MTA – ELTE
CRISES HISTORY RESEARCH GROUP
WORKING PAPERS IN CRISIS HISTORY / NO. 1
Financial Crises during the Great Depression
The Hungarian Financial Crisis in a Central-European Context
Ágnes Pogány
December 2014
1088 Budapest, Múzeum krt. 6-8. II. 247.
valsagtortenet.elte.hu
1
WORKING PAPERS IN CRISIS HISTORY
No. 1 / December 2014
Financial Crises during the Great Depression
The Hungarian Financial Crisis in a Central-European Context
Ágnes Pogány
2
Abstract
Central European countries like Austria Germany or Hungary were especially hard
hit by the fiscal, banking, currency and foreign debt crises from 1931 onward. The
paper analyses the main factors of these multiple financial crises and investigate their
interconnectedness. Hyperinflation of the early 1920s undermined the stability of the
banking sector which was not remedied in the few years following financial
reconstruction. The fragility of the banks was aggravated by short-term foreign
indebtedness and frozen industrial loans as well. The universal banks of the regions
proved especially vulnerable in these years, while the possibilities of the monetary
policy were curtailed by the rules of the gold exchange standard re-established in
1924.
The Hungarian financial crisis in 1931 is often understood as the
consequence of the bank collapses in Berlin and Vienna. The data, however, suggest
that the withdrawal of deposits started much earlier than May or July 1931. A
smaller bank run took place already during the autumn of 1930 and investors’
confidence was gradually lost in the following months. Confidence was
undermined by various factors such as the problems of Hungarian public finances,
the significant foreign indebtedness, severe export difficulties and low levels of
bank liquidity. The events occurring in Vienna and Berlin merely exacerbated an
ongoing financial crisis rather than caused it. Contrary to Germany, where the
largest Berlin branch banks suffered the greatest deposit withdrawals, in Hungary it
were the country banks that lost the biggest part of their savings and current
account deposits which is consistent with the grave effects of the agricultural crisis
in Hungary.
Keywords: Great Depression, financial crisis, banking failure Hungary
_____________________________________________________________
The first version of the paper was presented in the panel Multiple Economic Crises in Historical
Perspectives, during the Fourth European Congress on World and Global History (ENIUGH),
Paris, 4-8 September 2014.
3
1. Introduction
In recent years, there has been a revived interest in the history of financial crises
worldwide, which resulted in the publication of a number of important studies and
books, yet there have been hardly any Hungarian publications in the field. Ome of
the reasons for the growing scholarly interest is that the number of bank crises has
multiplied: while there were none from 1945 until the late 1970s, 130 of them
occurred around the world in the years between 1980 and 2008. The subprime crisis
that broke out in 2007/2008 further increased the appeal of the subject for
researchers.1 The historical analysis of financial crises has led to the conclusion that
they deepen economic recession and economic crises coupled with banking crises
last longer and recovery is more difficult. Developed and developing countries can
suffer from banking crises equally. 2
Longitudinal examination of financial crises has also shown that they were
not evenly distributed in the past. They were especially frequent in the interwar
years: three times as many occurred in this period than before the First and after the
Second World War. While the pre-1913 crises generally occurred in emerging
market nations, the Great Depression primarily hit industrialised countries. 3 In the
1930s, at least twelve European countries suffered through severe financial crises
and several waves of bank failures swept through the United States in this period:
out of the approximately 25000 banks operating in 1929, over 10000 suspended their
operations by 1933. According to Calomiris and Gorton, the banking crises of the
1930s were different from the nineteenth-century ones in that they resulted in far
greater losses and the banks were facing a higher rate of failure. 4 Analysts suggest
that the financial crisis of 1931 had a fundamental role in the evolution of the
1
Knutsen − Sjögren 2009.
2
Bernanke – James 1991; Sanches 2014.
3
Bordo – Eichengreen – Klingebiel − Martinez-Peria – Rose 2001: 51−82, 56−58.
4
Mitchener 2005: 152−185; Calomiris – Gorton 1991: 109–174.
4
depression and that, in fact banking crises turned the recession in the US to Great
Depression.5 Bemanke states that the financial crisis was the non-monetary channel
that spread and amplified the consequences of the crisis in the world.6 The 1931
financial crisis was the first major crisis of the interwar Gold Standard, and also the
beginning of its breakdown.7
Kaminsky and Reinhardt called the simultaneous currency and financial
crises ‘twin crises’ in their article published in 1999. 8 According to the authors,
financial crises often start in the banking system: currency crises are normally
preceded by problems in the banking sector and, in turn, they also aggravate the
consequences of banking crises, activating a vicious spiral. These studies shed new
light on financial crises in the interwar years and opened new avenues in research.
Historical research led to numerous publications and new results primarily
in the USA and Germany (e.g. works by Bordo, Calomiris, Ritschl, Schnabel, Adalet,
Burhop). In Central Europe, it was mostly Austrian researchers who contributed to
this field: the series of bank failures in Vienna during the 1920s, as well as the 1931
collapse of the Creditanstalt, have long been subjects of economic historiography.9
In Hungary, however, almost no publications appeared in this field.10 Even though
a number of foreign authors mention the Hungarian financial crisis parallel with
those in Austria and Germany (e.g. James, Schnabel, Eichengreen, Adalet), and
contemporary sources also report the severe Hungarian situation, Hungarian
researchers studying this period either remain silent about it or deny its existence.
The only exception was György Ránki who mentioned the banking and credit crisis,
5
Friedman – Schwartz 1963.
6
Bernanke 2000: 41−69.
7
Ritschl – Sarferaz 2014.
8
Kaminsky – Reinhart 1999: 473−500.
