Tuesday, March 24, 2009

Austrian Banks, Yesterday and Today

The government of the Czech Republic has just fallen as a result of the economic crisis that is hitting many countries in Eastern Europe hard, such as Hungary, Romania, and Ukraine. In and several of these, many people borrowed Swiss francs or other foreign currencies at low interest rates and are now hurting for repaying as their currencies have collapsed. Many of the banks that have been doing this lending and are now in serious trouble are located in Austria, with Raffeisen, Erste, and Bank of Austria reportedly getting emergency loans from the Austrian government, which is viewed as not able to handle a much worse crisis involving them. At least the Creditanstalt is not reported to be among those getting these loans, which was reconstituted after major problems earlier in its history.

It was the Creditanstalt that failed on May 11, 1931, triggering the worst financial crisis in world history. Founded in 1855, it had become the biggest bank in Central and Eastern Europe by then. Its failure set off a cascade of falling dominos among banks that then also failed, starting in countries formerly a part of the old Austro-Hungarian Empire to the east, many of them in trouble now, including Hungary, Czechoslovakia, and Poland. The next to go was Germany, where the unemployment rate would reach a world high of 30% by the time Adolf Hitler came to power in 1933. Many banks there had links to the Creditanstalt, and many failed in the months thereafter, with ones in France and Britain following suit. US banks were also linked to the ones in Germany because of the many loans made by them to the German ones under the Dawes Plan of the 1920s, worked out to help Germany deal with its debts arising from its reparations payments made under the Versailles Treaty. But the pressure on the US would peak after Britain went off gold in August, 1931. In the US, bank deposits fell by over 10%, and unemployment soared from a bit below 9% in 1930 to over 15% in 1931, higher than anytime since the Great Depression. Indeed, it was this wave of bank failures across the globe that more than anything else made an unpleasant recession into the Great Depression, as described well in such works as A Financial History of Western Europe, by Charles Kindleberger.

Hidden conclusion here.


Imee said...

I agree, Europe has been hit really bad by this global financial crisis. I didn't know about Creditanstalt until today, so I didn't really realize how bad things were back then. If history's gonna repeat itself worldwide again, then I'm scared.

Brenda Rosser said...

Marriner S. Eccles who served as Franklin D. Roosevelt’s Chairman of the Federal Reserve from November, 1934 to February, 1948 gave his view of what caused the Depression in his memoirs, "Beckoning Frontiers" (New York, Alfred A. Knopf, 1951):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped....

In 1974 Richard Barnet and Robert Muller wrote: "Economists now agree that the "job crisis" is a consequence of what James Grant calls the "artificial cheapening of the price of capital and the artificial increase in the price of labor." Poor countries have encouraged "urban-oriented factories and large scale mechanised farming as the fastest route to modernisation at time when the latest machines use less and less labor." Poor countries subsidise foreign capital by inflating interest rates, by making generous tax concessions, legal and illegal, and because of their inability to control transfer prices [in intracorporate trade]."

Global Reach. 1974. Page 170

Capital's price is also lowered by failing to cost 'externalities', forcing the public to pay for infrastructure costs of business ... and so on. Not the least of which is the outright bailing out of failed 'enterprises', as was done after the Austrian bank failed (with the global banking flow-on effects) in 1931.

rosserjb@jmu.edu said...

Well, as I said it is interesting that Creditanstalt seems to have avoided the worst of this lending spree that is now falling apart. Maybe they have an institutional memory of their own past. I remember seeing branches of it in Vienna and thinking that it was a bit surprising that it had survived, although there were several rounds of mergers and breakups and restructurings before the current Creditanstalt came to be as it is after the catastrophe of the 1930s.


I do not think there is a real disconnect here. The sorts of things you mention are the more fundamental ones, setting up the system for a big fall, and in fact it had been declining from 1929 until the crisis of 1931, which was when the world economy really and finally fell off the cliff like it never had before or since.

Ironically, and this is the first time I have thought of this (Kindleberger did not), but I think one can think of this as a higher order form of the "period of financial distress" model I have posted on before here. So, that went on with the New York stock market crash of 1929, the market peaking at the beginning of September, and then having its biggest crash on October 24, 1929.
That began the longer and more global slide in both asset markets and the real economy, with the slide of the latter, further aggravated by such things as widespread contractionary monetary policies and the trade war erupting after passage of the Smoot-Hawley tariff, which began undermining banks around the world as their loans began to gradually go bad on them.

In that regard, the collapse of the Creditanstalt was really more like the straw on the back of a really large and belearguered camel that had been getting battered for nearly two years. As an aside, and a reminder of the global nature of that crash, it was an increase in rates being demanded by some Dutch banks and also some French ones calling in assets from the Creditanstalt that combined to trigger its fateful failure on May 11, 1931.