European banking crisis of 1931
The European banking crisis of 1931 was a major episode of financial instability that peaked with the collapse of several major banks in
The causes of the crisis included a complex mix of financial, fiscal, macroeconomic, political and international imbalances that have nurtured a lively debate of historiography.[1][2][3][4][5][6]
Background
Germany's banking sector shrunk dramatically from 1913 to 1924, but expanded rapidly again in the later 1920s, with fivefold growth of aggregate bank assets between 1924 and 1930.[2]: 831 The banks were generally undercapitalized and overstretched following rapid balance sheet expansion in the late 1920s,[2]: 838 with a predominance of short-term debt, much of it foreign.[1]: 72 During 1924-1929, Germany's was the world's largest capital importer, with U.S. banks lending massively to German counterparts and U.S. investors buying German bonds in large volumes.[4]: 351 By mid-1928, 42 percent of deposits at joint-stock banks were foreign,[7]: 568 and the share was 18 percent of all deposits in the German banking sector in 1929.[2]: 833 This unusual feature of the German financial system was a direct legacy of the hyperinflation of 1921-1923, which durably impaired the role of capital markets and made the country abnormally dependent on short-term foreign lending. Many German companies routinely parked their money in foreign subsidiaries that in turn lent to their German parent.[8]: 193 Similar patterns could be observed in other Central European countries that had suffered from hyperinflation, particularly Austria, Hungary, and Poland,[9] to a lesser extent Romania,[10] and much less so Czechoslovakia.[11]
The large Berlin-based branch banks also made a large number of acquisitions of smaller competitors, a trend which contributed in the rapid increase of their market share from 12.6 to 23.3 percent of total assets between 1913 and 1928,[2]: 832 and culminated in 1929 with two large-scale transactions, Commerzbank's acquisition of Mitteldeutsche Creditbank and Deutsche Bank's acquisition of Disconto-Gesellschaft.[7]: 580 The long-standing practice of self-regulation in the German banking sector, with the exception of local savings banks (German: Sparkassen), implied that this increase in leverage was not kept in check by public supervision.[1]: 72 Even at the time, self-regulation was not obviously effective to keep risks in check: for example, Deutsche Bank was impacted by a series of scandals related to poor credit risk controls in the mid-1920s.[2]: 838
By the late 1920s, public banks (Staatsbanken,
Harbingers of crisis started to accumulate at the end of the decade. German stock prices started declining with the "Black Friday" of May 1927, and GDP growth slowed substantially in 1928 and turned negative in 1929.[2]: 842 Industrial production started to decline from mid-1929.[1]: 69 A cyclical credit crunch started in May 1930 and resulted in German money supply, defined as currency and bank deposits, contracting by 17 percent from June 1930 to June 1931.[1]: 71
German policymakers displayed excessive confidence in
Incipient financial instability occurred in Spring 1929, due to fictions in the reparations negotiations; July 1930, due to governmental crisis; and September 1930, due to the Nazi Party's strong showing in the Reichstag election.[2]: 843 These episodes, however, were kept under control by the Reichsbank.[1]: 69 Similarly, the collapse in August 1929 of insurer Frankfurter Allgemeine Versicherungs-AG (FAVAG) due to fraudulent management, known in Germany as the FAVAG scandal , turned out to be an idiosyncratic event and perceived as such by depositors.[2]: 847
In France, an early wave of deposit flight occurred from October 1930 to February 1931, during which retail savers transferred their holdings on a large scale from small and mid-sized banks, for which no
In Austria,
Crisis
