The Political Economy of Public Finance and the Industrialization of Prussia, 1815–1866

Abstract

At the close of the Napoleonic Wars in 1815 Prussia was an industrial backwater. By the mid 1860's Prussia had achieved a considerable degree of industrialization. In a sense, her economy had “taken off.” The turning point dates from around 1840 and was closely related to railroad building. Before 1840 industrial investment grew haltingly. The combination of inadequate markets and the lack of supporting enterprise made industrial investment—particularly in those lines in which Europe's industrial leader, England, was already specialized—too risky and/or its anticipated yields too low for most potential investors, who preferred to invest in real estate, commerce, and in foreign government bonds. As leading Prussian entrepreneurs argued, the country's industrial development required public investment in river improvements, roads, canals, railroads, banks, and other facilities which would generate external economies and make private investment, for example in metalworking enterprise, more profitable. Theoretically, such public investment could have been financed by curtailing other governmental expenditures, by taxing unproductive consumption, and/or by borrowing. The technical proficiency required by such investments was either domestically available or could be readily borrowed from abroad. Even Prussian political economy, through its interpretation of the Classicists, reflected these conditions and called for state assistance. The will, the means, and a rationale for a program of public investment were at hand: one could truly speak of an abundance of “advantages of backwardness” in Prussia after 1815.

State Capacity and Long‐Run Economic Performance

“…11 The constitution under King William I (1815-40) gave parliament the right to audit state finances, but only at ten-year intervals (van Zanden and van Riel, 2010). 12 Tilly (1966) and Ziblatt (2006, pp. 113-16) alike code the post-1848 regime in Prussia as constitutional, although Tilly notes that the executive acted without legislative approval of military budgets during the 1860s.…”

“…Tilly () and Ziblatt , pp. 113–16) alike code the post‐1848 regime in Prussia as constitutional, although Tilly notes that the executive acted without legislative approval of military budgets during the 1860s.…”

State Capacity and Long-Run Performance

“…However, the case study in Section 4 accounts for its fiscal impacts. Napoleon III, who was elected president of the Second Republic in 1848, staged a successful coup in 1851 and estab- Tilly (1966) argues that there were binding fiscal constraints in Prussia from 1848 onward, although the government operated without legislative approval of its military budgets during the 1860s. Also see Ziblatt (2006, pp.…”

Political Regimes and Sovereign Credit Risk in Europe, 1750-1913

“…According to Ferguson (1998), Rothschild lenders urged King Frederick William II (1786-97) to implement constitutional reforms as a credible way to improve sovereign credit risk. Tilly (1966Tilly ( , 1967, moreover, argues that the constitutional reforms of 1848 strengthened the ability of the Prussian parliament to follow sound fiscal policies. Finally, the quantitative analysis by Dincecco (2009a) finds that limited government in Prussia led to a significant increase in percapita tax revenues.…”