Case Studies on Modern European Economy

Entrepreneurship, Inventions, and Institutions

Ivan Berend

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415639941
• eBook ISBN: 9781135917685
• Topic: History
• Subtopic: 19th Century History
• Index: History

The last two centuries have been the scene of dramatic change throughout Europe. And one of the main causes of these tremendous and spectacular changes was the economy. These transformations were achieved by people: scientists and political thinkers, inventors and entrepreneurs, educators, skilled and educated workers. Who not only invented machines and computers, but were able to renew economic and political systems. This volume, therefore, presents a new approach to the period by looking at case studies to understand how these changes came about and the impact they had on modern Europe.

Ivan Berend presents the spectacular history of modern European economy as a chain of "small" events, actions, and the ideas of individuals, as the influence of institutions and bold entrepreneurs. The essays are grouped into six chapters and discuss the power of entrepreneurship; the power of institutions; economic regimes and the permanent renewal of capitalism; the power of ideas and inventions; pioneering companies; from the rise of industrial cities to post-industrial suburbanization; bubbles, great depressions and economic cycles. All of the single episodes and personal stories offer a cross-section of the complex and interrelated history of modern Europe.

Case Studies on Modern European Economy will be essential reading for students of economic and modern European history.

1The power of entrepreneurship

Introduction

The modern market system has its own rules and mechanism. If fully introduced, it has a decisive impact on economic development. The geopolitical situation of a continent or a country, the possibility of water transportation, nearby seas and navigable rivers, its natural endowments, e.g., its possession or lack of crucial raw materials of the age such as water, coal, iron ore, or oil, also have decisive influence on economic growth.

Nevertheless, the most important factor in modern economic development is people. The majority of people in a society collectively share certain values and principles that may assist or block the road of economic development. Equally important, however, was the role of the armies of workers who learned the skill and developed their proud identities with their work and companies. Invented or imported technology, the prime mover of economic development, would not work without the social capability of the given society, as the Stanford University economist, Moses Abramovitz, called it. Social capability includes a certain educational level, but it also includes social habits, attitudes, and behavioral patterns, or, to put it in a different way, the culture of the society.

Within the army of actors in a modern economy, the special, talented, and courageous individuals, the captains of industry, the pioneering bankers, entrepreneurs, and managers whose innovative talent put them into the driver's seat, deserve special attention. Their work and initiative may make tremendous difference. As already noted in the Preface, economist Joseph Schumpeter maintained that entrepreneurs are the central figures of the modern market economy. Schumpeter stressed the role of entrepreneurs as innovators who introduce new products and new production methods, discover new markets, and realize new forms of organization of work. Actually he calls only those to be an entrepreneur who carry out innovation: “The entrepreneur may, but need not, be the inventor … may, but need not, be the person who furnishes the capital … It is leadership rather than ownership that matters.”¹ The entrepreneurial spirit is the engine of innovation and technological change. Entrepreneurs are often called the “spark in the engine of economy.” Two main characteristics made them successful: creativity and risk-taking. Calculated risk-taking, however, had to be cautious and not hazardous. Good entrepreneurs, often obsessed by certain ideas, are never gamblers. “Casino-type” entrepreneurship may ruin the entire business. Entrepreneurs establish firms to compete in the market, and they have to introduce something new to be successful. They have to put ideas into effect. These ideas are sometimes their own invention, sometimes just a superb realization of others’ technological invention. Good entrepreneurial instinct helps to find, and often to create, a need of the people and satisfies it. To gain profit and maximize it required a highly competitive spirit. Entrepreneurs of big companies, with huge financial resources, might play an especially crucial role in investing in research and development projects and create positive economic change.

This chapter presents a few portraits of an endless number of entrepreneurs, among them the first bankers of modern Europe, the Rothschilds, who emerged from antique business and money exchange; and the inventor and producer of the steam-hammer, James Nasmyth, who became a leading entrepreneur from his craft and small business. Some of them established entire dynasties and sons continued their fathers’ business. Amazing stories help us to understand the role of entrepreneurs, such as the story in this chapter of the illiterate peasant-serf Morozov family that emerged to be one of the richest textile dynasties of Russia. A quite different type of entrepreneur is illustrated by the British William R. Morris and the French Louis Renault, skilled and obsessed entrepreneurs who established a whole industrial branch from experimenting in their garages. A very different type again is the university-educated scholar-entrepreneurs such as the pioneers of the German electro-chemical industry, the Rathenaus, or the Siemens brothers, central heroes of the second industrial revolution. A case study presents the problem of females in business and management. Half of the society, the women, were excluded from holding an equal role in business for a long time, but they always had an important role that, at last, was recognized and was even assisted by social programs. The essays in this chapter illustrate the role of the human, entrepreneurial factor in the development of the modern European economy.

Mayer Amschel Bauer and the foundation of the House of Rothschild²

The Rothschild family opened a separate chapter in European banking. Mayer Amschel Bauer, who started using the name of Rothschild permanently, emerged as the most prominent banker of the age. He kept his oldest son in Frankfurt, but sent his other four sons to London, Paris, Vienna, and Naples, and, after his death in 1812, the five collaborating brothers ran major Rothschild banks throughout Europe. The banking dynasty played a central role in nineteenth-century investment banking, railroad construction, and industrial investment all over Europe, significantly contributing to the industrialization of the continent.

