War, state growth and market integration in the German lands, 1780–1830 Hakon Albers+ and Ulrich Pfister++ + Martin-Luther University Halle, Department of Economics [email protected] ++ University of Münster, Institute of Economic and Social History [email protected] (This version: 24.08.2018) Abstract We employ a novel dataset of rye prices in 33 German towns to test the hypothesis that state growth promoted market integration. The Revolutionary and Napoleonic Wars transformed Germany’s political system from a plethora of dominions with limited sovereignty to a loose federation of about 40 states in 1815. Price gaps between markets that belonged to different polities before the wars and that both became part of Bavaria fell significantly between the 1780s and the 1820s. Similarly, we find a reduction of the price gaps in a region that was part of the Kingdom of Westphalen during the wars and was integrated into Prussia in 1815. State growth created internal markets, which was aided by the replacement of heterogeneous domestic tariffs with unified systems of external tariffs. The effect of state growth on market integration is relevant to account for Germany’s transition to the post-Malthusian era after 1815. Keywords: economic development, state growth, market integration, Napoleonic Wars JEL: N13, N53, O13, O43 Acknowledgements: We are grateful for comments received by Wolf-Heimo Grieben, Andreas Hoffmann, Michael Kopsidis, Martin Uebele, Fabian Wahl, Christoph Wunder and participants at earlier presentations at the FRESH meeting Vienna 2016, Department of Economics Halle, CGDE-workshop Jena, EHES Conference 2017 Tübingen, and the SMYE 2018 Palma de Mallorca. All errors remain ours. 1 “A large obstacle of interior transport are the restrictions, which one German state enacted against another one so far. Simply because the number of states was reduced, trade will 1 benefit.” (Winkopp 1806, p. 66) 1. Introduction This study employs rye price gaps between some thirty urban markets to explore the effects of the Revolutionary and Napoleonic Wars (1792–1815) on market integration in the German lands. Studying market integration during the decades around 1800 is relevant because the 1810s mark Germany’s transition to the post-Malthusian era. In 1730–92 population in German territories expanded at an annual rate of 0.4 percent, whereas the real wage declined at a similar pace. After the Revolutionary and Napoleonic war, the rate of population growth increased to 0.8 percent in 1815–1870, whereas the real wage, which had recovered to the pre-war level already by about 1820, remained largely stable during the remainder of the pre-unification era. The Malthusian link between population and material welfare had obviously been broken. Moreover, the rate of natural increase of the population was always positive after 1813; the Malthusian positive check had lost much of its former force (Pfister and Fertig 2010; Pfister 2017; Fertig et al. 2018). Together with the onset of the Agrarian Revolution, and especially the cultivation of the potato, which diversified food risk and increased carrying capacity (Klasen 1998; Uebele and Grünebaum 2013), market integration and associated Smithian growth constitutes a potential mechanism for the transition to the post-Malthusian era (Møller and Sharp 2014, p. 118). Thus, while our analysis focuses on grain price gaps, it responds to a wider literature on institutions, market integration and economic development (e.g., Acemoglu et al. 2005; Rodrick et al. 2004). Because of repeated changes in political regime the trajectory of the German economy between the late eighteenth and late nineteenth century holds ample potential to provide insights on this topic. Specifically, Acemoglu et al. (2011) relate French presence to regional city growth and argue that institutional reforms enacted in territories under French rule or French influence at the beginning of the nineteenth century had a beneficial impact on economic development after 1850 (see Kopsidis and Bromley 2016 for a discussion of their study). Keller and Shiue (2016) employ a similar framework but combine the analysis of city growth with the one of price gaps as a proxy for market integration. Their findings suggest that institutional change impacted on economic growth both directly and indirectly through market integration. Rural property right reforms constitute an example of the direct channel because they improved incentive structures in a sphere that was not governed by market relations. The results obtained by Keller and Shiue suggest that the 1Own translation of original German quote: “Ein großes Hinderniß des inneren Verkehrs machen die Beschränkungen, welche bisher ein deutscher Staat gegen den anderen verfügte. Schon dadurch, daß der Staaten wenigere geworden, wird der Handel gewinnen […].