The Rise and Fall of the German Stock Market
Bryan Taylor, Chief Economist, Global Financial Data
Between 1815 and 1914, Europe was able to avoid any major wars on the European continent. Nothing like the Thirty Years’ War between 1618 and 1648 or the Napoleonic Wars between 1792 and 1815, each of which cost millions of lives, occurred in Europe. Germany was defeated by the French in the Napoleonic Wars, and beginning in the 1860s, Germany took advantage of this peace to become the most powerful economy in Europe.
Germany and Austria were defeated by Napoleon in the Wars between 1792 and 1815. The Holy Roman Empire, which had existed in Germany between 1512 (some would say 962) and 1806 collapsed under the weight of French forces. Napoleon dissolved the Holy Roman Empire in 1806 and replaced it with the Confederation of the Rhine. After Napoleon was defeated at Waterloo in 1815, the allies attempted to create a peaceful Germany to separate France and Russia. In the years that followed, Germany brought the German states closer together. A tariff-free Zollverein was established in 1834 between the German states and railroads were built in Germany and Austria in the 1840s to industrialize the German Confederation.
In the 1840s, Germany suffered setbacks. The hungry 1840s pushed the lower classes to rebel. Revolution swept through Europe in 1848. King Louis-Philippe abdicated in France in February 1848. This led to a number of sympathetic revolutions in Germany. The German stock market declined as a result and hit its bottom in May 1848. It bounced back in 1849 as the revolutions were repressed by troops in Austria, Bohemia, Italy, and Hungary. Germany was defeated in the First Schleswig War by Denmark which occurred between March 1848 and May 1851.
The stock market suffered another decline during the Austro-French Piedmontese War between April and June of 1859. This led to a sudden decline in both German and Austrian stocks in May 1859. However, after 1859, Prussia was able to successfully fight three wars against Denmark between February and October 1864, against Austria between June and August of 1866 and against France in 1870. Austria’s defeat in 1866 shifted the balance of power in Germany from Austria to Prussia. When Prussia defeated France in the Franco-Prussian War of July 1870 to January 1871, all of Germany fell under the sway of Prussia, which declared the new German nation on January 28, 1871, at the Palace of Versailles. The Treaty of Frankfurt concluded the war with an armistice and an indemnity imposed on France on May 10, 1871.
Figure 1. Germany and Austria Stock Markets, 1845 to 1914
It is interesting to compare the performance of the German and Austrian stock markets between 1845 and 1914. Between 1845 and the 1880s, the two markets behaved similarly, in part because corporations in Austria listed on German exchanges and vice versa. The first stock to list on the Frankfurt exchange was the Austrian National Bank. Both countries showed similar declines in 1848, 1859, 1866 and in the late 1870s. The speculative bubble in 1872 was much stronger in Germany than in Austria, but the decline was worse in Germany. Yet, both countries ended up at the same levels 30 years after the chart begins. After 1885, however, Germany clearly outperforms Austria with higher peaks as Germany industrializes and becomes the largest economy in Europe.
For the first time, in 1871, all of Germany, except for Austria, was unified in a single nation. The result was a post-war bubble which lasted until November 1872 when the stock market peaked after a 145% bull run from the previous bottom in 1866. However, the bubble burst and the German market crashed by 64% falling back to the levels it had been at in 1859. The Austrian stock market crashed on May 9, 1873, leading to a 53% decline in its stock market.
Figure 2. Germany Stock Market Index, 1845 to 1925
Germany used the indemnity from the 1871 Treaty of Frankfurt, which was equal to about 25% of France’s GDP, to move Germany onto the Gold Standard and to industrialize the nation. German railroads were nationalized not only to aid Germany in war, but to help build its industries. There followed a series of peaks in the stock market as new waves of industrialization swept Germany. The market quickly recovered in 1879, then stabilized for the next six years. As Figure 2 shows, the stock market peaked in December 1889, May 1899, November 1905, November 1912 and finally in May 1918. In each case the stock market advanced slightly over the previous peak, then fell back, but each time, the decline was smaller than the previous decline before the market moved forward again.
Given the strong performance of the stock market, it is no wonder that Germany thought it could win the war in 1914. Over a 45-year period, Germany formed what technicians call a rising wedge. The pattern displays slightly higher highs and higher lows until the pattern reaches a breaking point where it either breaks out to new highs or crashes down. If Germany had won the war, the stock market would have broken out to new highs, but Germany did not win the war. When Germany lost World War I, the stock market crashed. France imposed an indemnity on Germany at the Palace of Versailles after the war and Germany tried to inflate its way out of the indemnity. The result was a stock market crash during which the stock market lost 97% of its value in real terms between May 1918 and October 1922. The hyperinflation wiped out German savers and investors.
Unfortunately, Germany’s defeat in World War I laid the foundations for the Second World War and during the 1930s, Germany began to rebuild its economy and military to launch the Second World War against France, Russia and the rest of the world. The result was the destruction of Germany.