Banking in Hungarian Economic Development, 1867-1919 Thomas Barcsay RyersonPolytechnical Institute The year 1867 saw not only the creationof the dual monarchyof Austria-Hungary,but also marked the beginningof a half century of remarkableeconomic progress, especially for Hungary. The economicterms of the compromiseagreement established a customsand commercialunion betweenAustria and Hungary with free movementof labor,goods, and capital withina vastarea of centraland easternEurope--an area crisscrossedtoday by all manner of artificial economicbarriers. Financialstability was to be assuredby the creationof a joint ministryof finance(though both partners also maintainedtheir own financeministries), a commoncurrency, and a common bank of issue. The latter, the Austrian National Bank founded in 1816, had been the Habsburgmonarchy's central bank eversince, though not withoutrumbles of protestfrom the HungarianDiet and nationalistpoliticians. Despitethe agitation,the compromisemaintained the issuingprivileges of the bankfor a further ten years. Finally,in 1878,the Austrianand Hungarianparliaments approvedthe creationof theAustro-Hungarian National Bank with principal officesin both Vienna and Budapest.The new statutesobliged the bank to openbranches on an equitablebasis in both halvesof the monarchyand stipulatedthat the Hungarianminister of finance,together with hisAustrian counterpart,would nominate the bank'sgovernor. In returnthe Hungarian governmentundertook to respectthe bank'sprivileges as the solebank of •ssue in Austria-Hungary. This action seeminglylaid the politically controversial"bank question" to rest. However,nationalist politicians within the opposition Independenceparty were to wage a relentless--though ultimately unsuccessful--campaignduring the next fifty years for the establishmentof an independentHungarian bank of issue[7]. Though the Hungarian governmentwas thus obliged to share responsibilityfor the overallfiscal policy of the monarchywith its Austrian partner,it retainedconsiderable freedom in the field of domesticeconomic policy. Despiteoccasional conflict between agrarian and industrialinterests, successiveHungarian governments were remarkably successful in speedingup the modernizationof thecountry by creatingan efficienttransportation system and by encouragingindustrial development. BUSINESS AND ECONOMIC HISTORY, SecondSeries, Volume Twenty, 1991. Copyright(c) 1991by the BusinessHistory Conference.ISSN 0849-6825. 216 217 Thanksto generoustax incentivesand outrightsubsidies, the railway networkgrew into one of the most extensivein east-centralEurope. The railwayboom of the 1860sand 1870sencouraged in turn the growth of ancillaryindustries in wagon,locomotive, and machine construction. A series of lawspassed in 1881,1890, 1907, and 1909provided tax exemptionor direct governmentaid to thoseprepared to expandexisting industrial enterprises or createnew ones. Specialincentives were providedfor thosewho introduced the latesttechnologies to their factories[21]. Thankspartly to government help and the dynamismof local and foreign entrepreneurs,Hungarian industrialproduction increased fourteen-fold between 1867 and 1913. During the sameperiod the averageannual growth rate of Hungarianindustry was one of the highestin Europe[6, p. 910]. Perhaps the most spectacularsymbol of the country'seconomic progresswas the emergenceof Budapestas a major Europeancapital. One of the fastestgrowing cities on the continent,it quadrupledits population between1868 and 1914. On the eveof WorldWar I, the erstwhileprovincial town had become,with overa millioninhabitants, the seventhlargest city in Europe. Much of Budapest'swealth was based on the millingindustry, which haddeveloped by leapsand bounds from the 1850sto 1900. Budapestwas the largestmilling center in the worlduntil 1900,when it wasgradually overtaken by Minneapolis.Despite this decline,Hungary remained the world'ssecond largestexporter of milled flour (after the United States),until the outbreak of the First World War [9; 12, p. 367]. In 1867, however, much of this was still in the future. As far as Hungary'sfinancial structure was concerned,the picture then was a fairly bleak one. The countryhad a total of four banks,one land credit institute, and fifty eight (mostlysmall), local savings banks. Amongthese, only the FirstPest Domestic Savings Bank (founded in 1839)and the PestHungarian CommercialBank (founded in 1841)could be consideredgenuinely Hungarian financial institutionsof any importance. Apart from these two, most significantbanking operationswere in the hands of the Austrian National Bankand the Pest branch of the ViennaCreditanstalt which had been opened in 1857[18, p. 19]. The economicand political optimismgenerated by the compromise agreementwas to