institutions established themselves as major economic actors, she notes, only after German industrialization was already underway. In her view, such banks co-evolved with industry during the last prewar decades. In addition to downplaying the notion of a special role for Germany's corporate banks in stimulating industrialization, Fohlin questions the purported distinctiveness of German universal banking, compared, for example, with banks in Britain and the United States. In making international comparisons of financial institutions, she finds more similarities than differences. She also identifies significant indications of prewar convergence.
In the fifth chapter, Fohlin investigates corporate governance, focusing on the last two prewar decades. She examines linkages between financial and industrial corporations based on equity stock holdings, proxy voting, and interlocking directorates. She concludes that, in terms of ownership and control, universal banks played a significant but not overwhelming role in the affairs of large German industrial enterprises before the First World War. This assessment is elaborated upon in chapter 6, which examines how and to what extent banks affected the performance of industrial corporations. The author finds no consistent relationship between the nature and extent of bank involvement and industrial outcomes as measured in terms of profitability and corporate survival.
In chapter 7, Fohlin shifts her focus from Germany's banks to the country's securities markets. She challenges the assumption German financial markets before the First World War languished in the shadow of the great banks. Instead, she gives a positive assessment of the performance of the markets, arguing that banks and markets in Wilhelmine Germany complemented each other. Again, she downplays differences between Germany's financial system and those of Britain and the United States during the prewar decades.
Fohlin's final chapter represents a departure from those preceding it. It provides a condensed overview of German financial developments from the beginning of the First World War to the present. Fohlin justifies this somewhat anti-climactic last chapter as adding perspective to her in-depth analysis of pre-1914 developments.
Even before the publication of the present volume, the general outlines of Fohlin's position in the recurrent debate on the role of large German joint-stock banks were already known and respected. With this book, she has substantially reinforced the foundations of her revisionist position, without claiming to have answered all relevant questions. Those who will continue the debate in the future will have to consider Fohlin's work.
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Elaine Glovka Spencer. Review of Fohlin, Caroline, Finance Capitalism and Germany's Rise to Industrial Power.
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