It was Thomas Mann who wrote the most significant and evocative account of the German commercial classes and their perpetually problematic relationship to entrepreneurship and moneymaking. Buddenbrooks was published in 1901, when Mann was only twenty-five. Together with another book written not long after, Joseph Schumpeter’s Theorie der wirtschaftlichen Entwicklung (1911), which eulogized the creative destruction of entrepreneurship, it has indelibly molded our approach to business history, and in particular the way we view the dynamics of the family firm. Commentators on the phenomenon of family firms, whether academics, journalists, or business people, invariably refer to a “Buddenbrooks syndrome.” The concept corresponds to long-familiar slogans in England (“from clogs to clogs in three generations”), Japan (“the fortune made through the hard work of the first generation is all lost by the easygoing third“), and India (“poor, miser, rich, spendthrift”) as well as Germany (“The father makes it, the son keeps it, the grandson breaks it.”).1 The novel stands appropriately, in terms of chronology, at the turn of the century: between a nineteenth century dominated in Europe by family firms and a twentieth century shaped by large, multi-owner, joint stock corporations. Mann’s novel appears to give a graphically memorable account of the decline of a family (that is its subtitle: Verfall einer Familie), which could serve as a broader metaphor for the erosion of the values of small-town Germany and the victory of a self-destructive modern materialism.
Figure 1.1 The founder: Friedrich Krupp (1787–1826). Courtesy of Historical Archives Krupp.
The Krupps seemed to anticipate this dynamic almost a century earlier. The family had originally moved from the Netherlands in the sixteenth century. They were a respected and prosperous family in the small-town world of early modern Essen, a small ecclesiastical territory ruled by the abbess of the Essen Damenstift (nunnery). Arndt (or Arnold) Krupe (or Krupp) had moved to Essen in the late sixteenth century presumably for religious reasons, as he was a Lutheran, and in 1587 he is mentioned as a member of the merchants’ guild and from 1600 to 1623 sat on the town council.
His great-great-granddaughter, Helene Amalie Ascherfeld, at the age of nineteen in 1751 married Friedrich Jodocus Krupp, the son of the Essen mayor Arnold Krupp. Friedrich Jodocus had developed both a retail and a wholesale business in so-called Kolonialwaren, imported goods such as tobacco and spices, and had at least seven properties in Essen, including a residence that was both living quarters and business property on the Essen Flax Market. When he died in 1757, his widow was only twenty-four, but she soon built up the business, trading with cloth, porcelain, sugar and spices, and increasingly with coffee, and developing an extensive range of contacts in the Netherlands, Bremen, and Hamburg as well as London. Her substantial profits were largely invested in real estate. There was a separate linen-trading business, in which she bought cloth from local rural producers.2 She also in 1759 established a snuff tobacco mill on Essen’s Flax Market, which was still flourishing at the beginning of the next century. In addition, she seems to have acted as a financier.
It was financial engagement that eventually led Helene Amalie Krupp also to move into iron production, with the acquisition of the Gutehoffnungshütte, which combined a blast furnace with a small foundry. Gute Hoffnung’s owner, Eberhard Pfandhöfer, originally an imaginative and innovative businessman, had engaged in a diverse series of speculative investments, descended into alcoholism, and had needed to borrow extensively, in particular from the “widow Krupp” in Essen. She later noted that “Eberhard Pfandhöfer had built in 1782 the Gute Hoffnung Iron Furnace in Sterkrade with my cash advances.”3 In particular, Pfandhöfer seems to have used her services for making transfers to the Netherlands. In 1796 Pfandhöfer was obliged to stop operations at Gute Hoffnung, though he continued to run the nearby St. Antony ironworks. Finally, in 1799, perhaps in order to secure her debts, which had risen to the quite substantial sum of eighteen thousand thalers, Helene Amalie bought the Gute Hoffnung ironworks at an auction for twelve thousand thalers, though she only managed to begin operations in June 1800. Her major advantage was that she had excellent business contacts in the Netherlands. Helene Amalie introduced some technical innovations but found that the Gutehoffnungshütte was a rather problematic possession. The products, mostly pots and small boilers as well as weights, needed to be taken overland to the port of Ruhrort on the river Rhine, and the delicate castings seem to have often been damaged during transport.4 But in particular the ironworks depended for its water supply on a competitor, the St. Antony Hütte, located in a different small German principality.
