Lessons from the 19th century German Customs Union

Europe – Lawson & List

The 19th century German Customs Union is barely known about in Britain. But it was very important in the development of a united Germany. Brendan Clifford looks at what it was and was not. He also demonstrates that Adam Smith’s The Wealth of Nations was based on an illusion – it took for granted a political framework that had to be carefully created before ‘free trade’ became a possibility.

While Nigel Lawson was still Chancellor he appeared on Question Time with Ted Heath. Heath baited him on the subject of the European Monetary System (EMS). Having to make some reply before the watching millions, and being obliged to make it in accordance with the Thatcherite world-vision, he compared the EEC with the German Customs Union of the early 19th century, the Zollverein.

The EEC, like the Zollverein, he said, was a free trade area. There was no need for a free trade area to have a common currency. The common currency of Germany did not come about until the Customs Union had been superseded by the establishment of a common state.

The Zollverein being the only historical precedent to guide the development of the EEC, it is obvious, Lawson said, that the establishment of a common European currency would mark the establishment of a European state, or “super-state“.

But if the Zollverein is the only historical point of reference for the EEC, it is as well that it should be understood what the Zollverein was and what it was not. And what it clearly was not was a cosmopolitan free trade area encompassing a number of independent nation states – which is what Thatcher wants Europe to be.

It is true that the Customs Union functioned without a common currency. When the German state was established in 1871, it had seven different currency areas, each with its own separate legal tender. A central mint office was established in 1873, and the new state currency then displaced the local currencies very quickly.

But, in historical reality, the Zollverein was not a free trade area at all in the sense in which the term is now used. It was both a practical and a theoretical denial of the legitimacy of the economic philosophy of free trade advocated by Britain. It was a negation of cosmopolitan free trade.

The movement of German nationality began immediately after the battle of Jena in 1806. Its inspirational document was Fichte’s Lectures On The German Language. And the Prussian Army played its critical part in the battle of Waterloo in 1815.

Napoleon had provoked the emergence of German nationality. German nationality contributed to his defeat. But, on. his overthrow, the Congress of Victors at Vienna buried German nationality under a restoration of part of the old array of petty German states.

The German Confederation established in 1815 consisted of 39 sovereign states, each with its own King, its own money, its own commercial laws, its own transport system, its own system of weights and measures, and its own customs. And each German state was economically a . foreign state to all the other German states.

Germany was balkanised in the English interest, and was bombarded with English free-trade philosophy. Only the Prussian Government was immune to English pressure or blandishment, and conducted an economic policy in its own interest. Prussia therefore became the example for progressive elements in the other German states to follow.

Friedrich List, the prophet and theorist of the Zollverein, put it like this:

“Prussia gained her title to rank amongst the European powers not so much by her conquests as by her wise policy of promoting the interests of agriculture, industry and trade, and by her progress in literature and science …

“Meanwhile all the rest of Germany had for centuries been under the influence of free trade – that is to say, the whole world was free to export manufactured products into Germany, while no one consented to admit German manufactured goods into other countries. This rule had its exceptions, but only a few. It cannot, however, be asserted that the predictions and the promises of the school about the great benefits of free trade have been verified by the experience of this country, for everywhere the movement was rather retrograde than progressive. Cities like Augsburg, Nurnberg, Mayence, Cologne etc. numbered no more than a third or a fourth part of their former population, and wars were often wished for merely for the sake of getting rid of a valueless surplus of produce.

‘The wars came in the train of the French Revolution, and with them English subsidies together with increased English competition . .’.

“Next followed Napoleon’s Continental blockade, an event which marked an era in the history of both German and French industry… Whatever theorists, and notably the English, may urge against it, this much is clearly made out … – that, as a result of this blockade, German manufacture of all and every kind for the first time began to make an important advance …

“But with the return of peace the English manufacturers again entered into a fearful competition with the German” (The National System Of Political Economy, 1841, 1904 English edition, p 68-9).

 

Napoleon’s conquest precipitated the growth of German nationality, but the memory of economic development under Napoleon blended with German nationality in the period of English hegemony after 1815. The extensive market created by Napoleon and his blockade against English goods had fostered industrial development in Germany. And, a few years after the restoration of petty German states, a national organisation of businessmen (the Handelsverein) was established, with branches in all the states, to press for the establishment of a unified German market.