9
Eigner 2013; Schubert 1991, Stiefel 1988, Weber 2008.
10
Pogány 2007.
5
as well as the ensuing panic. While Béla Tomka, author of the most recent
Hungarian work on banking history, suggests that “in an international context,
Hungarian banks weathered the crisis with relatively small losses” which he
explains with the banks’ resilience and prudent, liquidity-sensitive business
policies.11 The aim of this present study is to prove that Hungary in 1931 underwent
severe financial crisis, which also involved a deep banking crisis. Using new
approaches developed in recent historical works, Hungarian financial crisis will be
presented in a Central-European context.
2. The concept of multiple financial crises
There are several concepts concerning financial crisis. It is often associated with
banking crisis, or interpreted as a large-scale systemic shock to the financial market,
which also encroaches upon other areas of the economy. Bordo defines seven key
elements of financial crises, such as general banking panic and a reduction in the
money supply, of which some or all have to be present.12 Barry Eichengren and
Richard Portes defined financial crisis as “a disturbance to financial markets,
associated typically with falling asset prices and insolvency among debtors and
intermediaries, which ramifies through the financial system, disrupting the
market’s capacity to allocate capital within the economy.”13 Bordo, Eichengreen et
al. define financial crises as “episodes of financial-market volatility marked by
significant problems of illiquidity and insolvency among financial-market
participants and/or by official intervention to contain such consequences. For an
episode to qualify as a banking crisis, we must observe financial distress resulting
in the erosion of most or all of aggregate banking system capital (…). For an episode
to qualify as a currency crisis, we must observe a forced change in parity,
11
Ránki 1996: 96−97.
12
Bordo 1986: 190−248.
13
Eichengreen − Portes 1987: 11; Knutsen – Sjögren 2009: 6.
6
abandonment of a pegged exchange rate, or an international rescue.”14 According to
Jonker and van Zanden, financial crises are shocks threatening the stability of the
(inter)national financial system and include banking crises stock market crashes
and foreign exchange crises.15 Eichengreen and Portes identify three main types of
financial market’s disturbances: debt default, bank failures and exchange market
disturbances.16
According to Ritschl and Sarferaz, the German financial crisis of 1931 was a
foreign debt and reparation crisis.17 Schnabel describes the same disturbance as a
twin while Harold James as a triplet crisis including fiscal, banking and currency
crises.18 We use the term in a wider sense in this study: while banking crises,
currency- and external debt crises are classified as financial crises, fiscal crises are
not. Not unlike Austria and Germany, Hungary in the 1930s experienced more than
simple bank or twin crises it sank into multiple crises. Parallel to the severe
liquidity and solvency problems of money institutions, fiscal, currency and foreign
debt crises also occurred, which means that rather than calling it a twin crisis the
situation unfolding in the region can be described more properly as quadruple or
multiple crises. Most of the historiography on the financial crisis of 1931 focuses on
banking failures, and less attention is paid to the complexity of crises. Since
Hungary underwent a severe multiple disturbances without crowd scenes in front
of the banks, like in Berlin and several US cities in the early 1930s, financial crisis
here should especially be understood in a wider sense than bank run or banking
panic. In the late spring and summer of 1931, the Hungarian government and
central bank managed to keep the serious structural weakness and shake-up of the
14
Bordo – Eichengreen – Klingebiel − Martinez-Peria – Rose 2001.
15
Jonker – van Zanden 1995: 77–78.
16
Portes – Swoboda 1987: 1–9. 3.
17
Ritschl 2013: 111−139.
Schnabel 2004. 822-871. „In Germany a fiscal and a banking crisis coincided and set off the
foreign exchange crisis. These were not “twin” but “triplet” crises.” James 2001: 53.
18
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banking system completely under wraps, which not only averted banking panic,
but also successfully kept the details hidden from modern researchers. As a result
of a well functioning censorship Hungarian press did not write about mass
withdrawals of deposits and the shaken position of banks. Dutch newspapers
(Allgemeine Handelsblatt and Rotterdamsche Courant) however reported that
Hungarian press is not allowed to publish the news that the Hungarian state took
over the share majority of the Hungarian General Creditbank. Secretiveness was
also characteristic in central bank inner circles to avoid the leaking out of critical
information.19 The aim of this paper is to present the hitherto unknown history of
the Hungarian banking crisis based on available data and archival sources and
demonstrate how it was tied to contemporaneous foreign debt, budgetary and
currency crises.
3. Key factors of financial crisis
In many respects, the history of the Hungarian financial crisis in the 1930s was
similar to its German, and especially to Austrian counterparts. The similarities are
not coincidental, as Austrian and Hungarian monetary history were in many
respects alike in the 1920s. Partially as the shared heritage of the Austro-Hungarian
Monarchy’s joint financial market and central bank, the two countries had a similar
history of inflation and financial stabilisation, as well as financial structure, banking
system, and central banks.20 There are many sriking parallels with Germany as well
as a consequence of the First World War and similarities in the banking systems.
Comparative multi-country analyses show the important role of certain factors in
the development of financial crises. Banking crises mostly occurred in countries
MNL OL K 256 Box 5348. 266/1931. P.M. res. Telegram of the Hungarian Embassy in the
Hague, 10. November 1931; BECA OV 33/79 Note of a conversation with Dr. Popovics in Zurich,
on the 9/10th February 1931.
19
20
Kövér – Pogány, 2002; Pogány 2001: 95–125.