Helene Amalie’s eldest son, Peter Friedrich Wilhelm Krupp, died at the age of forty-one, and it was his son, Friedrich, who founded the business that would achieve world fame as Krupp. But his initial business move was a disappointment. By 1807 Helene Amalie Krupp had left the management of the Gute Hoffnung to her grandson. He initially aimed to change the emphasis of production to parts for steam engines, and Petronella Krupp (the widow of Peter Friedrich Wilhelm Krupp) concluded a contract for the supply of such parts for steam engines built by Franz Dinnendahl that would be used to drain coal mines. But Friedrich Krupp rapidly found that Gute Hoffnung iron was inferior in quality to that produced by St. Antony. He ran out of fuel during the winter of 1807/8 and, as his debts mounted, agreed with his grandmother to withdraw from the enterprise. In September 1808 she sold the ironworks to the brothers Haniel, who had already bought the St. Antony works and rapidly established an important business.
In the 1800s Helene Amalie also started to buy some mining shares. She clearly recognized at a relatively early stage the transformative potential of the fuel resources of the Ruhr Valley, even though the mining techniques available meant that the amount of coal that could be extracted was still quite limited.
Only a few years later, in May 1810, she died at the age of seventy-seven, leaving a substantial fortune to Friedrich Krupp, his brother Wilhelm, and his sister Helene. Friedrich almost immediately merged his own trading firm into that of his grandmother and liquidated them both in order to concentrate on specialty iron known as Gussstahl or Tiegelstahl (cast steel) production. A notary’s contract of November 20, 1811, established the firm as “Friederich Krupp in Essen.”
The venture looked like, and was, a wild speculation, giving up a solid business legacy for something that rested on an arcane and uncertain new mode of fabrication. The experience with the Gutehoffnungshütte might have served as a warning. In particular Friedrich was obsessed with the English ability to produce steel, which was treated as a closely guarded secret and the fundament of British prosperity and military strength. Indeed, until 1828 England prohibited its skilled craftsmen from emigrating, so that the commercial secrets would not be lost. In 1811 Krupp concluded a contract with the brothers Georg Carl Gottfried and Wilhelm Georg Ludwig von Kechel, two quite elderly former officers from the army of the principality of Nassau, who had made cast steel in 1803 in the Eifel with the brothers Poensgen (another name that would become identified with a great steel tradition in Germany) and who promised to transfer their knowledge to Krupp.
The new enterprise was described as making cast steel “in the English manner,” in other words according to the crucible process that had been developed experimentally in the mid-eighteenth century by the Sheffield watchmaker Benjamin Huntsman, who had required a high-quality, homogeneous steel for making watch springs. That process involved the melting of blister steel in a clay crucible and adding carbon and other materials; skimming off the impurities in the slag; and then pouring the product and working it. It produced very tough steel, although it was difficult to work it because the hammering could take place only while the steel was still heated. The critical metallurgical discovery of the English industrial revolution concerned the importance of the carbon content of steel, in other words iron with a carbon content of less than 2 percent. As the carbon content grew higher, the steel became harder but less malleable and less easily worked and smelted.
The Huntsman process seemed to many Europeans to have the qualities of a great mystery, and numerous continental imitators set about the development of an analogous process. In particular, the properties of the substances in the flux that needed to be added to the molten iron were the subject of a great deal of speculation. The need for indigenous German cast steel was increased after 1806 because of the impact of Napoleon’s Continental System, which excluded English products from the European mainland.
Friedrich Krupp started to build a works in a costly surge of construction activity in 1812/13 that included a furnace for making steel by a cementing process, a smelting workshop, and a hammer workshop. The new business was located on one of his grandmother’s properties that he had bought from his brother Wilhelm. He also seriously investigated the possibility of establishing a file-making workshop on French territory on the left bank of the Rhine but then transferred the planned production to Essen after the defeat of Napoleon in Russia. Krupp went ahead with the plan to make “English steel” even though the results seemed ever more elusive. He made a decisive technical turn when, dissatisfied with the small size and the high cost of the clay crucibles that he brought from near Passau, he started to produce his own, larger, crucibles in 1812. By 1813 he was so pleased with progress that he turned the contract with the von Kechels into a lifetime guarantee of employment and participation in the profits of the enterprise. In reality, there was nothing but loss: by autumn 1814 Krupp had spent 30,000 thalers but had made only 1,422 thalers in revenue. In November 1814, just as the Napoleonic Empire was breaking apart, Krupp dismissed the von Kechels. They, it appears, were not surprised by the rupture and concluded that the problems were the fault of Friedrich Krupp for working with larger than conventional crucibles.5 By the end of his life, Krupp’s inheritance from his grandmother, which has been calculated as the large sum of 42,222 thalers, had completely evaporated. The real estate that was the core of his grandmother’s legacy was sold in two big blocks in 1818–19 and in 1824.6