On 11 May 1931, Creditanstalt publicly announced that it would not be able to publish a financial statement.[1]: 71 . On 6 June 1931, the German government announced it would be unable to pay reparations as previously planned, triggering a parliamentary crisis.[2]: 852 On 20 June 1931, U.S. President Herbert Hoover announced a one-year "holiday" or moratorium on the payment of political debts, known as the Hoover Moratorium,[1]: 71 which brought some relief even though it was initially opposed by France. On 22 June 1931, the Reichsbank introduced restrictions to its domestic bill discounts, with the aim disincentivizing transfers of money abroad by German firms - but this had catastrophic effect by creating financial squeezes even for essentially sound firms.[1]: 81
From mid-June,[14]: 873 concerns arose around a loan of 48 million Reichsmark that Danat-Bank had granted to struggling textile company Nordwolle, corresponding to 40 percent of its equity.[2]: 838 On 4 July 1931, Danat-Bank ran out of discountable bills. The Reichsbank had to discontinue its liquidity assistance on 10 July 1931, and on 13 July 1931 Danat publicly disclosed its inability to meet commitments, triggering a general panic as the public felt the Reichsbank was reaching the limits of its liquidity assistance capacity.[2]: 862 The government declared a general bank holiday, starting on 14 July 1931.[7]: 596 On 15 July 1931, the Reichsbank suspended the convertibility of the Reichsmark, effectively taking Germany out of the gold standard, and imposed capital controls.[2]: 853 From 1931/17/16, some banking transactions were again authorized but with severe limits and restrictions, partly loosened on 20 July.[8]: 197-198
Meanwhile, the Reichsbank sponsored several mechanisms to facilitate the revival of interbank transactions. On 18 July 1931, it established a temporary Transfer Association (
The Reichsbank's subsidiary
The unraveling of the gold standard continued after Germany's exit in mid-July, immediately followed by Hungary. The UK abandoned gold parity on 19 September 1931, and Austria did so on 8 October 1931.[6]: 15 France remained in the gold standard until 1936, with severe deflationary effect.[13]: 2
Significant banks collapsed in other countries as well. In Hungary, in addition to high foreign indebtedness, several banks had significant exposures to Austrian banks and were thus directly impacted by the Austrian banking turmoil.
Germany made "standstill agreements" with major creditor countries in August and September, following a conference in London on 20-23 July.[1]: 82 The general bank holiday was lifted after three weeks on 5 August 1931.[1]: 69 The Hoover moratorium, which aimed to protect longer-term exposures by imposing a standstill on short-term repayments, disproportionately impacted British merchant banks involved in trade finance to German counterparts, but also triggered a collapse in the value of German bonds, many of which had been underwritten by American institutions.[4]: 353
Political constraints linked to the controversies over war reparations, implying that the "appearance of prosperity" and visible public investment should be avoided, weighed negatively on key economic sectors such as the automobile market and infrastructure works. Economic historian Peter Temin concludes that Brüning "ruined the German economy — and destroyed German democracy — in the effort to show once and for all that Germany could not pay reparations."[3] It remains debated, however, to which extent an alternative strategy of expansion would have been viable. Harold James notes that the legacy of the hyperinflation episode of the early 1920s implied that public borrowing and spending could not be an appropriate strategy for crisis resolution, in Germany as in other Central European Countries including Austria, Hungary, and Poland.[1]: 83-84
Aftermath and legacy
The financial crisis sharply exacerbated the economic downturn that had started before mid-1931. The German turmoil of July 1931 generated powerful spillover impact on other countries, particularly the United States which were uniquely exposed because of the structuring of German post-WWI reparations.
At its low point in 1932, German economic output had declined 39 percent from its level in 1929.[1]: 68 The large joint-stock banks were fully reprivatized in 1937.[7]: 600 Capital controls were kept for an extended time period.
