The Hungarian Banking Crisis of 1931

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The current presentation is on the first paper of my thesis

PhD thesis plan

Paper #1

Paper #2

Paper #3

The causes of the Hungarian crisis of 1931

The causes of the Austrian crisis of 1931

Crisis triggers and crisis propagation: Austria, Germany and Hungary

2

• International literature: Eichengreen (1992), James (2002), Kindleberger (1986)

– Highly indebted CEE countries – binge borrowing in foreign currency after stabilization

– Debt service becomes problematic once availability of foreign capital becomes limited

– Foreign creditors become wary of the stability of the region

– Once Credit-Anstalt collapses, foreign creditors withdraw from the whole of the region

• Local accounts: main reference is Berend (various works), Berend-Szuhay (1978):

– Crisis originated in: the monetary system

– Crisis caused by: decline in export revenue, decline in availability of capital

– Crisis triggered by: flight of foreign depositors after Credit-Anstalt shock

There is no detailed, systematic analysis of the Hungarian financial crisis of 1931

Purpose of the paper

Mainstream interpretation

• Test the current interpretation by using the relevant data sources

Goal

• Contemporary statistical publications

• Statistics from the archival records of the Hungarian National Bank

Data

• Minutes of the board meetings of the National Bank and the Central Commission for Financial Institutions

• Contemporary papers

Narrative

3

This paper proposes that the crisis originated in the banking system andwas caused a currency crisis in 1928, an agricultural crisis in 1930 and a fiscal policy, providing state-guaranteed loans

Summary

Turning point:

• Currency crisis in late 1928 after Fed tightening

Type of crisis:

• Banking crisis

Initial conditions

• Banking system’s exposure to argiculture

• Government debt and deficit seem complementary to this

4

Proposed interpretation

Turning point:

• Wall Street crash in Oct 1929

Type of crisis

• Currency crisis

Initial conditions

• Government debt and deficit

Hungarian historiography

Causes:

• Tight monetary policy

• Agricultural crisis in 1930

• State-guaranteed loans

Causes:

• Decline in the inflow of foreign capital

• Decline in export revenues

Contents

Monetary policy after the currency crisis in late 1928

Agricultural crisis in 1930

Fiscal policy - state-guaranteed loans

Wrap-up

Crisis indicators

5

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

07-Jan-27 07-Jan-28 07-Jan-29 07-Jan-30 07-Jan-31 07-Jan-32 07-Jan-33

Hungary experienced a currency crisis already in late 1928. This was the turning point that started the avalanche of troubles

The exchange market pressure index (EMP)

Source: Magyar Gazdaságkutató Intézet, Eichengreen-Wyplosz-Rose, 1996

Crisis: protracted period of swings

6

The banking crisis indicator signals for Oct 1930 – this was the Budapest banking crisis, and then from July 1931 – this was the nationwide banking crisis

