Austrian Reconstruction and the Collapse of Global Finance, 1921–1931

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the complete review - economics / history

Austrian Reconstruction and
the Collapse of Global Finance,
1921–1931

by
Nathan Marcus

general information | our review | links | about the author

Title:	Austrian Reconstruction [...]
Author:	Nathan Marcus
Genre:	Non-fiction
Written:	2018
Length:	379 pages
Availability:	Austrian Reconstruction [...] - US
	Austrian Reconstruction [...] - UK
	Austrian Reconstruction [...] - Canada
	Austrian Reconstruction [...] - India

With numerous illustrations, graphs, and tables

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Our Assessment:

B+ : detailed and engaging small slice of (economic) history

See our review for fuller assessment.

The complete review's Review:

       Nathan Marcus opens his book noting that: "The financial history of interwar Austria is one of precedents". Austrian hyperinflation in the early 1920s preceded that in Weimar Germany; Austria was the first country to begin economic reconstruction under an outside, international group -- the League of Nations --; and, in 1931, Austria was the first country to suffer a banking and currency crisis (often credited with triggering the European banking panics and crises that followed -- though already on the first page of his book Marcus notes parenthetically: "Spoiler alert: it did not)).
       In this thorough study, Marcus shows the role historical circumstances, contemporary politics, and public opinion played in these crises -- both as cause and in reaction. As with more recent financial crises, 'economics' and economic solutions prove impossible to disentangle from a complex mix of other influences. And, both amusingly and depressingly, economic expertise seems no better or worse now than it was back in that day (while the social and political constraints any 'economic' solution has to deal with remain similarly significant, leaving textbook theory still entirely inadequate in the face of political reality).
       With the collapse and dismemberment of the Austro-Hungarian Empire after World War I, and the transition from monarchy to republic, the small left-over rump state of Austria was structurally and economically a far different one than the multi-nation empire it had been just a few years earlier, including now being particularly reliant on food imports. Compounded by the toll of the war -- in economic, human, and structural terms --, the new Austrian economy was in a precarious condition from the get-go -- and, of course, the doubts about its very viability (at least as independent state/economy) undermined investor (and consumer) faith.
       When hyperinflation appeared it was, as Marcus points out: "a novelty [,,,] and one that was little understood". Debate about its cause(s) was based on specific views of the country's economic position:

Experts who thought Austria was economically viable blamed inflation on the budget deficit and the imprudent printing of money. Others who believed Austria could not economically survive sought the causes of inflation in its negative balance of trade and the consequent depreciation of its currency.

       These are familiar arguments from multiple modern-day situations, too -- and surely there's a lesson to be learned in the Austrian example, where neither explanation seems to have hit the spot: rather surprisingly, the Austrian crown (the currency): "stabilized in 1922, even though both note issue and trade deficit continued unabated" -- i.e. neither position/explanation for the cause of hyperinflation was anywhere near completely correct. As Marcus points out, consumer expectations -- influenced also by: "the pace of government borrowing and its chances of obtaining a foreign loan" -- played a much more significant role in causing (the spiral of) inflation. Marcus points to Georg Simmel's concept of a speeding up of a sense of time, given these circumstances, and finds evidence in many consumer markers, from a significant decline in the percentage of births that were out of wedlock ("suggesting that the number of illegal abortions rose with hyperinflation") to a spike in tobacco consumption: behavior was determined by (pessimistic) beliefs about the future, fueling the hyperinflationary spiral.
       While the involvement of the League of Nations was a generally positive and certainly stabilizing intervention, it was also an easy target for politicians playing up hurt national pride, such foreign intervention in and say over the very fundamentals of a nation's policies easily sold to populist followers as an unacceptable undermining of Austrian sovereignty. With Vienna -- the outsized urban center of the nation, and firmly in the Socialist political camp -- at odds with much of the rest of the country (and the ruling Christian-Social party), and domestic political conflict that reflected the urban/rural and industrial-worker/farmer divides, domestic politics had an enormous influence on policy -- much as domestic politics (and foreign presence/influence presented as bogeymen) warp policy in contemporary Hungary and Poland (among others).
       A typical example is the debate about the choice of the head of the new National Bank by the end of 1922: the idea of a foreign head, signaling (to the markets, inter alia) true independence from Austrian political influence, "was widely opposed by Austrians" Typical, too (in many recent modern instances as well, one could argue ...), is the outcome:

