The Bear’s Lair: Holy Roman Empire example should deter governments

The Holy Roman Empire was a pioneer in banking through the Fuggers, it had adequate constitutional protections for at least the middle classes, and it benefited from fabulous German engineering talent, so why didn’t it get the Industrial Revolution? Its main problem was internal tariffs; we are told that in the 18th Century there were 32 toll houses on the Rhine and 35 on the Elbe. The Empire’s failure to overcome that problem despite its enormous costs for its economy has lessons for us facing similar entrenched inefficiencies today, which are equally regarded by us as part of the natural order.

I am currently researching the countries of Europe in 1600-1800, to determine why Britain and not other countries got the Industrial Revolution first. I believe the main cause to have been better British policy, but there are other interesting subtleties when you look closer. In the case of France and Spain, both much richer than Britain in 1600, the structural flaws and policy failings are fairly obvious (in France’s case after the great Henri IV was assassinated in 1610.)

However, the Holy Roman Empire, unlike France and Spain, was not absolutist; it had an Imperial Diet, or Reichstag that met pretty regularly and was as representative as the French Estates General or the British Parliament. It also had a strong legal tradition of “German Freedom” that dated back to the German tribes examined by Tacitus around AD 100. It had an established service sector through the great Fugger banking dynasty, and an extremely strong engineering tradition throughout Germany. It also had plenty of coal, the initial fuel of the Industrial Revolution.

Structurally, the Holy Roman Empire had two flaws, both of which appeared so much part of the “way things were” that no leaders, however reforming, made serious attempts to change them until well into the 19th Century. One was a feudal system of land tenure. Particularly in the East, many peasants still had a serf relationship with their local landlord. (Britain had ended serfdom gradually in the expensive-labor period of the 15th Century, after the Black Death had decimated the population.) In addition, even the big landowners did not own freeholds; their ownership was feudal, so reverted to their “lord” if they ran out of heirs. Hence, even the biggest landlords could not easily sell land nor mortgage it at a reasonable cost. Together with the Holy Roman Empire’s lack of lucrative overseas colonies, this meant that capital for industrialization was hard to come by.

The other problem, as I mentioned above, was internal tariffs. Since the Empire consisted of about 800 “countries,” each “country” had the right to levy tariffs. In the case of countries on the Rhine and Elbe, they levied them by requiring tolls to be paid by passing river traffic, giving the inordinate profusion of toll stations noted above. With so many tariffs to be paid, each one delaying traffic as well as adding costs, it was impossible to build a single decent-sized market for a new product; there were no economies of scale available. Thus, no large commercial companies like Wedgewood could be formed, let alone new industrial ventures. Like the landholding problem, this was solved in the mid-19th Century, initially by the “Zollverein” (customs union) of 1833, but by then industrialization was a matter of playing catch-up (which Germany did, very successfully.)

Both these problems were built into the Holy Roman Empire’s legal and constitutional system, and into the thinking of its people. No statesman, however “reforming” could remove these barriers before it became blindingly obvious after 1815 that they needed to be removed. (Even then Klemens von Metternich, trying to remove them in post-Imperial Austria, was prevented from doing so by ferocious opposition from Archdukes and other big landowners.) By their existence, these problems delayed the Industrial Revolution in Germany by at least 50 years, and made the first half of the 19th Century a period of increasing impoverishment and distress, as pre-industrial process attempted to compete with industrial development in other countries.

Today’s United States has a similar problem, and we should learn from the Holy Roman Empire’s failure what it may cost us. The combination of aggressive environmentalists and over-powerful lawyers is proving an increasing drag on the entire operations of the U.S. economy, and may indeed be responsible for much of the decline in productivity growth since the 1970s.

To give three recent examples: a recent Supreme Court decision allowed the Atlantic Coast pipeline to run under the Appalachian Trail, a lawsuit that had held up the pipeline for years. However, this decision was essentially nullified when Dominion Energy, one of two companies that had been developing the $8 billion project, gave up on the project and sold its remaining natural gas assets to Warren Buffett. Apparently, even with Supreme Court approval, the remaining environmental harassments and legal delays were sufficient to make the project uneconomic.

In a second case, the $4 billion Dakota Access oil pipeline, which has been opened with oil passing through it quietly for three years, was suddenly blocked by a Washington district court, and prevented from further operation, because of some alleged defect in the pipeline’s paperwork before it was opened. By this decision of a lower court 1,500 miles from the pipeline, the operation of a $4 billion asset will be prevented for an indefinite period, at least 13 months.

In the third case the Keystone XL pipeline, a major international project which was held up arbitrarily for the entire eight years of the Obama administration, and has slowly been working its way through the paperwork since 2017, was held up by the Supreme Court for yet another environmental review, thus dooming it if Joe Biden should win the November election.

This mindless harassment is not limited to pipelines. The projected tunnel under the Hudson between New York and New Jersey is now projected to cost $12.3 billion, compared with the $750 million equivalent of the $8 million cost of the Holland Tunnel, completed in 1927. All over the economy, not only are huge costs added by environmental/legal delays, but projects are completely unable to be completed in a timely fashion.

President Trump and the Democrats in Congress are agreed that a spending program on infrastructure would be desirable, but the reality is that around 90% of the money spent on such a program would be wasted, judging by the cost bloat in the NY-NJ tunnel project. What’s more, the nation would get very little infrastructure for a decade or more, as endless environmental studies and witless lawsuits would eat up time, even supposing some future set of politicians did not decide to cancel the projects, as they have California’s High Speed Train.

Environmental considerations deserve more consideration than they got in the 1950s; nobody wants to set the Cuyahoga River set on fire again. But the nexus of grotesquely complicated regulations and legal liabilities that were set up in the late 1960s and early 1970s is literally a menace to civilization. Just as the Holy Roman Empire was completely unable to have the Industrial Revolution for which it was otherwise well set up until the internal tariffs and feudal property ownership were dismantled, so the U.S. and indeed the world will miss out on huge future advances because of the delays and exorbitant costs imposed by the environmental/legal nexus.

Half a century of poverty may be an underestimate of the costs this will produce. China is already eating our lunch; it will be much more able to do so if we handicap ourselves by this means (China will of course sign all sorts of treaties promising to combat global warming, protect endangered species and clean the air; it just won’t abide by them, treating them as it does all its other obligations.) For geopolitical reasons as well as for our own living standards the environmental/legal nexus must go, or the loss of U.S. living standards and freedom may be permanent.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)