In Wurttemberg, in 1822, List drafted a petition in favour of commercial union and was imprisoned in a fortress by the King. He was released after a few months on the condition that he renounce Wurttemberg nationality and leave the state. He went to America, founded a German-language newspaper, worked out his ideas on national economy, returned 😮 Germany as American Consul at Leipzig, and became a German national force.

He summarised his views in a Preface to The National System Of Political Economy:

“I would indicate, as the distinguishing characteristic of my system, Nationality. On the nature of nationality, as the intermediate interest between those of individualism and of entire humanity, my whole structure is based …

“I have been accused by the popular school, of merely seeking to revive the (so-called) ‘mercantile’ system. But those who read my book will see that I have adopted in my theory merely the valuable parts of that much-decried system, whilst I have rejected what is false in it; that I have advocated those valuable parts on totally different grounds from those urged by the (so-called) mercantile school, namely, on the grounds of history and of nature” (ibid :xlii).

List counterpoised his national system of political economy to Adam Smith’s cosmopolitan political economy of universal free trade. And he argued, with reason, that universal free trade is not political economy at all.

The Zollverein was a free trade movement only insofar as it was a movement to establish a unified German market and remove the obstacles to economic growth posed by the independent states of the German Confederation. Its object was to establish free trade within the nation. In its world view it was from the outset a protectionist movement, and rejected the philosophy of universal free trade which England advocated in its own national interest (as the strongest economy in the world).

The Zollverein was not a free trade movement without political power, such as Thatcher Toryism wants the European Community (EEC) to be. It was the economic agent of a vigorous national movement – and a national movement is a kind of political power even before it becomes a national state. The Zollverein was never without political orientation. It was part of a national development in which a national state was implicit from the start. It was an economic movement in a supra-economic medium. And the national dynamic which carried it along allowed for considerable flexibility and anomaly in economic matters in the short run – such as the persistence of seven independent currencies until a few years after the establishment of the national state.

The EEC cannot be a free trade area of that kind because it is not the economic aspect of a national development.

But, though the EEC is not a national movement, the ideas of the theorist of the Zollverein are not without relevance to it. Even though List used the term “national”, and that term was entirely apt for the Customs Union, his reasoning was not nationalist in the narrow modem sense. (His defence of Napoleon shows that.)

His essential point was that sound economic development required a combined agricultural and industrial base organised by a political framework. He rejected the English free trade propaganda which represented the individual entrepreneur as the basic and adequate unit of economy, and a world consisting of atomised entrepreneurs in a cosmopolitan market as the perfect form of economic organisation. He treated the productive power of the individual as a function of the arrangement of the national economy, or the political economy:

‘The example of Holland, like that of Belgium, of the Hanseatic cities, and of the Italian republics, teaches us that mere private industry does not suffice to maintain the commerce, industry, and wealth of entire states and nations, if the public circumstances under which it is carried on are unfavourable to it; and further, that the greater part of the productive powers of individuals are derived from the political constitution of the government and from the power of the nation” (p 27).

The free trade of the Customs Union was like the free trade within the United Kingdom, rather than like free trade within a system of independent nation states. The states of the German Confederation had a formal sovereignty conferred by the Congress of Vienna, but the substance of Germany had been permanently affected by the French Revolution and the Napoleonic era. There was a feeling abroad that Germany was destined to become a single state, and the Zollverein was a product of that sense of destiny.

But the free trade of the Zollverein was less perfect than the free trade of the United Kingdom, and its imperfections were not removed until after the formation of the state. Perfect free trade (leaving aside the form of international plunder which sometimes goes by the name of free trade) can exist only within what List usually called a national economy but sometimes called a political economy. There had been perfect free trade within the United Kingdom since about 1820 when it became a single political economy.

The Zollverein was an expanding free trade area amongst the obsolescent states of the German Confederation. But unobstructed free trade was not achieved until the Zollverein was superseded by the German state.

The Common Market is a product of politics no less than the Zollverein was. It gains its dynamic from a sense of destiny, which cannot be described as national, but which is certainly political. And it will not be a perfect free trade area until it becomes a political economy – an economy structured by a common political framework.

But, because the dynamic of the EEC is not national, each phase of development must be worked out more systematically than was necessary in the case of the Zollverein.

The statesmen of the Common Market are undoubtedly familiar with the history of the Customs Union and have learnt from it. But when Thatcherites make reference to the experience of the Customs Union, they only bring out their own essential ignorance of both European history and of political economy.

There is only one English history of the Customs Union that I know of: The Zollverein by W.O. Henderson, published in Cambridge in 1939 (not the best publication date). Nigel Lawson, now that he has lost faith in the magic of monetarism, would do well to find it and re-educate himself with it.