Although appointing a foreigner to head the ANB had been considered "vital" and the failure to do so had been "fatal," neither the British nor the League of Nations was ready to abandon the scheme. The League was too committed in Austria, needed a success, and hoped its intervention would prove a stepping stone toward further important achievements in Europe. The BoE similarly considered the fruits of possible success too great to abandon the scheme prematurely.

Marcus sees a major trigger of the 1931 collapse of the Credit-Anstalt bank, Austria's largest, in the earlier (1929) failure of the Boden-Kredit Anstalt, itself caused in no small part by the continuing financial and political uncertainty in the wake of the resignation of Austrian Chancellor Seipel. Worried about a bank run, and with the BKA obviously unsustainable as an independent entity, it was merged with the Credit-Anstalt in October 1929 -- not a great moment in global financial history. Not much later, it was the Credit-Anstalt that was no longer sustainable, and collapsed. Marcus takes considerable care, however, in emphasizing that this was not so much the first domino but rather a more isolated case. While a clear indicator of the weaknesses of European banking, he argues it did not directly lead to the Depression-era banking crises that followed; once again, Austria's particular circumstances were the root cause of the CA collapse and it was, in many respects, an isolated incident
Marcus suggests throughout his study that:

Austria's weakest link remained people's trust in the stability of its financial system and currency, which in turn were linked to the unsettling climate of its domestic politics.

       He's particularly good at presenting these political (and social) tensions and their influence, with examples of events ranging from the protests about a performance of Arthur Schnitzler's play Der Reigen to the 1927 July Revolt -- the Justizpalastbrand. Even a football (soccer) friendly in France figures in his interpretations -- convincingly enough, as do practically all his examples.
       Relying extensively on a wide variety of data, Marcus charts the three different crises that are the focus of his study in great detail. But numbers are only part of the story: as he repeatedly notes, what people believed (and the actions they took as a result of those beliefs) was what mattered. So he also offers examples from the press of the time, including numerous cartoons that reflect the attitudes of the times. While the focus is specifically on the economic, Austrian Reconstruction is a work of history -- and Marcus does quite well in making it engaging beyond the narrow financial focus.
       Nationalism, in its peculiar Austrian form -- including a powerful and inescapable Pan-Germanist faction, and with the rump-state struggling to establish a new national identity -- obviously played a significant role at that time, and Marcus is good at tracking that. So also, for example, in his account of the establishment of a new currency, the (by then completely debased) crown finally replaced by the new (and more representative of the new republic) schilling in 1925.
       The different political factions -- specifically the governing Christian Social party and the oppositional (but Vienna-dominating) Socialists -- and other tensions of the turbulent decade covered in the study are also well-presented.
       How much economic stability matters, and how difficult it can be to sustain and maintain it, are made abundantly clear here. The Austrian examples Marcus discusses here show just how much of a mess even a small country can create and cause -- and many of the difficulties faced, locally and internationally, in dealing with financial problems, given how much perception matters and how much of an effect popular opinion can have. Far too many aspects of what Marcus discusses still seem relevant today.
       Austrian Reconstruction and the Collapse of Global Finance, 1921–1931 can certainly seem, at least in its subject matter, recondite, but it is surprisingly accessible to the lay-reader; indeed, much of it is entertaining. Marcus' presentation is clear and his writing and examples very accessible -- though it is,of course, rather much, about a rather narrow slice of history. Still, given the relevance to (far too many) contemporary situations, it is certainly worthwhile.

- M.A.Orthofer, 26 April 2018

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Links:

Austrian Reconstruction and the Collapse of Global Finance, 1921-1931:

Harvard University Press publicity page

Other books of interest under review:

See Index of books dealing with Business and Economics

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About the Author:

Nathan Marcus teaches at the Higher School of Economics, National Research University, Saint Petersburg, Russia.

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