This strategy was crucially dependent on the skills of the workforce. Like Britain, Germany relied on apprenticeship as the principal means of skill formation, but, in contrast to Britain, it was supplemented by government-financed vocational schools at which apprentices received part of their training. In addition, most states established technical high schools, later upgraded to universities, for the training of engineers. The classical universities were reformed, and, although their mission was strictly non-vocational, the systematic pursuit of knowledge for its own sake contributed to the scientific advances – notably in chemistry – which underpinned the success of German entrepreneurs in the second industrial revolution.
Scientific and technical education was one of the means by which German industry made up for its late start. Another was a financial innovation, the universal bank, which had no counterpart in Britain or the US. Local financial networks were less highly developed than in Britain, and heavy industry needed large amounts of initial capital.22 From the middle of the nineteenth century, and more extensively after 1870, the gap was filled by the universal banks, which combined commercial and investment banking under the same roof. The three leading Grossbanken – Deutsche Bank, Dresdner Bank and Commerzbank – formed a continuing relationship with their industrial clients, often becoming shareholders and taking seats on their boards of directors.
The influence of the Grossbanken was largely confined to heavy industry. In states such as Baden and Württemberg, which had a long pre-industrial tradition of skilled craftsmanship, the typical manufacturing enterprise was the family-owned firm, specialising in a narrow range of products.23 Operating in such industries as textiles and mechanical engineering, they formed networks in which firms sub-contracted to each other the responsibility for particular components or manufacturing processes. The cutlery industry in Solingen, in the lower Rhineland, was a well-known example. These firms did not need large amounts of capital, and their financial requirements were met by local savings and cooperative banks.24 Despite the rise of a few large companies, such as Krupp and Siemens, industry in Germany was much less concentrated than in the US at the time of the First World War.
Another difference from the US was that German manufacturers depended to a greater extent on exports. Trade policy was a contentious issue in German politics, as it was in Britain. But whereas British manufacturers favoured free trade and the landowners protection, in Germany the opposite was the case. Manufacturers wanted to keep imports out so that they could build up their industries. The landowners were large exporters of grain and feared that the imposition of a tariff would provoke retaliation, putting their overseas business at risk. The fall in grain prices in the 1870s, together with growing competition from American grain exporters, brought a change of heart, and tariffs were introduced in 1879. This represented a shift away from British-style liberalism towards the more nationalistic economic policy advocated by such thinkers as Friedrich List. List’s National System of Political Economy, published in the 1840s, was intended as a riposte to Adam Smith, and called for a national effort to resist Britain’s industrial expansion.25
The lack of enthusiasm for free markets was also reflected in a tolerant attitude on the part of the German authorities towards cartels. Price-fixing and market-sharing agreements spread widely in German industry in the closing decades of the nineteenth century. In 1897, seven years after the Sherman Act was passed in the US, the German supreme court confirmed the legality of cartels.26
The abandonment of free trade was the product of a pragmatic alliance between two previously hostile interest groups, the landowners and the industrialists. Their common enemy was an increasingly assertive working class. Trade unions began to organise themselves in the 1870s and the political arm of the labour movement, the Social Democratic Party, won nearly 500,000 votes in the Reichstag elections of 1877. The reaction of the ruling oligarchy was repression, balanced by attempts to de-politicise the working class through social insurance and other welfare measures. In contrast to Britain, no ‘viable class society’ emerged in Germany before the First World War, and there was no scope for the compromise between unions and employers which took place in Britain between 1850 and 1870. This had important consequences for the character of the German trade union movement. Although union membership was at first largely confined to skilled workers, the driving force was not, as in Britain, the desire to protect craft jobs against incursions from semi-skilled and unskilled workers, but the need for a common front against employers and the state. The German trade union movement was more class-based than craft-based.
The constitution of the German Reich, as devised by Bismarck at the time of unification, has been described as ‘an autocratic monarchy with a few parliamentary trimmings’.27 This archaic political system perpetuated social strains which were to have catastrophic consequences in the inter-war years, but it did not prevent the rapid build-up of manufacturing industry. The distinctive features of German industrialisation were the commitment to technical education and workforce skills, the close links between heavy industry and the big banks, the special importance of small, craft-based firms, and the reliance on cartels and protection.
The British Response to Competition
American and German competition affected different British industries in different ways. As far as the older industries are concerned, there was no obvious sign of entrepreneurial failure before 1914. The cotton textile industry, for example, continued to dominate the world market. Although export growth slowed down after 1870, this was due, not to a loss of competitiveness, but to the build-up of production behind tariff walls in countries which had previously imported from Britain. Similarly the shipbuilders faced no serious challenge from the US or Germany. Even in steel, where production in Britain fell behind that of Germany and the US soon after the turn of the century, this was largely for reasons outside the control of British steel-makers. Germany and the US were still in their catch-up phase, and steel consumption was rising more rapidly than in Britain. Both countries also protected their steel industries with tariffs. Thus British steel-makers were restricted from selling to the two most dynamic overseas markets, while their own home market was fully exposed to imports. In these circumstances a fall in Britain’s share of world steel production and exports was unavoidable.28
The situation in the newer industries was more worrying. In electrical engineering, for example, none of the British entrepreneurs who came into the industry in the 1880s, following the invention of the incandescent lamp, built companies to match the size and technical strength of General Electric in the US, or Siemens and AEG in Germany. This has been blamed by historians on a variety of factors, including lack of support from the capital markets29 and a distinctively British inability to create and manage large companies.30 But a more important factor was a domestic environment which slowed down the growth of demand for electricity. In Britain, unlike the US and Germany, urbanisation was well advanced by the time electricity became available, and an extensive network of gas lighting was in place. The existence of this network was a disincentive to the rapid introduction of electricity, and it was reinforced by regulations designed to protect the interests of the gas-lighting suppliers.31
The other celebrated British failure was in the chemical industry, above all in dyestuffs, where German firms pioneered the new technique of synthetic organic chemistry and established a virtual world monopoly. But it