For a time Krupp contemplated giving up the factory altogether. But then he rapidly found a new partner, Friedrich Nicolai, a mechanic who had a Prussian patent for the production of cast steel and who promised to invest his own money in the Krupp enterprise. Nicolai had a colorful past, had been briefly imprisoned as a spy, and had volunteered in the Prussian army as a captain of hussars. The two concluded a contract in July 1815, in which Nicolai committed himself to produce cast steel immediately, “without more experiments,” according to the qualities set in the Prussian patent. The main attraction was that he would contribute a special flux, which contained a mixture of “Markasit,” a form of pyrites, manganese ore, and cow dung.7 But Nicolai was in reality even more incompetent than the von Kechels. An atmosphere in which knowledge is regarded as a kind of alchemical mystery clearly leads to chicanery and charlatanism. In reality, Nicolai had no money of his own to invest. He did move into the Essen factory immediately after concluding the contract, directed the building of three new crucible furnaces, and added furnaces so as to preheat the iron. Nicolai also traveled to Berlin, where he managed to obtain contracts to supply cast steel. But he found the actual producing of steel much harder. When things did not work out, he blamed Friedrich Krupp’s idiosyncratic crucibles, much as the Kechels had done. What success there was depended on Krupp’s own increasing skill with judging the right temperatures for the smelting process and the right additives in the crucibles. This practical skill represented the major technical breakthrough on which the future of the Krupp business would depend. By 1816 the partners were no longer on speaking terms, and Nicolai was even accusing his enemies of trying to kill him. Krupp ordered an investigation of the quality of the steel produced by Nicolai, which showed that steel to be unusable.
It was only in 1815 that Krupp managed to produce small quantities of steel on the basis of the crucible process, and only in 1818 that he began to use the Osemund pig iron from the Sauerland area (also known as Grafschaft Mark), which produced a much more consistent quality of cast steel. But even that source proved quite variable, and Krupp continually changed suppliers. It was a fortuitous occurrence that the crucibles Krupp made from local clay had a high silicate content, and that this silicate was absorbed by the molten metal and affected its metallurgical qualities. It gave a hardness not just at the surface but deeper down in the metal, making the result particularly useful for steels where different levels were exposed (notably in stamps and casts): for surface hardness, English Sheffield steel was notably superior.8
Another problem was that the initial location of the factory was unsuitable. Transporting the coal that was needed both as fuel and as a source of carbon was difficult, and there was no room for expansion. Part of the business was thus moved to a site near the Limbeck Gate of Essen, while the hammer works had to stay where they were because they required the flow of the creek to drive them.
Figure 1.2 The Krupp works, c. 1820. Courtesy of Historical Archives Krupp.
By 1817 Krupp was producing cast steel blocks and bars as well as drills, files, and artisans’ tools, especially for tanners. Most importantly he began to produce stamps for coining. The discovery of a reliable process for producing cheap, low-nominal-value token coinage was an important innovation, which laid the basis for a vast expansion of simple commercial activity in the early nineteenth century and ended centuries of economic uncertainty caused by the absence of a reliable low-value circulating medium.9 Matthew Boulton in England had in 1786 adapted the steam engine for use in the milling of coins. In 1817 Diedrich Uhlhorn of Grevenbroich developed a lever or knuckle action that could be driven by steam and turn out thirty to sixty coins a minute. The demand for coin-making equipment thus became a key part of a new economic era.
By 1817 the Düsseldorf mint had delivered a positive verdict on the coining stamps produced from cast steel in the Krupp works, and in 1818 Krupp was producing for the Prussian mint in Berlin as well. It was this move, rather than production of tools for local craftsmen, that made Krupp’s reputation. In 1817 the works sold 2,607 thalers worth of goods, in 1818 4,202, almost half of the revenue coming from the coin-stamping casts. It was a very high-value but small-scale production: in 1820, a very good business year, the amount of steel involved in the production of the casts weighed no more than some two hundred kilograms.10 Business went so well that Krupp set off on a new round of construction, which included a small house for a supervisor that would later be celebrated as the original Krupp house, the Stammhaus. He planned twenty-four furnaces in the foundry, although in the end only eight were built. Krupp had very ambitious expansion plans, and in November 1817 he asked the Prussian government for an interest-free loan of the vast sum of 20,000 or 25,000 thalers to extend the factory. Such a request seemed quite hopeless. But Krupp was instructed to wait for the outcome of his court case against Nicolai, and then there could be a determination of “whether there were business grounds and the means to support the enterprise.”11
But in 1818 the Prussian government went over to a regime in which tariffs were greatly reduced, and the factories that were producing goods to compete with English products became much more vulnerable. Krupp’s factory suffered from other problems. By the spring of 1819 the Düsseldorf mint master wrote of the “sad experience” that the quality of the metal used in the coin-making equipment had deteriorated, and that only a third of the stamps supplied were usable. A substantial problem lay in access to the right quality of pig iron. But this was just the moment when the new smelting works had been completed, with more furnaces and larger crucibles. Krupp may also have been too keen to diversify his production; he started to make a variety of steel rolls and blocks, as well as steel for springs and coils, when he might better have concentrated on the market for coining equipment, which in 1819 amounted to two-thirds of Krupp’s sales. There was also new competition, not only from England but also from a rival plant, which managed to win a large share of the contracts to supply Prussia’s eastern provinces. In the early 1820s there was a brief flourishing of the enterprise, but affairs were always quite precarious. In fact 1820 and 1823 were the only years in which the factory produced a small operating surplus.