8
which had hyperinflation as a result of the First World War, and banks that were
closely intertwined with industry. The probability of a financial crisis was also
greater in countries which were undergoing severe economic crisis and where
central bank did not fulfil its role as a lender of last resort.21
3.1. Hyperinflation
In countries where the First World War was followed by hyperinflation, the
probability of a bank crisis was very high in the 1930s. 22 Severe depreciation of
money eroded the banks’ assets, weakened their capital base, and annihilated their
loans and deposits. At the same time, banks had little time to recover after
stabilisation, so the money market of these countries was more vulnerable to
banking panics or global financial instability. Austria, Germany, Hungary, and
Poland all had hyperinflation and economic dislocation in the 1920s, and all
suffered severe banking panics in 1931.23 Experiencing the trauma of the
hyperinflation, as well as fears of depreciation made it difficult to respond to the
crisis with devaluation of the currency.
Carsten Burhop, Isabel Schnabel and Harold James point out the role of
hyperinflation in the deteriorating liquidity of German banks, whose capital base
was significantly weaker than in 1913. Aurel Schubert also thinks that the Austrian
economy of the early thirties was “a prisoner of the hyperinflation experience and
the behaviour of economic agents was largely influenced by this traumatic
experience.”24 The banks’ balance sheets were severely affected by the depreciation
of the Austrian currency. The debt/equity ratio from the mid-1920s was much less
21
Jonker – van Zanden 1995; Adalet 2009.
22
Jonker – van Zanden 1995.
23
Bernanke – James 1991: 54–55.
24
Burhop 2009: 80−81; James 2001: 59-60; Schnabel 2004; Schubert 1991: 33.
9
favourable than before the war, the relative capital base behind the increasing
balance totals decreased, and the biggest money institutions of Vienna increasingly
financed businesses from borrowings.25 Austrian money market was characterised
by high levels of instability in the second half of the 1920s. As a consequence of the
inflation, Austrian financial institutions lost 77.5 − 84.6 percent of their base capital
by 1925 and their liquidity rates continued to deteriorate in the second half of the
1920s.26
Hungarian financial institutions also weakened during the inflation, which
caused severe losses and internal disparities within the banks’ balance sheets. In
1925, following the financial stabilization, joint stock-companies were obliged to
draw up a gold balance sheet. The main aim of the regulation, similar to the legal
regulations of other inflationary economies (in Germany, Austria), was to balance
the profits and losses of the previous years. To get a clear picture of the joint-stock
companies’ financial position was a necessary precondition of the economic
reconstruction as well. The gold balances showed that while industrial
undertakings had been able to preserve or even slightly increase their pre-war
assets, money institutions had suffered serious losses. According to the gold
balance of 1 January 1925, Budapest banks lost nearly 80 p. c. of their pre-war share
capital and reserves, and banks elsewhere in the country suffered even bigger
losses. Hantos calculated that the rate of preserved equities in the country banks
was 14.6 per cent of the 1913 value, while this figure was 21.36 per cent in Budapest,
similar to the Austrian ratio. Banks were not able to compensate for the capital
losses caused by depreciated loans, subscribed war bonds and other fixed income
25
Schubert 1991: 33.
26
Schubert 1991: 33; Enderle-Burcel 1994: 118; Bachinger – Matis 1974: 97–99.
10
bonds by latent reserves or by capital increases undertaken after revaluation of their
balances. 27
Financial recovery was slow in the ensuing years and the prewar proportions
of the balances were not restored. In 1927, the biggest Budapest banks had only 26.6
per cent of their 1913 levels of equity and their balance totals was a mere 23.8 per
cent of the pre-war values. While the banks’ stock of deposits was merely at 49 p. c.
foreign short-term creditors reached 83 p. c. as compared to 1913 values. The
slowdown of capital accumulation is clearly demonstrated by the fact that the
decline of equities and deposits was much greater than that of credit demand. The
stock of rediscounted bills showed a less intense decline, which was a consequence
of the weakening capital base of the Hungarian commercial banks (Figure 1). 28
3.2.
Universal banking system
The peculiarities of the banking system also affected the money market. Countries
with a universal banking system were more prone to crisis and experienced greater
economic decline in the inter-war years than economies with a market-oriented
banking system, where investment and deposit banking were separated
institutionally. The so-called ‘mixed’ banks dealt both with commercial and
investment banking, so at least theoretically, these financial institutions were lower
risk than those dealing exclusively with either investment banking or traditional
banking, because they had access to information from more sources, were able to
distribute risk among their various activities, and had more protection against
sector-wide and local crises. During the time of the Great Depression, however,
they turned out to be more vulnerable and exposed. Since bankrupt businesses and
defaulting loans could cause banks to fail, the universal money institutions’ close
27
Szádeczky-Kardoss 1930.
28
MNL OL K 289 VI/13: 5. Varga 1928.
11
ties with the industry made them more vulnerable.
29
It was not only loans to
industrial firms that posed a threat for mixed-profile banks. They also faced
problems with owning corporate shares and bonds, which could incur serious
losses for the banks by losing their value during recession or by the falling rates due
to stock exchange crises. In addition, the devaluation of the banks’ portfolio
damaged their liquidity positions. As a response to the 1873 crisis, German,
Austrian and Hungarian banks turned into universal banks in the last couple of
decades of the nineteenth century. This, however, became the source of the most
serious problems in the 1930s and their vulnerability to deflation was also far
greater. 30
Research has also shown that because of their asymmetric access to
information, banks were often uninformed about the real financial condition of the
businesses they invested in; what is more, companies are known to have misled
banks in order to obtain loans.31 It is no accident that after the crisis mixed-profile
banks were either banned or became strictly regulated and placed under banking
supervision in most countries.
4. Multiple financial crises in Hungary
4.1. Foreign debt crisis
In the second half of the 1920s, economic growth was unfolding with balanced
budgets and stable gold exchange standard currency both in Austria and Hungary.