Only scattered information is available on the family during the previous centuries. What is known is that, in the 1560s, Isak, son of Elchanan, built a house called “zum Roten Schild.” From that time on, the Bauer family also often used the name of Rothschield. Sixteenth-and seventeenth-century Bauer-Rothschilds were relatively successful small business people. Their taxable income doubled from the late sixteenth to the late seventeenth century. However, Mayer Amschel's father, Amschel Moses, lived in the same small house where the family moved in the seventeenth century. He was a goldsmith and also dealt with money-changing.

Here, in the Judenstrasse, in the walled ghetto of Frankfurt am Main, Mayer Amschel was born in 1744. Jews had to wear a special sign on their clothes, were not allowed to enter inns or coffee houses, parks or promenades. On Sundays, they were banned from leaving the ghetto. To leave Frankfurt, they had to apply for a special pass. In the early eighteenth century, about 3,000 people lived in this ghetto. The young Mayer Amschel, after having completed his primary education, was sent to Fürth to a rabbinical school. At the age of 12, however, both of his parents died in an epidemic, and his three older siblings sent him to Hanover as an apprentice to learn business at the Wolf Jacob Oppenheim merchant firm. The Oppenheims were court agents, a continued practice of the medieval “court Jews.” This experience certainly influenced Mayer Amschel during his entire life.

His first independent business activity after 1764, when he returned to Frankfurt, was selling rare coins and medals, and soon other kinds of antiques. The buyers of these goods were mostly recruited from the aristocracy and via this business he came into contact with William, Hereditary Prince, later Elector (or Kurfürst) of Hesse-Kassel and one of the biggest capitalists of the age. This connection determined Mayer Amschel's later success, since he established permanent business contact with the Prince as his financial agent. In 1769, he gained the rank of court agent. Next year, the 26-year-old merchant married the 16-year-old Gutle Schnapper, the daughter of the court agent of the Prince of Saxe-Meiningen. Between 1871 and 1892, Gutle Rothschild delivered 19 children, virtually one per year. Ten of them, five girls and five boys, survived. These boys, Amschel Mayer, Salomon Mayer, Nathan Mayer, Kalman (Carl) Mayer, and Jacob (James) Mayer became employees, and later partners, in their father's business. After the birth of his last child, Jacob, Mayer Amschel started his banking activities. This was a general custom for merchants and goldsmiths at that time, since their business was connected with crediting and money exchange.

As one of the best Rothschild historians, Niall Ferguson, stated, “At the beginning of the 1790s, Mayer Amschel Rothschild was no more than a prosperous antique-dealer.”³ Within the space of a decade, however, he emerged as one of the richest men in the country and the founder of Europe's most famous banking house. What really happened? One of the main secrets behind the spectacular rise, beside the genuine aptitude and superb manner and talent for contact-building, was Mayer Amschel's fruitful court connection. In the medieval and early modern centuries, the institution of “court Jew” played a central role in money-lending and primitive banking. This institution was rooted in the Church's banning of usury, i.e. medieval money-lending, and also in the strict bans that excluded Jews from activities other than trade or the money business. Jews filled the “lücken Positionen,” as Karl Marx called the gap positions in societies.

Mayer Amschel joined this group of court Jews, many of whom, in the nineteenth century, became court bankers. Rothschild built and maintained personal contacts with the court and started lending money, investing and handling Kurfürst William's huge wealth, including the Prince's English investments. Managing this portfolio was a great business. In a few years, for example, Rothschild purchased securities for the Prince nine times with a total amount of £664,850. He got one-eighth of 1% as the brokerage fee, but gained 2% from the difference between the agreed and real purchasing price, and some other amount from the difference between the agreed and real exchange rate. Furthermore, most of the transactions were conducted by using Rothschild's money as a loan to the Prince who only later paid back the amount, with interest. Until the securities were fully paid, they remained in Rothschild's ownership. Altogether the banking profit was high. The same was true with the discounting business. Mayer Amschel also discounted hundreds of thousands of gulden bonds for various courts that needed the money promptly, and he later sold the bonds at a higher price. Just one transaction of 290,000 gulden made a profit of several tens of thousand guldens. As a consequence, the Rothschilds’ wealth jumped from 108,504 gulden (£10,000) in 1797 to 800,000 gulden (£80,000) by 1810.

He also started lending to foreign governments, first to Denmark. His business activities had a huge geographical range, including Hamburg, Berlin, and all other parts of Germany, but also Vienna, London, and Paris. During the French occupation, he established the same banking business with the French authorities in Germany. Via his son, Nathan, and the established London branch, the Rothschilds financed the war against France. The British government entrusted the Rothschilds to manage its payments to its continental allies. In this way, Rothschild established contacts with almost all of the European ruling houses. In the early 1800s, Mayer Amschel Rothschild was appointed court agent to the Order of St. John, the Prince of Thurn und Taxis, the Count of Büdingen, the Landgrave of Hesse-Darmstadt, and most of all, the Emperor of Austria. The court banker's role became especially lucrative during the years of the Napoleonic wars, when the House of Rothschild established its huge wealth.