The enterprise was financed as a family business, with relatives lending increasingly large amounts to support it through its vulnerable infancy. There were obviously high risks: most infant industries at that time were expected to perish. In Krupp’s case most of the funding came from his mother, Petronella Krupp, who in 1820 owned 18.3 percent of the 42,150-thaler debt, as well as his father-in-law, Johann Wilhelmi, who was always slightly dubious of his relative’s business sense.12
Krupp never stopped hoping for a better outcome and for new fields of business activity. In 1820 he turned to the Russian government and asked permission to establish a cast steel works in Russia. In 1821 he was visited by the chairman of the Prussian Association for the Promotion of Commercial Skills, but the factory was idle at the time of the visit and cannot have made a good impression.
In 1824 came an utter collapse. All of Friedrich Krupp’s inherited real estate was now sold off. In 1825 the Faktor named Tacke, the skilled and obviously very loyal foreman who had run much of the commercial side of the business, left the company, vacating a simple dwelling on the factory site; and in 1826 the man who had looked after the finances also went. In 1824 Krupp’s family had to leave the imposing house on the Flax Market and move into the small supervisor’s hut next to the new works. (By the 1870s Friedrich Krupp’s son Alfred had turned this “original house” [Stammhaus] into the stuff of legend.) Friedrich Krupp’s mother, Petronella, took over the management of the firm’s finances but refused to extend further credit. It looked as if the Krupp story might simply end in the small-scale narrative of the decline of a well-established Essen Bürger family because of an excessive dedication to technical innovation and the absence of any business sense or responsibility. This was total entrepreneurial failure: Krupp was obsessed with technology but had no deep understanding of the importance of securing markets, establishing a reliable supply of raw materials, or of financial control.
Friedrich Krupp remains a shadowy figure: there is indeed by contrast with his predecessors and his successors no oil portrait, only a cheap scissors silhouette. A Bürger should not take undue risks or threaten the comfortable existence of his family. But Krupp’s failure as a Bürger set the scene for entrepreneurial breakthrough and success. In the end, the values of Bürgerlichkeit and innovative entrepreneurial activity, the Schumpeterian process of creative destruction, are mutually incompatible.
In November 1812 more than a decade before his finances collapsed, Krupp had been elected to the Essen municipal council, and he continued to play a role on the council, in the militia, and as a fire officer. But in 1824 he was required to give up all these offices and was crossed off the list of “merchants with rights.” Krupp was disgraced as well as impoverished. Nervous strain exacerbated his physical illness, and his combined physical and mental collapse damaged business prospects even more. Friedrich Krupp died, probably of tuberculosis, on October 8, 1826, at the age of thirty-nine. His son Alfred, who in 1825 had begun to assist in the factory, took over the running of the business, which now belonged to yet another widow Krupp. Therese Krupp, wife of the deceased Friedrich and the mother of young Alfred, did not hesitate in continuing the operations of the factory, a decision which, as the historian Burkhard Beyer points out, indicates that she and her financially strong father-in-law believed that Friedrich had been more than a technically gifted dreamer and that there existed, despite all the setbacks, a real basis for potential prosperity.
Figure 1.3 The widow: Therese Krupp (1790–1850). Courtesy of Historical Archives Krupp.
In continental Europe, widows played a central role in the development of the steel industry. Women in fact had a much greater part in the formulation of business strategies than at a later time in the nineteenth century, when the corporation and its statutes and the bureaucratization of corporate existence left less to chance and less to the skillful operation of dynastic politics. But this widow Krupp chose a different strategy: she circulated an advertisement to the effect that “the secret of cast steel has not been lost in consequence of the death of my husband, but has passed to our oldest son, who has already supervised the factory for some time.”13 The advertisement did not comment on the fact that the son’s age was fourteen. That son, who had been baptized as Alfried, was just one year younger than the ineffective (fictional) Hanno Buddenbrook at the time of his death.