Henderson says straightforwardly that “the Zollverein alone could not have brought about the economic progress that Germany achieved between 1834 and 1871” (p 340). And, without having any particular axe to grind, he draws three “lessons of general significance” from the history of the Customs Union, which are of relevance to the development of the Common Market:

“In the first place, the actual establishment of a customs union is only a first step towards the attainment of the objects for which such a union is founded …

“Secondly, a customs union would generally appear to be a half-way house… Its members must sooner or later decide if they are to go backwards or forwards. If they go back they revert to their old position as independent tariff units. If they go forward they unite their economic organisations as far as possible. Common tariffs are followed by common systems of internal taxation… They adopt the same weights and measures, the same coinage, the same railway tariffs, the same code of commercial and maritime law, the same legislation with regard to regulation of industry and workers. Some of the early difficulties of the Zollverein were due to the fact that its members failed to see this clearly. They seem to have hoped to secure the advantages of economic union and yet to preserve a large measure of economic independence. Only when they recognised that economic unity means more than the establishment of a single tariff were the full benefits of the Zollverein secured. The tendency towards uniformity is seen also in the gradual whittling down and eventual disappearance of the special financial privileges secured by a few States (such as Hanover) when they first entered the Zollverein. This absorption of the middle-sized and small German states into a wider economic system may perhaps … be one explanation of why Hanover and the South German States when to war with Prussia in 1866. The main reason was obviously a political one. They wanted to preserve a balance between the two German Great Powers and they sided with the weaker against the stronger …

‘Thirdly, the history of the Zollverein gives little support to the argument that an approximate equality of economic development and similarity of economic interests in the various regions forming a customs union are essential if such a union is to be a success. It would be difficult to find an area of the same size with greater economic diversity than Germany in the early 19th century … These differences were neither insuperable difficulties to the founding of the Zollverein nor did they prevent its expansion. Indeed, perhaps the most striking achievement of the customs union was to contribute powerfully to the welding of these divergent areas into a single prosperous economic unit” (p 343- 4).

The war referred to above is the Seven Weeks War, the war between Austria and Prussia in the summer of 1866. Because the South German states supported Austria, it also had the character of a civil war within the Zollverein. The Zollverein was therefore dissolved. Through Bismarck’s statesmanship, it was re-formed on a stronger basis in 1867, with the full participation of the South German states. In the new Zollverein, the veto which individual states had on decisions no longer applied.  Developments thereafter proceeded rapidly towards the formation of the German state in 1871.

The importance of a common currency to free trade has clearly increased since the time of the Customs Union. In those times, money had its own value determined by its cost of production as silver and gold. The only problem about interchangeability of the various German currencies was that they were not all divisible by a common factor – that they were not multiples of a common basic weight. The problem is essentially different and infinitely more complex today, with money being a form of marked paper guaranteed by the state. Rates of exchange are now a matter of economic policy between political economies. There is no natural rate of exchange. In bygone days, two travellers meeting in a desert might have figured out an approximate rate of exchange between the silver coins of different states by. biting them and weighing them, but the physical form of currency notes gives no clue to their relative values.

Ten years ago the Thatcher Tories seemed to have lost sight of the crucial difference between real money (money which had its own value based on the cost of producing the metal from which it was made) and paper money. The monetarist vision in practical politics depended on treating paper money as real – though I seem to recall that the theoretical guru of monetarism, Von Hayek, more realistically, but less practically, based his scheme on a return from paper money to gold and silver.

Nigel Lawson has revealed that, as Chancellor, he gave up the attempt to count the quantity of functional money in the economy, and only counted M Nought, i.e., banknotes in circulation. This was the ultimate lunacy which followed from treating paper money as real. And it was accompanied by a massive form of fictitious, but conditionally functional, money in the form of credit created by private banks.

And it would seem that, at the same time as Lawson narrowed his scrutiny of money down to natural banknotes (thereby treating them as if they were gold and silver, and handing actual monetary policy over to private enterprise), he was trying to get sterling into the most artificial and highly managed monetary system in the world, the EMS. He lost his belief in “free floating” between exchange-rates so that they might find their own level, because he came to appreciate that, in the era of paper money, there is no natural exchange rate between currencies because all currencies exist by virtue of public management.