The crisis had major consequences for the development of prudential
Historiography
The financial crisis of 1931 has long been identified as a major contributor to the global economic depression of the early 1930s.[18] In the early decades following the crisis, it was often described as a somewhat serendipitous crisis of confidence, in which the key mechanism was the withdrawal of short-term foreign deposits or "hot money". Joseph Schumpeter described the crisis as triggered by "vicissitudes [that] would have to be explained primarily in terms of accidents and external factors". This narrative was echoed[1]: 70 in reference works such as those by Karl Erich Born[19] or Gerd Hardach ,[20] and more recently by Thomas Ferguson and Peter Temin.[21]
By contrast, historian Harold James has argued in 1984 that a domestic crisis of public finances was at the core of the German sequence, noting that domestic deposit flight predated the exodus of foreign investors in Germany by several critical weeks.[1] Isabel Schnabel in 2004 identified it as twin crises in currency and banking markets respectively, namely a "run on the Reichsmark" and a run on the banks viewed as "two independent causes".[2] Schnabel thus similarly de-emphasized the centrality of foreign-currency aspects, and noted the absence of currency mismatch in large banks' balance sheets despite high shares of foreign deposits.[2]: 835 Schnabel also argued that the large Berlin-based universal banks were made to feel too big to fail by the Reichsbank's liquidity policy stance, contributing to moral hazard and uncontrolled balance sheet expansion in a context of increasing competition among banks.[2]: 839-842 In 2014, economists Albrecht Ritschl and Samad Sarferaz found empirical evidence "consistent with the claim of Schnabel (2004) that Germany's 1931 crisis was causally a banking crisis, whereas monetary transmission under the Gold Standard played only a limited role."[4]: 366
The long-accepted causal link between the Creditanstalt collapse and the events in Germany has likewise been questioned in more recent historiography.[7]: 582 [2]: 857 Separately, recent research has demonstrated that France was not spared by the banking crisis, against a long-established view that the country had been spared. That view was distorted by the lack of accessible data beyond the country's four largest banks which were comparatively unscathed, and could only be corrected with the rediscovery of a unique collection of balance-sheet data of most French banks gathered by Crédit Lyonnais between 1901 and 1939, known as the Album.[13]
See also
- Panic of 1930
- Emergency Banking Act
Notes
- ^ JSTOR 2596832
- ^ S2CID 154503072
- ^ S2CID 153640975
- ^ S2CID 153140854
- ^ Flora Macher (2015), "Did monetary forces cause the Hungarian crises of 1931?" (PDF), EHES Working Papers in Economic History, 86, European Historical Economics Society (EHES)
- ^ a b Flora Macher (2018), The Austrian Banking Crisis Of 1931: One Bad Apple Spoils The Whole Bunch (PDF), Economic History Department, London School of Economics and Political Science
- ^ S2CID 154642962
- ^ SSRN 2101727.
- hdl:10419/180328
- ^ Silviu Cerna (2020). "Romanian Stabilization in the 1920s and the Missing Gold Reserves". The Market for Ideas.
- ISBN 9783110850734
- ^ a b Albert Fischer. "Die Landesbank der Rheinprovinz in der großen Bankenkrise der 1920er Jahre". Portal Rheinische Geschichte.
- ^ a b c d e f g Patrice Baubeau, Eric Monnet, Angelo Riva, and Stefano Ungaro (2018), Flight-to-safety and the Credit Crunch: A new history of the banking crisis in France during the Great Depression (PDF), Banque de France
{{citation}}
: CS1 maint: multiple names: authors list (link) - JSTOR 3874822
- ^ Norbert Bacher, Matthias Beitl, Nadia Rapp-Wimberger, Aleksandra Aleksić (2015), The CEE History Project: The History of Savings Banks in Central and Eastern Europe and the History of Erste Group's subsidiaries in the Czech Republic, Slovak Republic, Hungary, Croatia, Serbia, Romania, Ukraine (PDF), Vienna: ERSTE Stiftung
{{citation}}
: CS1 maint: multiple names: authors list (link) - ^ Enrique Jorge-Sotelo (2022), Politicians, bankers and the Great Depression: The Spanish banking crisis of 1931 (PDF), Frankfurt: European Association for Banking and Financial History (EABH)
- JSTOR 20662122– via JSTOR.
- ^ Milton Friedman and Anna Jacobson Schwartz (1963), A Monetary History of the United States, 1867-1960, Princeton University Press
- ^ Karl Erich Born (1967), Die deutsche Bankenkrise 1931 - Finanzen und Politik, Munich: Piper
- ^ Gerd Hardach (1976), Weltmarktorientierung und relative Stagnation: Währungspolitik in Deutschland 1924-1931, Berlin: Duncker und Humblot
- SSRN 260993