Financial stability, however, lasted only a few years and by 1930 the public finances
of both governments were in deficit, the central banks lost most of their foreign
currency reserves and finances were bordering on bankruptcy. In the second half of
29
Bernanke – James 1991; Adalet 2009.
30
Bernanke – James 1991.
31
Kopper 2011; Balderston 1991.
12
the 1920s Hungary achieved economic growth while its balance of payments
showed constant deficits, which caused increasing foreign indebtednes. Low
productivity of the export sector, balance of trade deficits and the growing burden
of debt service stood in the background of permanent disequilibrium of the
Hungarian economy.32 The foreign debt crisis was further aggravated by the
plummeting prices in agriculture and dramatic decline in Hungarian terms of trade
which put export branches in a difficult position. Calculating the volume of
Hungarian export in 1931 at 1928 prices would have resulted in 169 million pengő
more in value. In 1931, foreign debt service alone took 300 million Hungarian
pengő, while trade balance saw as little as 14.1 million surpluses and no more than
30−35 million pengő new foreign loan was available. The serious external imbalance
of the Hungarian economy and halting capital import forced the National Bank of
Hungary to sacrifice its gold and currency reserves. Already before the Austrian
financial crisis broke out, the central bank’s gold reserves decreased by one-third
between 1 January and the end of April 1931. By the end of the year, Hungary
proved unable to service its foreign debts and declared a transfermoratorium on its
long-term debts in December 22 1931 and concluded a Standstill agreement with
the short-term creditors in the summer of 1932.33
4.2.
Fiscal crisis
The position of the budget was similarly shaken. In the 1929/30 budget year,
Hungarian public finances were once again in deficit for the first time since the
financial stabilisation of 1924. The deficit was caused partly by the huge personal
costs, approximately 50-55 per cent of the expenses comprised salaries of civil
servants and pensions. Despite staff cuts carried out during the League of Nations
32
Péteri 2002: 137−147.
33
Nötel 1984: 186; Pogány 2001.
13
reconstruction phase, government administration was still vastly oversized. In
addition, loss-making state-owned companies, especially the railways, continued to
produce high amounts of deficit every year. Revenues kept shrinking due to the
economic crisis and no longer covered increasing expenditures. Prime minister,
Bethlen was already sharply criticised for the reckless management of public
finances, when in 1930 a costly rural protection policy was introduced to provide
financial support for the agricultural crisis-stricken and severely indebted farmers.
The government purchased wheat to ease the marketing problems and raise the
extremely low wheat prices. Despite the lack of resources, the government also
initiated a public works scheme to relieve the increasing unemployment in the
country.34 Because of the strict conditions of the Geneva reconstruction plan, the
Hungarian central bank was not allowed to provide loans for the government,
which, after 1930, was also cut off from foreign loans. Financing the deficits became
an insurmountable problem by the beginning of 1931.
4.3.
Bank failures
4.3.1. Liquidity problems
The Hungarian banks faced serious problems already well before the summer of
1931. Following the inflation a number of prestigious institutions were forced to
liquidate its activities. The problems were indicated by the deteriorating balance
sheet data; liquidity ratios of the financial institutions lagged considerably behind
the pre-World War I ones. Before 1914, the equity ratio (the ratio of equities to total
assets) were around 16-17 p.c. in Hungary, which was actually much lower than the
25-30 p.c. ratio held desirable at the time. However, during the hyperinflation it had
dropped further to an abnormally low level, it did not reach even 10 p. c. The equity
BECA OV33/79 Strictly Confidential, Report on the Budget and Exchequer Position of
Hungary by Mr. Per Jacobsson, April 1931; Pogány 2009.
34
14
ratio was the highest in 1925 with 20 p. c. which, however, might have been
attributed mainly to banks who wanted to present their capital positions in a more
favourable light than real in their new gold balance sheets. The revalued balance
sheets were often face-lifted which had been already pointed out by the
contemporaries.35 The liquidity ratios of the banks decreased gradually in the
second half of the 1920s, during the crisis they had barely exceeded 10 p. c. and
remained at that level until 1938 (figure 2). At the micro level, however, the picture
is more varied; in the case of the Hungarian General Credit Bank, or the Domestic
Bank the index number dropped to the two-thirds of its 1913 level, but there were
other financial institutions that have been able to maintain or increase their liquidity
positions, such as the Hungarian Commercial Bank of Pest, or the Inner City
Savings Bank (figure 3).36
The deterioration in liquidity positions was accompanied by a steady decline
in equity ratios in Germany too. According to Schnabel, the decline was most
pronounced at the great banks where the equity ratio decreased from 19.5 percent
in 1913 to 6.7 percent in 1929. In addition, equity ratios at the great banks were on
average much smaller than at the other credit banks. The low equity ratios
indicated higher risk-taking.37
4.3.2. Foreign short-term indebtedness
The biased debt structure was one of the fundamental causes of the liquidity crisis
that broke out in Vienna, Berlin and Budapest alike in 1931. Banks were vulnerable
because their low own capital were not in proportion to the loans they granted and
35
Varga 1928; Szádeczky-Kardoss 1930; Spitzmüller 1987: 273.
36
Varga 1928.
37
Schnabel 2004: 837.
15
their huge foreign debts. The smallest losses could entail serious consequences.38
The situation of the Hungarian financial institutions was also exacerbated by the
high level of short-term foreign debts even its net value (subtracting short-term
foreign assets) was well above the central bank's monetary reserves (figure 4). The
net short-term foreign debts of the Hungarian banks grew by 44.5 p. c. from 1927 to
1929 and reached 345 million pengős. The volume of debts has started to decline
from 1930 already.In 1931 depositors withdrew their foreign short-term assets on a
dramatic scale it decreased by 42.3 p.c. between 1929 and 1931.