At the time of the Customs Union, the Prussian Thaler, the Hamburg mark, and the South German florin all had different weights of silver (14, 34 and 24 units of a Cologne mark of fine silver respectively); and they broke down into different quantities of smaller coin (for example, the Prussian and Hanoverian thalers, which had the same silver weight, broke down into 30 groschen and 300 pfennig in the case of the Prussian thaler and 24 groschen and 288 pfennig in the case of the Hanoverian Thaler: and the relative values of the small coin of coinages based on different silver weights were of course even more difficult to work out.)

The existence of the different German coinages was of itself only a practical inconvenience in the way of trade, since coin values were objectively set by silver content. Fluctuating exchange rates between paper currencies which in themselves have no value at all, and whose operative value is a function of political economy, constitute a much greater obstacle to trade, and an obstacle of a different kind. Uncertainty, even in the short term, is added to inconvenience. And that uncertainty not only provides scope for currency speculators, which in tum aggravates the uncertainty, but it almost makes currency speculation a necessary part of trade.

 

The EMS is an arrangement which facilitates free trade by curbing currency fluctuations. But monetary obstacles to trade will not be removed until the Common Market has a common currency. And then of course a common currency will signify the existence of · a Department of a European State.

But it was a very English illusion to believe that a free trade area in the full sense could exist without a corresponding political framework.

List, in his criticism of Adam Smith, says that Smith tacitly assumes the existence of a universal republic as the political framework of trade. And:

“J.B. Say openly demands that we should imagine the existence of a universal republic in order to comprehend the idea of general free trade” (p 98).

I suppose it was easy for Smith, at a moment when Britain, with its skill in statesmanship and its national economy which had been made powerful by national political economy, seemed destined to rule the earth, to take the universal state as his framework. But it turned out that the British Empire was not to be the basis of the universal state, and therefore what List calls Smith’s “cosmopolitical economy” has proved to be of little practical use in the world, even though The Wealth Of Nations has remained a famous book.

And List, in place of the customary reasoning that trade generated peace, argued that peace generated trade, and that politics generated both:

“The popular school [i.e., English political economy, which then dominated the German universities] has assumed as being actually in existence a state of things which has yet to come into existence. It assumes the existence of a universal union and a state of perpetual peace, and deduces therefrom the great benefits of free trade. In this manner it confounds effects with causes. Among the provinces and states which are already politically united, there exists a state of perpetual peace; from this political union originates their commercial union, and it is in consequence of the perpetual peace thus maintained that commercial union has become so beneficial to them. All examples which history can show are those in which the political union has led the way, and the commercial union has followed. Not a single instance can be adduced in which the latter has taken the lead, and the farmer has grown up from it. That, however, under the existing conditions of the world, the result of a general free trade would not be a universal republic, but, on the contrary, a universal subjection of the less advanced nations to the predominant manufacturing, commercial and naval power, is a conclusion for which the reasons are very strong… A universal republic … , i.e. a union of the nations of the earth whereby they recognise the same conditions of right among themselves and renounce self-redress, can only be realised if a large number of nationalities attain to as nearly the same degree as possible of industry and civilisation, political cultivation and power. Only with the gradual formation of this union can free trade be developed, only as a result of this union can it confer on all nations the same great advantages which are now experienced by those provinces and states which are politically united. The system of protection, inasmuch as it forms the only means of placing those nations which are far behind in civilisation on equal terms with the one predominating nation, … appears to be the most efficient means of furthering the final union of nations, and hence also of promoting true freedom of trade” (p 102-3).

A century and half after that was written, the “predominating nation” of those times has been comprehensively displaced from its predominance by the “political economy” implemented, in succession by America, Germany, Japan, France, etc. etc.

Thatcher uses the verbiage of free trade when opposing the establishment of European free trade. She drivels on about the Mother of Parliaments when confronted with the brute fact that the art of statesmanship has passed from Westminster to the more vigorous representative assemblies of Europe. Following Adam Smith, she sees the household as the microcosm of the general economy, and she carries this to the logical but absurd conclusion of denying the existence of society. She is the quintessence or the dregs of a misconception of the world which was once grand but is now piffling.

By contrast, Charles Haughey, Taoiseach of the Republic of Ireland, has emerged as one of the statesmen of Europe. Charles Haughey’s assumptions about the world are European because he developed in a political culture whose political economy has Friedrich List as its source. Arthur Griffith’s Sinn Fein consisted very largely of List’s political economy

 

This article appeared in January 1990, in Issue 15 of Labour and Trade Union Review, now Labour Affairs.  You can find more from the era at https://labouraffairsmagazine.com/very-old-issues-images/.

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