When people look at Germany, the country with Europe’s largest economy, they are quick to point out, “See! To be prosperous at scale, there needs to be one state.”
One flag. One government. Case closed.
Except history disagrees.
Before 1871, there was no unified Germany—only the German Confederation. Formed in 1815, it was a loose association of 39 states, lacking a central executive and common court.
Critics then and now insist that an economy with that kind of fragmentation must collapse under its own weight. Too many governments, tollgates, and petty princes must make free commerce and peace impossible.
And yet, the German Confederation did more than merely exist for half a century—it prospered. OECD historical data show that Germany boasted a real GDP growth rate of 2.01% from 1820 to 1870, while the Western European average was 1.71%. Real GDP per capita grew at 1.09% versus 1.00%, respectively. For context, Western European GDP per capita had grown at just 0.14% in the preceding centuries.
The Confederation inherited a tradition stretching back a millennium under the Holy Roman Empire: many jurisdictions, open trade, and long stretches of peace. The German Confederation was the next chapter. Its history is sown with dynastic rivalries, shifting alliances, and liberal revolts. Yet, one pattern keeps surfacing: competing sovereignties opened markets, checked political overreach, and kept the peace.
Thirty-Nine States
During the Napoleonic Wars in 1806, the Holy Roman Empire was dissolved. As Napoleon’s final defeat drew near, the victorious powers aimed to restore a balance of power in Europe at the Congress of Vienna in 1814–1815.
Out of these deliberations came the German Confederation: 39 independent states bound by mutual defense, with no central executive and no common judiciary.
“Why did it not restore the hundreds of states of the Holy Roman Empire?” one might ask.
Many tiny entities had been swept away by the war. The Congress would have had to undo earlier consolidations and split the regions up again.
“And why did it not create one unified Germany?” one might also ask.
A unified Germany would have signified one strong German superstate in the middle of Europe. This ran counter to the power balance the Congress wanted to achieve. In the twentieth century, with one large Germany at the center of two world wars, the world learned that this instinct was not a bad one.
The German Federal Act, the Confederation’s founding document, states the goal clearly: “Its aim shall be to maintain the external and internal security of Germany and the independence and inviolability of the individual German states.”
The Federal Act laid the groundwork for decades of peaceful economic collaboration. Some states soon began to implement protectionist policies, yet competition was quick to punish the protectionists.
Economic Union > Political Union
In the late 1810s and 1820s, customs unions began to form among the German states. Prussia moved first, abolishing internal customs duties and signing a trade pact with Hesse-Darmstadt. Southern states followed with their own union; central states formed another. The logic was contagious: lower barriers meant more commerce. No prince wanted to watch his merchants fall behind his neighbor's.
The Zollverein (“customs union”) unified those alliances in 1834. At its founding, it consisted of 18 states. Over the years, it grew to encompass most of Germany, creating a large free-trade zone. By midcentury, goods moved across most of Germany as freely as they moved within any single state.
Inter-state trade grew. Inter-state price differences fell. However, while territories became more economically interconnected, political systems remained separate. Kingdoms traded alongside duchies and free cities. Some states had written constitutions early, while others stayed more autocratic.
Nothing illustrates the Confederation's voluntary cooperation better than the railways. Track grew from 6 kilometers in 1835 to nearly 19,000 by 1870. They were not built by a central ministry but by states and private associations that chose to standardize because it made economic sense to do so.
Political coordination was another story. In 1819, ministers pushed through the Carlsbad Decrees, which aimed to censor liberal and nationalist ideas across the Confederation. However, enforcement depended on 39 separate governments, and within a few years, the decrees were dead letters. The contrast with the Zollverein is instructive: a command imposed on 39 sovereignties collapsed; a deal that served all 39 sold itself.
Competition
The pattern of the Holy Roman Empire held into the Confederation: decentralized sovereignty bred competition.
Capital moved between states. Businessmen from the Rhine and Ruhr owned the Karlsruhe engineering industry, located in another state. Money moved to wherever the returns were highest, regardless of borders.
Joint-stock banks were outlawed in some states but not in others. In Prussia, special permission was needed to establish one, but it was rarely granted. Hence, Prussian businessmen founded a joint-stock bank, the Darmstädter Bank für Handel und Industrie, in the Hesse-Darmstadt territory. By 1854, it was already issuing government loans to Baden and Bavaria. Prussia's restriction didn't kill joint-stock banking; it exported it.
Patent law varied just as sharply. Some states discriminated against foreign applicants; others welcomed them. Fees, durations, and approval rates all differed. The result was a market for legal regimes. Inventors went where they were treated best.
German Unification
For decades, the balance held because no single state could dominate the rest. But by the 1860s, Austria and Prussia had grown powerful enough to tip that balance. In 1866, the Seven Weeks’ War between the two broke out, initiating the process of German unification. In 1871, the German Empire was born.
As long as power stayed dispersed, the system worked—just as it had under the Holy Roman Empire. Many states can coexist; when some censor, repress, or threaten their neighbors, people can leave for a rival jurisdiction. But when power concentrates, the system cracks.
In such a decentralized system, economic cooperation grew. But when strong ideological blocs formed, war followed. The Holy Roman Empire was fatally weakened when the Protestant Union and Catholic League hardened into large rival blocs. The German Confederation would eventually mirror this fragmentation and break apart.
Respecting the independence and freedom of others turns out to be good for business and good for peace.