Foreign savings deposits and current accounts were to be found practically
only in the large metropolitan financial institutions, their proportion within total
deposits fluctuated around 24-27 p. c. in the second half of the 1920s but fell rapidly
during the crisis, at the end of 1933 it was only 11 p. c. in the twelve largest financial
institutions of Budapest. The withdrawals of deposits have already begun in the
second half of 1929, and escalated in July 1931. At the end of 1931 the amount of
foreign deposits decreased to only 58.5% of their value in the summer of 1929,
confirming the news spreading on a bank run (figure 5).
The share of foreign creditors in Austrian banks was significantly higher it
was more than one-third of total deposits. Reliance on short term credits was even
bigger in Germany; in 1928 42 per cent of German credit bank deposits were owed
to foreigners according to Balderston.39 The large-scale capital import that started
after the financial stabilization mobilized mainly short-term capital resources,
which made many experts concerned about the excessive indebtedness of each
country already in 1925 − 1926. The rules of the gold standard, and the need to
maintain external equilibrium required continuous capital imports, which in turn
demanded high bank rates. However, external funds were often available only on a
short-term basis. Due to the high domestic interest rates banks found it frequently
38
Schubert 1991: 35, 44−45,
39
Balderston 1991: 568.
16
cheaper to make use of foreign resources. The discount rate of the National Bank of
Austria was 10 p. c., while Austrian banks could borrow abroad at 6 p. c. between
1925 − 1929.40 Hungary had the same difficulty after the financial stabilization.
Short-term liabilities and current account deposits were often re-lent on longterm investments purposes according to the needs of borrowers. This maturity
mismatch was widespread − it was particularly relevant in the case of the CreditAnstalt and the Hungarian General Credit Bank − and put the debt-ridden financial
institutions in a fragile position. The banks who had acquired a lot of "hot" (foreign)
money were vulnerable to sudden reversals of international capital flows.
Diminishing borrowing opportunities or greater deposit withdrawals might have
caused serious liquidity problems, bank runs might have occurred.41 The banks
have been put under dual pressure at these times, as they were neither able to call
back their long-term loans, nor had they been able to repay their short term
borrowings. During economic recessions all these were aggravated by the
insolvencies of industrial companies struggling with the consequences of the crisis.
Nonperforming loans have further increased the vulnerability of the banks, and
undermined their solvency.
4.3.3. Bank runs
Not only foreign depositors became anxious in 1930−1931, domestic deposit holders
also withdrew their assets increasingly in these months. A smaller bank panic
began in Hungary already in October 1930 when in a single month 70 million pengő
deposits were withdrawn in the twelve largest metropolitan banks (figure 5) and 30
million pengős securities were repatriated from abroad. Financial circles attributed
the run to the effects of the October speech of Prime Minister Bethlen who
40
Schubert 1991: 45.
41
Schubert 1991: 46; Schnabel 835.
17
announced an austerity policy.42 Others however took it for the consequence of the
German Reichstag election held on 14 September when National Socialists and
Communists gained much more votes than expected. The elections lead to a smaller
bank run in Germany as well.43
The withdrawal of deposits accelerated during 1931. Although many
contemporary eye-witnesses attached the beginning of the Hungarian bank run
subsequently to the collapse of the Vienna Credit-Anstalt of May, actually it already
started sooner. In March and April 1931, the savings deposits and current accounts
of the large Budapest banks decreased by more than 30 million pengős, in May,
however - surprisingly - "only" by 900 thousand pengős. The real attack began in
July, when 89 million were withdrawn in a single month. From early March to late
July, total deposits held at the twelve largest metropolitan financial institutions
shrank by nearly 150 million pengős, and by the end of November − even in spite of
the bank holiday – by a further 120 million. From early 1931 to the end of the same
year the volume of deposits shrank by 15.4 per cent, from the top level in August
1930 to the nadir of the crisis deposits of the largest Budapest money institutions
declined by 22 per cent Unfortunately we do not have data on a monthly basis on
the total domestic deposits, but it is clear that there was a dramatic decrease in their
volume. The amount of the savings and current account deposits declined by 520
million pengős or 18.4 per cent from the end of 1930 until the end of 1931, and by
22.4 p.c from 1930 to the end of 1933.
Thirty-four of the largest countryside money institutions also weathered
smaller-scale bank runs as early as October 1930, when nearly 4 per cent of savings
and current account deposits were withdrawn. In the course of 1931, mass bank
panic was beginning to unfold in the countryside too. As early as the beginning of
March, deposits began to crumble away, and by the end of the year nearly 42
42
43
Bethlen 1933: 310-311.
Balderston 1991: 582-583.
18
million pengős were withrawn by account holders, out of which 13 million was
withdrawn in July and August. In comparison with the 15 p. c. decline of Budapest
deposits, larger countryside money institutions lost 27 p. c. of all their deposits
during 1931, even though foreign deposits constituted only about 2%, which halved
after 1931. During the whole financial crisis country banks lost 42 per cent of their
deposits which was the biggest total lost compared to other types of money
institutes. The unstable country banks had to contend with indebted and defaulting
farmers and a severe agricultural crisis. In 1931 the biggest run was launched
against the state owned Postal Savings Bank: the volume of withdrawn savings and
current account deposits reached 52.3 million pengős, which meant the loss of over
a third of all deposits. The stock of deposits decreased by 39 per cent until the
spring of 1933 (figure 5).