“ Cf. Berding (1980, p. 528) who discusses parts of this quote briefly. Winkopp advocated the Rheinbund as an own federal state. 2 indirect channel prevailed over the direct channel; institutional reforms enacted at the beginning of the nineteenth century benefitted economic development primarily by fostering market integration, which in turn increased allocation efficiency. Both these studies focus on the period after 1815. However, given that post-war reconstruction was completed by about 1820 and Germany had transited to the post- Malthusian era by then we should explore the immediate connections between war-related political change and economic outcomes. After all, it is theoretically implausible to look for effects of institutional heterogeneity on growth more than half a century later when the polities under study experienced institutional convergence.2 Hence, we focus on the period c. 1780–1830, consider changes in territorial boundaries as a battery of treatments and — building on Keller and Shiue (2016) — explore whether treatments had an effect on market integration. Our hypothesis is based on a theoretical model by Alesina and Spolaore (1997): The size of internal markets and the efficiency of government are both related to state size. While too large territories can have disadvantages caused by large heterogeneous populations (e.g., secessions), too small states might have problems to cover the fixed costs of nonrival public goods (such as efficient taxation systems) and may suffer from market segmentation. For our case, we conjecture that, as a consequence of the boundary changes following from the Revolutionary and Napoleonic Wars, a few previously small German states expanded significantly and approached the optimal state size from below. Much larger internal markets were a direct consequence. The main immediate effect of the Revolutionary and Napoleonic Wars on Germany was a consolidation of territorial power. From about 150 major polities and hundreds of tiny dominions in the early 1790s, the number of political units shrank to about 40 in 1815 (Fehrenbach 2008, pp. 71-81). 60 percent of the German population were now citizens of one of the two largest states, Prussia and Bavaria (Fertig et al. 2018). This had two effects: First, more trade partners belonged to the same territory and heterogeneous internal tariffs were abolished, which increased the size of internal markets. Second, public authorities in large states were now better capable to provide public goods. Along with the development of modern states uniform systems of external tariffs were created. An additional case in point is infrastructure development: At the end of the eighteenth century there were few paved roads in Germany; after 1815, public authorities inaugurated programmes of state road construction (Müller 2000; Uebele and Gallardo Albarrán 2015).3 Through these two channels — creation of internal markets and improved supply of public goods — the development of modern, much larger states benefitted market integration, deepened labor division between regions and thereby contributed to the transition to the post-Malthusian era. 2 In 1861 German states agreed on a common business law (Allgemeines Deutsches Handelsgesetzbuch), in 1869/70 on an industrial code (Gewerbeordnung), and agrarian reforms enacted earlier were implemented in the 1850s and 1860s. 3 Note that some (parts of) paved roads were built during the time of French rule and of course also for military purposes (e.g., Pfeffer 2012; see also Winkopp 1806, p. 66). 3 We carry out a summary test of this hypothesis by implementing a difference-in- differences approach on a novel dataset of rye prices for 33 markets in 1780–1830. We thereby follow a well-established tradition of employing grain price gaps as a proxy for market integration (e.g., Federico 2012; Chilosi et al. 2013; Keller and Shiue 2014). We find that price gaps between markets that belonged to different polities before the wars and that both became part of Bavaria fell by about 62 percent between the 1780s and the 1820s. The effects in Prussia are heterogeneous and there is no uniform reduction of price gaps in newly included territories. But for those city-pairs that belonged to the former Kingdom of Westphalen, a French satellite state, and then became part of Prussia after the wars, we find a reduction of price gaps by about 41 percent. French presence as such had no uniform effect on price gaps. The latter finding suggests that institutional reforms, such as the introduction of modern, inclusive commercial law, had no immediate consequences for the operation of trade, at least with respect to grain markets. Thus, our