German Banks and German Growth, 1883–1913: an Empirical View

Almost without exception interpretations of the remarkable growth of the German economy before the First World War stress the role of the German banking system, in general, and that of the universal or Kreditbank, in particular. The most subtle and penetrating view of this question is that developed in Alexander Gerschenkron's essays, “Economic Backwardness in Historical Perspective” and “Prerequisites of Modern Industrialization.” According to this view, “backward” countries which experience successful industrializations do so by making institutional “substitutions” which enable them to compensate for or even to turn to their advantage their initial deficiencies of productive factors. The institution which is “substituted” in Germany to perform this function is the Kreditbank. This interpretation places special emphasis on the growth-inducing character of these banks, but is also open to the possibility that an industrialization led by such institutions might have entailed certain costs. In fact, Professor Gerschenkron explicitly invites help in assessing these costs in commenting: “it would be a fruitful undertaking in research to explore and perhaps to measure and compare the difficulties, the strains, and the cost which were involved in the various processes of substitution ….” Thanks to the work of Ekkehard Eistert, who has constructed a reliable set of statistics on the German banking system in this era, it is now possible to attempt such a “fruitful undertaking.” Making use of these data, an econometric model has been constructed to test the hypothesis that the manner in which the Kreditbanken allocated credit contributed to the growth of German non-agricultural output. Our findings strongly suggest that the credit allocation policy of these banks was inhibiting rather than stimulating the German economy in the period for which data are available and that previous interpretations are in need of serious revision. It appears that, in Gerschenkron's terms, the “cost” of bank-led industrialization was far greater than anyone has previously suggested.