Proposal preview

The Interwar Banking Crises: An International Perspective

The banking crises of 1931 were a major turning point for many Western economies during the Great Depression. In May of 1931, the largest financial institution in Austria, the Creditanstalt, collapsed. The collapse of the Creditanstalt instigated the beginning of an international banking crisis. During the next month, financial difficulties spread throughout central Europe, spreading to Hungary, Czechoslovakia, Romania, Poland, and eventually Germany. The failure of the large German bank, the Darmstadter- und Nationalbank in July triggered runs throughout that nation and the German government closed all depository institutions. Later that summer, the crisis spread to Britain. In September, sales of sterling and withdrawals from British banks accelerated. In order to halt financial outflows, Britain abandoned the gold standard (Barry Eichengreen 1992, Peter Temin 1989, 1993, and 2008; Charles Kindleburger 1986).

There has been a revived interest in the transmission and effects of the German crisis to the U.S. (Olivier Accominotti, 2012 and 2016; Harold James, 2009; Albrecht Ritschl and Samad Sarferaz, 2014; Gary Richardson and Patrick Van Horn, 2011 and 2009). This discussion has renewed interest in the possible transmission channels of the Austrian crisis abroad. Many of these studies utilize new archival microdata that yield new insights into the effects of the crisis and the possible diffusion of the crisis abroad.

There has also been a recent and intensive effort to investigate the effects of the crisis on other countries, the banking systems in place, and the response of financial institutions and central banks therein. For example, the experiences in France and Spain differed from those in other parts of the continent of Europe and the U.S. These results stem from newly exploited data from central and commercial banks. These results, when combined with the experiences across Europe, the U.K., and the U.S., suggest that there was a large amount of heterogeneity in regards to the effects of the banking crisis of 1931.

The purpose of this panel is to bring together scholars and research in all of these areas to discuss how all of these different countries and, in effect, banking systems, reacted to the crisis of 1931. By doing so, we hope to foster a dialogue that can add to our understanding of the crisis, its transmission, and in some cases its containment. There is possible funding for a preconference workshop that would take place prior to the World Congress of Economic History in the spring preceding the conference. This would allow the participants the opportunity to present their most current material prior to the conference, and therefore allow for a more productive session at the WEHC meetings in July.

References:
Accominotti, Olivier. “London Merchant Banks, the Central European Panic and the Sterling Crisis of 1931.” Journal of Economic History 72, no. 1 (2012): 1-43.
———“Global Banking and the International Transmission of the 1931 Financial Crisis.” Mimeo. (2016).
James, Harold. (2009). The Creation and Destruction of Value: The Globalization Cycle. Harvard University Press.
Park, Haelim. (2013). Bank Lending and Economic Recovery in Britain in the 1930s. University of California at Irvine (PH.D. Thesis).
Richardson, Gary, and Patrick Van Horn. 2009. “Intensified Regulatory Scrutiny and Bank Distress in New York City During the Great Depression.” Journal of Economic History, 69: 446-465.
Ritschl, Albrecht and Samad Sarferaz. Currency vs. Banking in the German Debt Crisis of 1931. International Economic Review, 55, no. 2 (2014): 349-373 .
Temin, Peter. Lessons from the Great Depression. Cambridge, MA: MIT Press, 1989.
——– (1993). Transmission of the Great Depression. The Journal of Economic Perspectives, Spring, pp. 87-102.
——– (2008) “The German Crisis of 1931: Evidence

Organizer(s)

  • Patrick Van Horn Southwestern University vanhornp@southwestern.edu USA
  • Gary Richardson University of California, Irvine and NBER garyr@uci.edu USA

Session members

  • Olivier Accominotti, London School of Economics
  • Patrice Baubeau, Université Paris Nanterr
  • Enrique Jorge-Sotelo, London School of Economics
  • Flora Macher, London School of Economics
  • Eric Monnet, Banque de France
  • Gary Richardson, University of California, Irvine and NBER
  • Angelo Riva, European Business School
  • Patrick Van Horn, Southwestern University

Discussant(s)

Papers

Panel abstract

In May of 1931, the largest financial institution in Austria, the Creditanstalt, collapsed. The collapse instigated the beginning of an international banking crisis. During the next month, financial difficulties spread throughout central Europe, spreading to Hungary, Czechoslovakia, Romania, Poland, and eventually Germany. Later that summer, the crisis spread to Britain. There has been a revived interest in the transmission and effects of the German crisis abroad. There has also been a recent and intensive effort to investigate the effects of the crisis on other countries, the banking systems in place, and the response of financial institutions and central banks therein. For example, the experiences in France and Spain differed from those in other parts of the continent of Europe and the U.S. The purpose of this panel is to discuss how all of these different countries and in some cases its containment.

1st half

International Banking and Transmission of the 1931 Financial Crisis

Olivier Accominotti

Abstract: In May-July 1931, a series of financial panics shook central Europe before spreading to the rest of the world. This paper explores the role of cross-border banking linkages in propagating the central European crisis to Britain and the United States. Using archival bank-level data, I document US and British banks’ exposure to central European frozen credits in 1931. Central European lending was mostly done by large and diversified commercial banks in the United States and by small and geographically specialized merchant banks/acceptance houses in Britain. Differences in the organization of international bank lending explain why the central European crisis disturbed few US banks but endangered many British financial institutions.

Abstract: In May-July 1931, a series of financial panics shook central Europe before spreading to the rest of the world. This paper explores the role of cross-border banking linkages in propagating the central European crisis to Britain and the United States. Using archival bank-level data, I document US and British banks’ exposure to central European frozen credits in 1931. Central European lending was mostly done by large and diversified commercial banks in the United States and by small and geographically specialized merchant banks/acceptance houses in Britain. Differences in the organization of international bank lending explain why the central European crisis disturbed few US banks but endangered many British financial institutions.