usherin a five-yearperiod of rapid, occasionallyfrenzied expansionin theHungarian banking system. Between 1867 and 1873,120 new banks were established,as well as 206 savingsinstitutions of various descriptions.Only ten of thesemushrooming "banks," however, were of any financialimportance. The majority of the rest were speculativeventures destinedto go to the wall duringthe greateconomic crisis of 1873[18, p. 21]. Until that soberingmoment, however, the countrywent on a heedless spendingspree. In thewords of oneobserver writing in the 1890s,"It seemed as if the whole of societywas consumedby a feverishdesire for quick and easyprofits and the massof peopleblindly followed every audacious schemer, impostoror crook"[19, p. 216]. Hungarianswere not the onlyones caught up by the excitementof the moment. Foreigncapitalists also rushed in to take advantageof seemingly 218 limitlessopportunities. This new interestin Hungaryled to the establishment of two initiallypowerful banks, neither of whichwas to survivemore than a decade. The first, the Anglo-HungarianBank, was foundedin 1868 by a consortiumof Austrianand British capitalists with localHungarian investors. Despite a board bristling with illustriousnames--Prince Sapieha, Count Szechenyi,and Budapest'sleading private banker, Maurice Wahrmann--the bankmade a numberof poorinvestments and was wound up in 1879[8]. The Franco-HungarianBank, establishedby the Franco-AustrianBank and the Erlanger Banking House, suffereda similar fate--despitean initial share capitalof 80 million francs[19, p. 215]. When the crashcame, in 1873 it camewith a vengeance.The total share capital of the five major Budapestbanks--which had stood at 59.1 millionflorins--plummeted to 16.7million florins by the end of the following year [1, p. 54]. The institutionsthat managedto survivethe storm,however, provedto be permanent.Foremost among them was the HungarianGeneral Credit Bank, foundedin 1867. The "Creditbank,"as it was to be generally knownuntil its nationalizationafter World War II, was an outgrowthof the Pest branch of the Creditanstalt. Two-thirds of the bank's shares were in the hands of the Creditanstaltand thus, indirectly,in those of the house of Rothschildand other foreigninvestors [18, pp. 20-21;1, pp. 54-55]. These powerfulbackers saved the Creditbankfrom the fate of the Anglo-Hungarian andthe Franco-Hungarianbanks. With the demiseof itstwo principal rivals, Creditbankbecame the largestbank in Hungary. Much of its prosperitywas based on its standingas banker to the government. Accordingto one estimate,in a singledecade--from 1880 to 1889--thebank participatedin the raisingof over 1.3 millionflorins in loansfor the Hungarianstate [18, p. 332]. Unfortunately,the Creditbankwas at this time no more than a subsidiaryof the Creditanstalt--andfully 40 % of its hugeprofits went to enrichthe mother institution[17, p. 5]. The bank'sdependence on Vienna was to lessengradually with the arrival from Pragueof SigmundKornfeld, the new and energeticgeneral manager.Kornfeld was to remainthe bank'sleading light from his arrivalin 1878until his deathin 1909. "It washis aim,"writes one of hisbiographers, "to createa powerfulinstitution which would act as guardianof Hungary's external credit and as a support for commerce and a pioneer of industrializationat home"[17, p. 63]. During his thirtyyears as managingdirector and president,Kornfeld wasable to achievethis. By 1899,the Creditbankhad become a completely independentinstitution, though it wasstill associatedwith the Creditanstalt andother banks of the Rothschildgroup. In 1913,it hadtotal assetsof nearly 553 millioncrowns ($111 million U.S.), whichput it in fourthplace among Hungary'smajor banks. In terms of profit for that year, however,the Creditbankoccupied second place [15, pp. 142-53]. The Creditbank'sprincipal rival during this period was the Pest HungarianCommercial Bank. Thisinstitution, established in 1841with native capital,pursued a prudentand conservative policy that had saved it duringthe boomyears and the crashthat followed.But this alsomeant that the bank had hardlygrown at all. A changecame about in 1881when the Parisian 219 banking house of Bontoux decided to invest in the Pest Hungarian Commercial Bank through its Austrian affiliate, the Oesterreichische Landerbank.Although the Bontouxbank was to collapsethe followingyear, the Commercial Bank was not affected and continued to maintain its relationshipwith the Oesterreichische Landerbank, which had managed to free itselffrom the Bontouxinterests in the nick of time [1, p. 54]. It was at this time that Leo Lanczyentered the bank's serviceas generalmanager. Like Kornfeld,he too wasto stayat the helm for overa generation,serving as presidentfrom 1896 to 1921. Again like Kornfeld, Lanczywas