The serious liquidity and insolvency problems are also indicated by the fact
that the volume of rediscounted bills of exchange increased by 41.2 p. c. from 1930
to 1931, which clearly shows that money institutions were greatly dependent on the
rediscount of the National Bank of Hungary. Since the investors’ confidence was
shaken in the entire region, the Hungarian banking crisis in 1931 is often seen as the
consequence of bank collapses in Berlin and Vienna. The figures above, however,
suggest that the withdrawal of deposits started much earlier than May 1931 and
confidence was undermined by various factors such as the difficult situation of the
Hungarian public finances, the significant foreign indebtedness, severe export
difficulties and low levels of bank liquidity. The events occurring in Vienna and
Berlin merely exacerbated an ongoing financial crisis rather than caused it.
5. Currency crisis
Contemporary and modern authors alike idenify the start of the Hungarian
currency crisis in the Austrian financial disturbances which then spread to
19
Hungary.44 Parallel to deposit withdrawals, the demand for foreign currency
increased. Bank runs brought about a real threat against the pengő as the deposits
were exchanged to foreign currencies and the already low foreign currency reserves
at the central bank were diminishing (figure 7). The news of the collapse of the
Creditanstalt caused stocks to plummet at the Budapest stock exchange and Vienna
banks began to withdraw significant pengő deposits. 45 As a result of the Berlin
events, the call-back of short-term foreign loans from Hungary intensified in July.
Due to the need to satisfy foreign currency demands and the withdrawal of
deposits, the demand of commercial banks placed tremendous pressure on the
Hungarian central bank.46 The national bank’s currency and gold reserves had been
continuously decreasing from 1927 onwards and by 1933 it dropped from 318
million pengős to 99 millions. The 1931 decrease was especially dramatic: the 206
million pengő reserve at the beginning of January dropped to nearly half, 116
million pengős, by September (Figure 6). To bridge the deficit the Bank borrowed 21
million dollars and one million pounds from the Bank of International Settlements,
and 5 million dollars from the Reichsbank.47
The Hungarian central bank was under dual pressure in these months; on the one
hand it had to fulfil its role as a lender of last resort and provide support for
struggling money institutions, on the other hand, it had to remain the guardian of
monetary equilibrium and the value of the domestic currency. Banks that were in a
difficult position due to their depositors’ runs could count on central bank help in
the form of bill rediscount, and many of them resorted to this in the summer of
1931. The volume of rediscounted bills increased by 40 per cent within one month
in July and continued to rise until December when it was already 71.6% of May
44
Wolf 2013: 86, 89. Ellis 1939: 88.
BECA OV 33/10, Letter of Dusán Tabakovics (National Bank of Hungary) to Harry A.
Siepmann (Bank of England), 19 May 1932.
45
46
MNL OL Z6 Protocols of the General Council 27 May 1931.
47
MNL OL Z6 Protocols of the General Council 24 June 1931.
20
figures. At the same time the composition of the bill portfolio deteriorated and the
proportion of finance bills increased because the struggling money institutions ran
out of eligible securities.48
The measures taken by the central bank clearly shows that monetary stability
continued to be its priority.49 Parallel to the creation of money and widening the
range of available loans, the reserves of the central bank were getting dangerously
low. Looking at the volume of monetary reserves above the obligatory cover of
21.78 per cent, the part of the bank’s actual reserve that could be used to protect
monetary stability was nearly gone: it diminished to less than twenty million
pengős by the autumn of 1931 (figure 7). At the same time, a number of further
worrying phenomena emerged: the bill portfolio was increasingly diluted the
disappearance of foreign currency reserves threatened the stability of the gold
exchange standard and the maintenance of the foreign debt service and foreign
trade. All this forced the Hungarian central bank to take further steps after the
initial restrictive measures taken in June. A drastic bank rate increase was
implemented, in which the rediscount rates were gradually raised from 5 to 9 per
cent, while severe deflation caused a 30 p. c. drop in the price level between 1928
and 1934. They also introduced Draconian measures to curb credit demand; the
maturity of bills was reduced from 90 to 40 days in the most critical period.50 In
Austria the interest rate was raised even higher as the National Bank of Austria
gradually raised it to an extremely high 10 p. c. from the beginning of June
onwards.51 However, since the last resort foreign the troubled money institutions
was the central bank, neither the Budapest nor the Vienna central bank was able to
reduce credit demand with interest rate policies any longer.
48
MNL OL Z6 Protocols of the General Council, 25 November 1931.
49
National Bank of Hungary, Report on the business year 1931: XXII.
50
National Bank of Hungary, Report on the business year 1931: XXII, XXVII.
51
Schubert 2008: 69−70.
21
As part of the restrictive policies, the circulation of bank notes dropped
dramatically and reached an all-time low in 1932 when it fell to 68.8 per cent of the
1928 top values. The M2 also shrank at a steady rate from 1930 to 1933, when it
finally stopped at 79.9 p. c. of the 1930 value.52
Hungarian contraction was
nevertheless less extreme than the Great Contraction in the United States where the
money stock fell by 33 per cent from August 1929 to March 1933.53 The only relief
from the general contraction occurred in July 1931 when the central bank increased
the volume of banknotes in circulation by 30%, to 501 million pengős, as a response
to the bank run (figure 8).
The generous rediscounting of bills and the restrictive measures proved to be
counterproductive and fruitless could not stop bank runs and the currency crisis.
Following the German bank holiday, the Hungarian government put emergency
measures into force; on July 13, a three-day bank holiday was proclaimed. Foreign
exchange control was introduced on 17 July: the convertibility of the pengő ceased
to exist, and foreign exchange transactions were monopolized by the central bank.
Deposit withdrawals were further limited after the bank holiday until August 14.
Gold pengő was introduced in order to calm the public alarmed by fear of inflation.
54
After barely six years of free currency economy, the country returned to exchange
controls and the repayment of foreign loans was suspended.