The 1930s Banking Crisis in France Revisited

Patrice Baubeau, Eric Monnet, Angelo Riva, and Stefano Ungaro

Abstract: Since banking regulation was introduced in France only in 1941, little is known about the balance sheets of French banks before that date. We do not have statistical information on the difficulties of banks in France during the Great Depression of the 1930s, let alone reliable information on the causes of bankruptcy and interbank contagion. This project aims to gather many historical sources to significantly improve our knowledge of the French banking system during the interwar period and, more generally to understand the reasons for the banking crises and the historical specificity of the French banking system. Our study was made possible by the discovery of exceptional archival sources. The Crédit Lyonnais – one of the four major banks – collected information for around 450 banks from 1910 until 1939 and, most important, standardized balance sheets to make them comparable. We present the sources and discuss why the Crédit...

Abstract: Since banking regulation was introduced in France only in 1941, little is known about the balance sheets of French banks before that date. We do not have statistical information on the difficulties of banks in France during the Great Depression of the 1930s, let alone reliable information on the causes of bankruptcy and interbank contagion. This project aims to gather many historical sources to significantly improve our knowledge of the French banking system during the interwar period and, more generally to understand the reasons for the banking crises and the historical specificity of the French banking system. Our study was made possible by the discovery of exceptional archival sources. The Crédit Lyonnais – one of the four major banks – collected information for around 450 banks from 1910 until 1939 and, most important, standardized balance sheets to make them comparable. We present the sources and discuss why the Crédit Lyonnais constructed such a database. The accounting choices made by the Crédit Lyonnais to standardize banks’ balance sheets are telling to understand what the definition of a bank was before banking regulation was implemented. Two main conclusions stand out. First, we confirm recent analyses that – contrary to the conventional wisdom – had claimed that France experienced a massive series of banking failures. About one third of banks failed between 1929 and 1936. This is in sharp contrast with England, for example, where only some important merchant banks suffered (Billings and Capie, 2011). Second, we find that the banking crisis in France started just after the October 1929 stock market crash and was already very severe before the 1931 international shocks (Kreditanstalt failure and then Sterling devaluation). These two conclusions point out that the chronology of the French banking crisis differs from the chronology of other countries on one hand, and – most surprisingly – from the chronology of French economic cycle on the other hand (it is well-known that the Great Depression started later in France than abroad). These observations also go against the argument that attributes the difficulties of the French banking system to the Gold standard. The French 1929-1931 banking crisis was mostly due to domestic weaknesses and did not worsen in 1932-1936, while France was staying in the gold standard.

The Limits to Lender-of-Last-Resort Interventions in Emerging Economies: Evidence from the Gold Standard and the Great Depression in Spain

Enrique Jorge-Sotelo

The Financial Crisis of 1931 and the Manhattan Money Center Banks

Gary Richardson and Patrick Van Horn

In the summer of 1931, a financial crisis began in Austria, spread to Germany, forced Britain to abandon the gold standard, crossed the Atlantic, and afflicted financial institutions in the United States. This article describes how banks in New York City, the central money market of the United States, reacted to this trans-Atlantic trauma. New York's money-center banks anticipated the onset of a financial crisis, prepared for it by accumulating substantial reserves, and during the European crisis, continued business as usual. New York's leading bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States. New York banks’ behavior changed only after the Federal Reserve raised discount rates to stem gold outflows in the fall of 1931.

In the summer of 1931, a financial crisis began in Austria, spread to Germany, forced Britain to abandon the gold standard, crossed the Atlantic, and afflicted financial institutions in the United States. This article describes how banks in New York City, the central money market of the United States, reacted to this trans-Atlantic trauma. New York's money-center banks anticipated the onset of a financial crisis, prepared for it by accumulating substantial reserves, and during the European crisis, continued business as usual. New York's leading bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States. New York banks’ behavior changed only after the Federal Reserve raised discount rates to stem gold outflows in the fall of 1931.

Banking Crises of the 1930s in a Peripheral Country: Portugal and its Empire

Nuno Valério

Banking crises in the wake of the Great Depression did not, of course, affect only large and highly developed countries. Small and less developed countries also suffered, mainly as a result of the impact of events in the core of the world economy. This paper will take the case of a small and medium developed European economy: Portugal. Section 1 will describe the institutional framework of the Portuguese banking system at the time. Section 2 will present the short-term background of the Portuguese situation at the time. Section 3 will present the general features of the evolution of the Portuguese banking system during that critical period. Section 4 will study the (comparatively moderate) troubles of one of the colonial issuing banks, Bank of Angola. Section 5 will study the (comparatively very deep) troubles of the other colonial issuing bank, National Overseas Bank. As a synthesis, it may be said that...

Banking crises in the wake of the Great Depression did not, of course, affect only large and highly developed countries. Small and less developed countries also suffered, mainly as a result of the impact of events in the core of the world economy. This paper will take the case of a small and medium developed European economy: Portugal. Section 1 will describe the institutional framework of the Portuguese banking system at the time. Section 2 will present the short-term background of the Portuguese situation at the time. Section 3 will present the general features of the evolution of the Portuguese banking system during that critical period. Section 4 will study the (comparatively moderate) troubles of one of the colonial issuing banks, Bank of Angola. Section 5 will study the (comparatively very deep) troubles of the other colonial issuing bank, National Overseas Bank. As a synthesis, it may be said that the action of the Bank of Portugal as a lender of last resort was enough to overcome the rather moderate problems of most Portuguese banks, although a few small bank were left to collapse, and a bail out was necessary to save the National Overseas Bank, which was the main concern of the Portuguese government.

2nd half