Banking was a multinational business from the beginning and the House of Rothschild was a genuine multinational company. Mobile, cosmopolitan minority people had a genuine advantage in that early stage of banking. Daniel Chirot suggests that it was their own identities and cultures that were the basis of success in the transnational networks: “Their ‘Greekness,’ ‘Jewishness,’ ‘Armenianness’ … meant an entry ticket to an international business network, because the diaspora entrepreneurs were always more loyal to international capital than to the nation in which they lived.”⁴

The Rothschilds also entered the English textile business during the British industrial revolution. Nathan, one of the most successful sons of Mayer Amschel, moved to Manchester in 1799 and began to be involved in textile export to the continent. During the war years and the banning of trade by continental blockade, he conducted the business by smuggling. Nathan then moved to London, and entered into banking operations. The London branch of the Rothschild house became one of the pillars of the British banking system, similarly to the family's private banks in Paris, run by Jacob, Vienna, headed by Salomon, and Naples, established by Karl. The century's most influential European banking network was created. Mayer Amschel, as the surviving correspondence proves, commanded the business. Except for official business letters, his letters to his sons were written in German, but using Hebrew letters to be strictly confidential, and guided them closely. He kept the entire organization in family hands. He excluded his daughters from the business. And while his sons-in-law were often employed by the family business, they never belonged to the top leadership. In 1810, at the age of 66 and seriously ill, Mayer Amschel signed an agreement with his sons to establish “Mayer Amschel Rothschild & Sons,” a family company. His daughters, sons-in-law, and their heirs had no share in the capital of the firm. In a will written hours before his death in September 1812, he reiterated the guiding principles of the company, including the rule that the oldest son is always the head of the House, unless the majority of the family decides otherwise.

After the death of the founder, the family council elected as head of the family the talented and successful Nathan Mayer, who was the fourth child and third son of Mayer Amschel, and also head of the London branch. As the second son, Salomon stated, “My brother in London is the commanding general, I am his field marshal.” Nevertheless, as the Brockhause Encyclopaedia's 1827 article on the Rothschilds stated, the number one guiding principle “obliged the five brothers to conduct their combined business in an uninterrupted community … Since his [Mayer Amschel's] death, any proposal … is the object of collective discussion; each operation … is carried out according to an agreed plan.”

The Rothschild dynasty emerged from Frankfurt's Judengasse and dominated nineteenth-and twentieth-century European banking. All five brothers got hereditary nobility and established a life of aristocracy. Unlike most of the enriched German Jews, the Rothschilds did not convert, and continued helping their community. Mayer Amschel not only paid out 10% of his income, according to the Jewish rule for the community, but worked on the emancipation of Jews both in Frankfurt and in many other countries where he had business. His sons became major donors in various areas.

During the ensuing two centuries, eight generations followed each other and nearly 100 German, English, French, and Austrian Rothschilds were born and lived in their home countries. The sons were involved in family business, while other members turned to various occupations. There were black sheep such as Nathan Mayer's daughter, Hannah Mayer, who—against the will of the family elders—married the Gentile Henry FitzRoy in 1839 and converted to Christianity. It shocked the family, which then shunned her. A few male members of the fifth generation rejected banking. Walter studied natural science, and his brother Charles became an amateur entomologist who published 150 papers, but he later committed suicide. From the French branch of the same generation, Jimmy became a liberal MP, and his brother Maurice an art collector. In the life of the seventh generation, it was natural that Emma Rothschild would become an excellent British historian; she married Amartya Sen, the Nobel laureate economist of Indian origin. The history of the Rothschilds has significantly broadened and not ended.

James Nasmyth, the pioneer of standardized mass production of tools and machines⁵

Early engineering during the industrial revolution was a bottleneck for industrialization because it remained behind in the age of handicraft work. The production of tools and the first newly invented machines, including steam engines, was thus expensive and lacked precision. “Engineers” were handicraft workers, used manual tools and worked without precise standardization. James Nasmyth stated in 1841: “Up to within the last thirty years nearly every part of a machine had to be made and finished … by mere manual labour … consequently the enormous expense [as well as inaccuracy] … proved a formidable barrier.”⁶

Around the turn of the nineteenth century, however, some brilliant London pioneers, among them Joseph Bramah and most of all Henry Maudslay, who invented machine-making t...

Table of contents

• Front Cover
• Case Studies on Modern European Economy
• Title Page
• Copyright
• Dedication
• Contents
• Preface
• Introduction
• 1 The power of entrepreneurship
• 2 The power of institutions: economic regimes and the permanent renewal of capitalism
• 3 The power of ideas and inventions
• 4 Pioneering companies
• 5 From the rise of industrial cities to post-industrial suburbanization
• 6 Bubbles, great depressions: economic cycles
• Index