Doctoral Thesis Flóra Macher THE 1931 FINANCIAL CRISIS IN AUSTRIA AND HUNGARY A CRITICAL REASSESSMENT A thesis submitted to the Department of Economic History of the London School of Economics and Political Science for the degree of Doctor of Philosophy September 2017 1 DECLARATION OF AUTHORSHIP I, Flóra Macher, certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 53,469 words. 2 ABSTRACT In this thesis, I re-investigate the 1931 financial crisis in Austria and Hungary with the help of new data compiled from primary sources. Our knowledge about the causes of these calamities is much less extensive than about the German crisis. The aim of my research is to provide for a better understanding of the Central European crises of 1931. Chapter 1 examines the role of international and domestic forces behind the crisis in Austria. Two newly constructed micro-level datasets demonstrate that a domestic factor, exposure to weakly performing industrial enterprises, was essential in accounting for the insolvency and possibly also for the illiquidity of the four universal banks that came under distress between 1925 and 1931. In Chapter 2, the focus shifts to Hungary, where both the national historiography and the international literature documented a currency crisis. A new database on the financial system and macroeconomic indicators reveal that the banking system played a critical role in the calamities and the country experienced a twin crisis in 1931. Chapter 3 zooms in on a particular aspect of the crisis: the political factors behind the weakness of the two countries’ banking systems. Facing social demands but their hands tied by the macroeconomic trilemma, the authorities of both countries had to resort to (ab)using the banking system to provide clandestine economic stimulus. Political interventions into banking encouraged imprudent lending and contributed to the vulnerability of the two banking systems and thereby to the crisis of 1931. Together these findings underscore the economic importance and the political risk of the banking system. They further emphasize the dramatic, and seemingly insurmountable challenges of nation building that Austria and Hungary faced in the interwar years. 3 ACKNOWLEDGEMENTS I would like to thank Professor Max-Stephan Schulze and Dr. Tamás Vonyó, my two supervisors for their guidance on this work. This thesis has evolved through feedback from several other colleagues. I owe gratitude to Olivier Accominotti, Peter Eigner, Clemens Jobst, Nathan Marcus, Matthias Morys, Avner Offer, Albrecht Ritschl, and Tobias Straumann. The thesis has benefitted from the valuable insight of participants at the EHES Summer School in Berlin in September 2014, Economic History Thesis workshops at the London School of Economics in 2015 and October 2016, the WEast workshops in Budapest in January 2015 and in Prague in July 2016, the LSE Interwar Economic History Workshop at the London School of Economics in May 2015, and the seminar of Nuffield College of Oxford University in February 2016. I would also like to express my appreciation for the support I received from Veronika Katz Kálniczkyné at the Hungarian National Archive and Claudia Köpf and Walter Antonowitz at the Archive of the Austrian National Bank. Finally, I would like to thank my family for their support. My boyfriend has been my most important advisor and most avid reader throughout this project. This work would not have been possible without his support. I am also grateful to my parents who always believed in me and who should have had the opportunity to study at the LSE. I hope this thesis makes them proud. It is dedicated to them. I am grateful to everyone who has helped. All remaining errors are my own. Funding from the Economic and Social Research Council is gratefully acknowledged. 4 TABLE OF CONTENTS Introduction 8 Data and methodology ________________________________________________________ 11 Historical context and findings _________________________________________________ 13 Chapter 1 - The Austrian banking crisis of 1931 22 Historical background and literature _____________________________________________ 24 Overview of the banking system ________________________________________________ 27 Exposure to foreign creditors __________________________________________________ 31 Domestic creditors ___________________________________________________________ 37 Konzern and bank solvency ____________________________________________________ 40 Causes and Triggers __________________________________________________________ 52 One bad apple ______________________________________________________________ 58 Appendix __________________________________________________________________ 60 Chapter 2 - The Hungarian twin crisis of 1931 62 Review of the literature _______________________________________________________ 63 Data and method ____________________________________________________________ 65 Pre-crisis currency weakness ___________________________________________________ 67 Pre-crisis banking system weakness _____________________________________________ 77 Event analysis ______________________________________________________________ 87 Missing the wood for the trees _________________________________________________ 95 Appendix __________________________________________________________________ 96 Chapter 3 - The political origins of the Austrian and Hungarian banking crises in 1931 102 The historical context _______________________________________________________ 104 The post-war political contract ________________________________________________ 107 Austria: commitment to industry _______________________________________________ 113 Hungary: commitment to agriculture ___________________________________________ 125 What if...? ________________________________________________________________ 133 Conclusion 135 Primary sources 140 Bibliography 142 5 LIST OF TABLES 1.1 The number of financial accounts in the bank database 1.2 Foreign currency mismatch (million Austrian Schilling) 1.3 The number of financial accounts in the Konzern database 1.4 Theoretical calculations for insolvency thresholds 1.5 Liquidity and solvency measures for the four Konzerns (million Austrian Schilling) A1.1 The number of financial accounts in the bank database - detailed A1.2 The representativeness of the bank database, 1929 (million Austrian Schilling) 2.1 Description of the bank database 2.2 Budget deficit (million pengő) 2.3 National debt denominated in foreign currency (million pengő) 2.4 Balance-of-payments (million pengő) 2.5 Growth and consolidation in the banking sector 2.6 Non-performing loan (NPL) calculation for all financial institutions 2.7 Non-performing loan (NPL) calculation for institutions with agricultural lending over 75 per cent 2.8 Trigger analysis (million pengő) A2.1 The representativeness of the bank database A2.2 Background information on the non-performing loan (NPL) estimation 3.1 Accounting fraud at the four universal banks which were bailed out 3.2 The structure of three mergers among universal banks in the 1920s 6 LIST OF FIGURES I.1 The economic activity index 1.1 The structure and growth of the Austrian financial system by total assets 1.2 The equity and liability side of universal banks' and Sparkassen's aggregate balance sheet 1.3 Foreign and domestic liabilities 1.4 The annual change in the foreign creditors of the banking system 1.5 Rediscount from the central bank to the banking system 1.6 The asset side of Sparkassen's aggregate balance sheet 1.7 Universal banks' foreign and domestic creditors by creditor type 1.8 The exposure of the four banks to good and bad Konzern companies in 1927 based on companies' debt 1.9 Exposure of the four banks to good and bad industries based on companies' debt in 1927 1.10 The reserves of the Austrian National Bank (million Austrian Schilling) 1.11 The rediscount of the Austrian National Bank (million Austrian Schilling) 2.1 Trade account (million pengő) 2.2 U.S. wholesale price of wheat and corn in Chicago (US dollar/bushel) 2.3 Reserves of the Hungarian National Bank (million pengő) 2.4 The structure of the Hungarian banking system by total assets 2.5 The equity and liability side of the banking system's aggregate balance sheet 2.6 The annual change in foreign and domestic currency deposits and credits (million pengő) 2.7 The asset side of the financial system's aggregate balance sheet (1926=100) 2.8 The monthly change in foreign and domestic currency deposits (million pengő) 2.9 The reserves of the Hungarian National Bank (100 = 7 Jan. 1927, 7 Feb. 1929, 7 March 1931) 2.10 Rediscount (100 = 7 January for each year) 3.1 Rediscount practices of the HNB following the 1929 currency crisis (million pengő) 7 INTRODUCTION 1931 was a monumental year in European economic history. It witnessed a series of financial crises following the collapse of Austria’s largest bank, the Credit-Anstalt, and these