The signals of the banking crisis indicator

DateDomestic Budapest

Foreign Budapest

Total -Budapest

Domestic non-

Budapest

Foreign non-

Budapest

Total -non-

Budapest

Jan-30 0 0 0 0 0 0

Feb-30 0 0 0 0 0 0

Mar-30 0 0 0 0 0 0

Apr-30 0 0 0 0 0 0

May-30 0 0 0 0 0 0

Jun-30 0 0 0 0 0 0

Jul-30 0 0 0 0 0 0

Aug-30 0 0 0 0 0 0

Sep-30 0 0 0 0 0 0

Oct-30 1 0 1 0 0 0

Nov-30 0 0 0 0 0 0

Dec-30 0 0 0 0 0 0

DateDomestic Budapest

Foreign Budapest

Total -Budapest

Domestic non-

Budapest

Foreign non-

Budapest

Total -non-

Budapest

Jan-31 0 0 0 0 1 0

Feb-31 0 0 0 0 0 0

Mar-31 0 0 0 0 0 0

Apr-31 1 0 0 0 0 0

May-31 0 0 0 0 0 0

Jun-31 0 0 0 0 0 0

Jul-31 1 1 1 0 0 0

Aug-31 0 0 0 1 1 1

Sep-31 0 0 0 1 0 1

Oct-31 1 0 1 1 0 1

Nov-31 0 0 0 1 0 1

Dec-31 0 1 0 0 0 0

Source: Magyar Gazdaságkutató Intézet

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Contents

Monetary policy after the currency crisis in late 1928

Agricultural crisis in 1930

Fiscal policy - state-guaranteed loans

Wrap-up

Crisis indicators

8

1926 1927 1928 1929 1930 1931 1932

Inflow

Current account

Total 950 897 987 1238 1111 733 397

Capital account

Medium- and long-term capital 206 364 446 319 377 120 10

Short-term capital 0 230 187 58 12 515 8

Total 206 593 633 376 389 634 18

Total 1156 1490 1621 1614 1500 1368 415

Outflow

Current account

Total 1098 1376 1489 1451 1249 958 422

Capital account

Medium- and long-term capital 38 86 131 100 179 100 9

Short-term capital 21 28 0 68 0 247 3

Total 59 114 131 168 179 347 12

Total 1157 1490 1620 1619 1428 1305 433

Balance of payments 1926 1927 1928 1929 1930 1931 1932

Current account

Balance -148 -479 -502 -213 -138 -225 -25

Capital account

Long- and medium-term capital transactions 167 278 315 218 198 20 1

Short-term capital transactions -21 202 187 -10 12 268 5

Balance 147 480 502 208 210 287 7

Balance as a % of DNI 2% 8% 8% 3% 3% 5% 0%

The inflow of foreign capital declined from 1929 and hence less forex was available in the country

Source: Statisztikai Szemle

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The trade account was in a deficit from 1925 through mid-1929 and this imbalance had to be financed

Hungary’s trade account

-50

-40

-30

-20

-10

0

10

20

30

40

50

01-J

an-2

5

01-M

ay-2

5

01-S

ep-2

5

01-J

an-2

6

01-M

ay-2

6

01-S

ep-2

6

01-J

an-2

7

01-M

ay-2

7

01-S

ep-2

7

01-J

an-2

8

01-M

ay-2

8

01-S

ep-2

8

01-J

an-2

9

01-M

ay-2

9

01-S

ep-2

9

01-J

an-3

0

01-M

ay-3

0

01-S

ep-3

0

01-J

an-3

1

01-M

ay-3

1

01-S

ep-3

1

01-J

an-3

2

01-M

ay-3

2

01-S

ep-3

2

01-J

an-3

3

01-M

ay-3

3

01-S

ep-3

3

Source: Statisztikai Havi Közlemények

1925

-45.9

1926

-82.3

1927

-346.3

1928

-370.3

1929

-22.6

1930

+77.5

1931

+17.5

1932

-4.9

1933

+79.7m pengős

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After the 1928 early crisis episode, the central bank became restrictive and biased towards agriculture

Total and agricultural rediscount and the gold cover

Rediscount:

m pengős

Source: HNA, Z12, 60. csomó, Magyar Gazdaságkutató Intézet

Total rediscount

Agricultural rediscount

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0

100

200

300

400

500

600

700

30-Jun-25 30-Jun-26 30-Jun-27 30-Jun-28 30-Jun-29 30-Jun-30 30-Jun-31 30-Jun-32

Gold cover

Gold coverHungarian National Bank received

emergency loans

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Contents

Monetary policy after the currency crisis in late 1928

Agricultural crisis in 1930

Fiscal policy - state-guaranteed loans

Wrap-up

Crisis indicators

12

Hungary sank into a recession from mid-1929, after the currency crisis bottomed out

Economic activity index for Hungary, 1925-1936

40

50

60

70

80

90

100

110

120

1301-

Jan

-25

1-Ju

n-2

5

1-N

ov-

25

1-A

pr-

26

1-Se

p-2

6

1-Fe

b-2

7

1-Ju

l-2

7

1-D

ec-2

7

1-M

ay-2

8

1-O

ct-2

8

1-M

ar-2

9

1-A

ug-

29

1-Ja

n-3

0

1-Ju

n-3

0

1-N

ov-

30

1-A

pr-

31

1-Se

p-3

1

1-Fe

b-3

2

1-Ju

l-3

2

1-D

ec-3

2

1-M

ay-3

3

1-O

ct-3

3

1-M

ar-3

4

1-A

ug-

34

1-Ja

n-3

5

1-Ju

n-3

5

1-N

ov-

35

1-A

pr-

36

1-Se

p-3

6

Source: Albers-Uebele, 2014

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The recession was due primarily to the contraction of the agricultural sector