6. The Collapse of the Hungarian General Credit Bank
Historiography traditionally views the collapse of Wall Street, the Vienna
Creditanstalt (CA) and the Berlin-based Danatbank as the emblematic events that
evoke images of the 1931 financial crisis in historical memory. Although Budapest
M2: the sum of bank notes, coins, current accounts and savings deposits at central bank
and commercial banks
52
53
Friedman − Jacobson Schwartz 2007: 15.
54
Varga 1964: 54.
22
avoided such displays of stock exchange crash or bank failures, meticulous research
reveals that several Budapest money institutions were in extremely dire situation by
the middle of 1931. The Hungarian General Credit Bank − the largest and most
respected Budapest bank in the interwar years − was one of the worst off of all.
Both researchers and the general public at the time associated the difficulties of the
bank with the failure of the Vienna Creditanstalt, which was also part of the
Rothschild consortium. Although the Rothschilds continued to be shareholders of
the Credit Bank and the London house remained the bank’s most important foreign
partner in international loan businesses, the ties between the CA in Vienna and the
Credit Bank in Budapest had loosened significantly since the nineteenth century.55
The run against the Credit Bank in May was a result of diminished depositor
confidence. Similarly to the CA, primarily domestic depositors took their money
away from the bank, the amount of domestic deposit withdrawals was twice as
much as foreign deposit recalls from May to October. The most intense attack
occurred in July rather than May, following the German banking crisis: between 1
July and the end of August 25 million pengős worth of foreign loans and 25 million
pengős of deposits were withdrawn. During this half year altogether 102 million
pengős were withdrawn, which was 1.66 times as much as the share capital of the
bank.56
The bank was struggling with serious problems since the early 1920s,
although this was kept from the public. By 1931 the bank became immobilized and
lost a substantial part of its capital. The causes were manifold. The bank had the
privileged position of the government’s banker since 1873 but these activities in the
period of war and hyperinflation caused a 210 million pengős loss. The bank
suffered a further 32.5 million loss following the financial stabilisation, due to loans
55
Der österreichische Volkswirt 16 May 1931: 380-381; 11 July 1931: 1094; Weber 1991: 572.
56
Ferber 1988: 102.
23
to the state and state-owned industries.57 The government, municipalities and state
owned enterprises, particularly the state railways were all heavily indebted to the
bank.58 The Credit Bank as a universal bank also financed an extended industrial
holding which faced particular difficulties in these years. The bank granted credits
to giant industrial firms in the engineering and food industry such as Ganz & Co.59
Hofherr − Schrantz, and steam flour mills which lost their markets after the war and
the dissolution of the big internal market of Austria – Hungary, struggled with
serious overcapacities and produced heavy losses since many years. Country banks
shattered by the agricultural crisis and the government’s measures protecting
indebted landowners were also heavily indebted to the Credit Bank.60 According to
the internal (not public) balance sheet drawn on 31 October 1931 the bank had
nearly 500 million pengő outstanding debts including the guarantees. The half of
these loans were granted to the insolvent Treasury and industrial firms (figure 9).
The Credit bank refinanced 61 per cent of these loans by foreign, partly
short-term credits that made its position even more vulnerable. The bank which had
41.4 million pengő share capital and its public balance-sheet total amounted to 343
million pengő in 1931 had nearly 160 million pengős (28 million dollars) foreign
debts in July 1931 that exceeded 40 per cent of the total foreign indebtedness of all
Hungarian commercial banks. What is more, around 50 per cent of the foreign debts
was short-term and became due before the end of the year. As a consequence of
57
MNL OL Z51. 33. 470.t. Memorandum, September 1935: 131-134.
MNL OL K 269. 370. t; AA/AdR Gesandschafts- und Konsulatarchive, Gesandschaft
Budapest Kt. 1. Letter of Ambassador Calice, Zl. 30/Pol. 15. July 1931. 5.
58
59
On the company: Hidvégi 2014.
60
Pogány 2007.
24
deteriorating stock market prices the latent reserves of the bank had also
substiantially diminished.61
Rediscount credits of the central bank helped the Credit Bank through the
most difficult days of the crisis. It owed more than 100 million pengős to the
National Bank by the end of October 1931, which was more than twice as much as
the bank’s share capital.62 Spectacular collapse was avoided only due to the bank
holiday transfermoratorium and the introduction of the foreign exchange control
which meant a real recourse for the heavily indebted bank that lost its capital and
faced bank runs. In the folowing years many plans were made for the
reconstruction of the bank which however dragged on until 1938 because the
government was not able to settle its debts earlier than that.
7. Conclusions
Although Hungary managed to avoid spectacular bank failures and stock market
collapses the intertwining banking, currency fiscal and foreign debt crises caused an
extremely severe economic depression which had not been overcome until 1938. In
my paper I wanted to prove that Hungary had a quadruple crisis from 1931 which
was in many respect similar to the financial crises in Austria and Germany. My
paper focused mainly on the history of the banking crisis which was not studied
before. Hyperinflation of the early 1920s undermined the stability of the banking
sector which was not remedied in the few years following financial reconstruction.
The fragility of the banks was aggravated by short-term foreign indebtedness and
frozen industrial loans as well. The universal banks of the regions proved especially
MNL OL Z51. 23. 261, Memorandum on the merger of the Hungarian General Credit Bank
and Hungarian General Savings Bank, 27. May 1929.
61
62
Weber 1991: 549. BECA OV 33/6, Phone conversation with Sándor Popovics 2. July 1931.
25
vulnerable in these years, while the possibilities of the monetary policy were
curtailed by the rules of the gold exchange standard re-established in 1924.