Real domestic national income, 1925-33, m pengős

Real DNI in absolute terms Real DNI annual change

Agriculture

Industry

Source: Eckstein 1956, Statisztikai Szemle

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1925 1926 1927 1928 1929 1930 1931 1932 1933

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

1926 1927 1928 1929 1930 1931 1932 1933

Services

-2%Growth rate = -3% -5% -6%

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The agricultural income decline in 1930 was due to a price effect and primarily reduced domestic currency income

The decomposition of the change in real agricultural DNI, m pengős

1929 1930 1931

-500.0

-400.0

-300.0

-200.0

-100.0

0.0

100.0

200.0

300.0

1929 1930 1931 1929 1930 1931

Domestic currency agricultural income

Foreign currency agricultural income

Price effect

Volume effect

Total change in real agricultural DNI

Source: Eckstein 1956, Statisztikai Szemle

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Contents

Monetary policy after the currency crisis in late 1928

Agricultural crisis in 1930

Fiscal policy - state-guaranteed loans

Wrap-up

Crisis indicators

16

The fiscal authority was anxious to boost lending and from 1930 was incentivizing the financial sector to lend through state-guaranteed loans

Guarantees

Deposits

LT creditors

ST creditors

Equity

Rediscount

1927 1928 1929 1930 1931 1932 1933

The annual change in the financing sources of the banking sector

Source: Own calculations based on the Big Hungarian Compass

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However, state-guaranteed loans all had to be distributed in agriculture and since other sources for new lending largely disappeared, in 1930 81% of new lending went to agriculture

The annual change in various types of lending by the banking sector

1927 1928 1929 1930 1931 1932 1933

Agriculture

ST loans

LT loans

Mortgages

Source: Own calculations based on the Big Hungarian Compass

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Non-agricultural lending declined from 1929, agricultural lending still increased in 1930 but due mainly to state-guarantees

The change in lending

Change in total lending

Change in non-agricultural

lending

Change in agricultural

lending

Change in guaranteed agricultural

lending

Change in non-guaranteed agricultural

lending

Total Total Total Total Total

1927 834,966,537 524,898,799 310,067,738 2,647,491 307,420,247

1928 757,431,577 241,260,336 516,171,241 9,412,711 506,758,530

1929 362,487,413 -79,112,198 441,599,611 141,863,823 299,735,788

1930 559,769,807 -74,328,367 634,098,174 462,720,830 171,377,344

1931 -653,166,230 -336,313,633 -316,852,597 -231,517,605 -85,334,992

1932 -176,634,537 7,076,447 -183,710,984 -31,767,569 -151,943,415

1933 93,245,692 -125,174,538 218,420,230 201,182,527 17,237,703

Source: Own calculations based on the Big Hungarian Compass

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Contents

Monetary policy after the currency crisis in late 1928

Agricultural crisis in 1930

Fiscal policy - state-guaranteed loans

Wrap-up

Crisis indicators

20

In 1930 app. 57% of the banking sector’s equity was tied up in non-performing loans

Non-performing loans in the banking sector

Total banking sector

Int.mar.to lending % change % change * 2 New NPL Guarantees

Unguaranteed NPL Equity

Part of equity lost

% % % pengo pengo pengo pengo pengő

1929 3.3%

1930 2.9% -12.0% -23.9% 806,488,152 621,121,411 360,876,507 633,439,120 57.0%1931 2.8% -3.3% -6.7% 195,933,153 389,603,806 118,050,336 681,787,404 17.3%

1932 2.4% -15.5% -30.9% 857,098,237 357,836,237 525,107,778 654,401,299 80.2%1933 2.2% -7.2% -14.4% 385,266,987 559,018,764 143,224,147 660,428,041 21.7%

Source: Own calculations based on the Big Hungarian Compass

Restrictive monetary policy

Agricultural crisis Fiscal policy: state-guaranteed loans

WEAK BANKING SYSTEM

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THANK YOU

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