The Hungarian financial crisis in 1931 is often understood as the
consequence of the bank collapses in Berlin and Vienna. The data, however, suggest
that the withdrawal of deposits started much earlier than May or July 1931. New
research discovered that a smaller bank run took place already during the autumn
of 1930 and investors’ confidence was gradually lost in the following months.
Confidence was undermined by various factors such as the problems of Hungarian
public finances, the significant foreign indebtedness, severe export difficulties and
low levels of bank liquidity. The events occurring in Vienna and Berlin merely
exacerbated an ongoing financial crisis rather than caused it. Contrary to Germany,
where the largest Berlin branch banks suffered the greatest deposit withdrawals, in
Hungary it were the country banks that lost the biggest part of their savings and
current account deposits which is consistent with the grave effects of the
agricultural crisis in Hungary.
26
APPENDIX
Figure 1: Selected balance sheet items of the Hungarian commercial banks, 1913 =
100
120
100
80
60
1913
1925
40
1928
20
0
Bills
Debtors
Total equity
Current Rediscounted Creditors
accounts and
bills
savings
deposits
Own bills
Profits
Source: MNL MOL Treasury K 289 VI/13. p. 5.
27
Figure 2: Ratio of banks’ own capital and balance-sheet totals, Hungarian money
institutions, 1908-1938, per cent
0,25
0,2
0,15
0,1
0,05
0
1908 1909 1910 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
Source: Hungarian Statistical Yearbooks, 1910-1938.
28
Figure 3: Liquidity ratios of the largest Budapest money institutes in 1913 and 1927,
per cent
Kisbirtokosok Országos Földhitelintézete*
Magyar Földhitelintézetek Országos Szövetsége
Magyar Földhitelintézet
Fabank rt.
Budapest-Lipótvárosi Takarékpénztár
Mercur Váltóüzleti rt.
Nemzeti Takarékpénztár és Bank
Magyar Takarékpénztárak Központi…
Egyesült Budapesti Fővárosi Takarékpénztár
Nemzeti Hitelintézet rt.
Magyar Kereskedelmi Hitelbank
Magyar-Cseh Iparbank rt.
Magyar Forgalmi Bank rt.
Hermes Magyar Általános Váltóüzlet rt.
Magyar Jelzálog Hitelbank
Magyar Általános Ingatlanbank
Belvárosi Takarékpénztár rt.
Földhitelbank
Hazai Bank
Magyar Országos Központi Takarékpénztár
Magyar-Olasz Bank
Magyar Általános Takarékpénztár
Magyar Leszámítoló és Pénzváltó Bank
Pesti Hazai Első Takarékpénztár
Angol-Magyar Bank
Pesti Magyar Kereskedelmi Bank
Magyar Általános Hitelbank
Eqity Ratio, 1927 %
Eqity Ratio, 1913, %
Source: Calculated on the data of Varga, pp. 447 és 449.
29
Figure 4: Short-term foreign indebtedness of Hungarian banks, 1927-1938, thousand
pengős
600000
500000
400000
Total short-term foreign debts
300000
Net short-term foreign debts
200000
100000
0
1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
Source: Hungarian Statistical Yearbooks, 1927-1938.
30
Figure 5: Current account and saving deposits in Hungarian banks1928−1933, 08.
1930 = 1.00
1,200
1,000
0,800
12 biggest Budapest bank
12 biggest Budapest banks, foreign
deposits
0,600
Postal Savings Bank
0,400
34 biggest country banks
0,000
12. 1928
2. 1929
4. 1929
6. 1929
8. 1929
10. 1929
12. 1929
2. 1930
4. 1930
6. 1930
8. 1930
10. 1930
12. 1930
2. 1931
4. 1931
6. 1931
8. 1931
10. 1931
12. 1931
2. 1932
4. 1932
6. 1932
8. 1932
10. 1932
12. 1932
2. 1933
4. 1933
6. 1933
8. 1933
10. 1933
12. 1933
0,200
Source: Magyar Gazdaságkutató Intézet, Gazdasági helyzetjelentések, (Hungarian
Economic Research Institute, Economic Reports) 1929−1934, Budapest
31
Figure 6: National Bank of Hungary, monetary data, 1924 – 1938, million pengős
1000
900
800
700
600
Monetary reserves
500
Rediscounted bills
Bank notes
400
Current account deposits
300
200
100
0
1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
Source: Annual General Assemblies of the National Bank of Hungary, Budapest,
1924-1938
32
Figure 7: Monetary reserve of the National Bank of Hungary, at the end of the
months in 1931, million pengős
200
180
160
140
120
Monetary reserve
100
Obligatory bank note cover
(21.78%)
80
Free part of the monetary reserve
60
40
20
0
1
2
3
4
5
6
7
8
9
10
11
12
Source: Annual General Assembly of the National Bank of Hungary of 1931,
Budapest, 1932.
33
Figure 8: Stock of money, 1924−1938, million pengős
4000
3500
3000
2500
M1
2000
M2
1500
1000
500
0
1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
Source: Annual General Assemblies of the National Bank of Hungary, Budapest,
1924-1938
Hungarian Statistical Yearbooks, 1924-1938.
34
Figure 9: Outstanding debts of the Hungarian General Credit Bank, 31 October
1931, million pengős
Government and municipalities
6,8
25
41
0,5
Industrial holding of the bank
86,5
Affiliated banks
Other banks
119,7
Other debtors
157,7
20,3
34,7
Foreign assets
Treasury bills
Mortgage loans
Other
Source: Pogány, Bankválság, MNL MOL Hungarian General Credit Bank,
Secretariat Z51 33. cs. 470. t. The present situation of the Hungarian General Credit
Bank, The balance sheet of the bank on 31 October 1931.
35
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