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Wall Street History
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02/08/2002
Creditanstalt
In case you haven''t noticed, many of our recent stories have
concerned the excesses of the 1920s. Today we''ll take a brief
look at another event that helped precipitate the Great
Depression, the fall of Creditanstalt Bank of Vienna.
You''ll recall that after the U.S. stock market collapsed in
October 1929, the world was almost immediately thrown into a
great funk, but it wasn''t until about two years later that real
trouble started.
By mid-1930, in some ways most of the world economies had
stabilized. The European countries, still trying to recover from
the ravages of World War I, were seeing some forms of pick up
in international lending and trade. But in September of that year,
a dark event occurred in Germany, as the National Socialists (the
Nazis) made tremendous gains in the election and suddenly were
the 2nd-largest party in the Reichstag. The amazing result
stunned the world and led to a large drop in confidence as well as
capital withdrawals from Germany itself. By 1931, Hitler''s
Stormtroopers, drawn largely from the burgeoning unemployed,
numbered some 300,000.
During the early part of ''31, German and Austrian banks
attempted to improve their weakening capital positions by
boosting their stock price, and the way some went about this was
to buy their own shares. As historian Charles Kindleberger
points out, "A bank buying its own stock rapidly weakens its
ratios of cash and capital to deposits, as cash and capital in the
open market both shrink while deposits remain unchanged in the
short run." The other problem, in this case, was that the deposits
were shrinking at the same time. And, just as today in the Enron
case, many of the bank directors were simply trying to
manipulate the share price for their own personal gain.
As for Creditanstalt (also labeled Kredit Anstalt) Bank of
Vienna, the largest commercial institution in the country, it was
the victim of both a rapidly deteriorating economy, particularly
in Germany and Austria, massive speculation*, and poor
management.
[*Back in the 1850s, Creditanstalt was a wildly popular IPO,
with initial shares being oversubscribed by 43 times.
--Kindleberger.]
By May 1931 most of Europe was in the midst of a rolling
deflation, starting with the collapse of some small banks in
France, which led to the fall of the government there because
three officials were implicated in a scandal. The crisis grew and
on May 11, Creditanstalt collapsed, declaring it had lost about
$20 million, with only $7 million or so left in capital. The
Austrian government sought a loan, part of which was arranged
by the newly formed (1930) Bank for International Settlements,
but it was not nearly enough.
Austria then sought help from the French, but the French were in
no mood to lend a hand. You see, earlier in the year Germany
and Austria had sought to form a Customs Union, in order to
help trade between the two. But France - remember, World
War I was still just a few years removed - correctly saw this as a
violation of the Treaty of Versailles, which forbid a union
between Austria and Germany, so the French, key to the loan
package, refused to go along unless Austria renounced the
customs idea. The Austrians, in turn, refused and their
government fell. Soon there was a run on the banks, as foreign
assets were immediately withdrawn, while the Gold bloc of
France, Belgium, the Netherlands and Switzerland started
converting dollars into gold, exacerbating an already weak
banking system in the U.S.
For its part, Germany''s official government policy was to slash
government spending, which only added tens of thousands to the
unemployment lines, while Chancellor Bruning declared that
Germany could no longer pay its reparations. [Someday we''ll
explore Versailles more fully.]
It was a very fluid situation, even for those days, so that by June
19, U.S. President Hoover proposed a moratorium on reparations
for 12 months, as well as granting America''s allies relief from its
war debts. Of course this only pissed off the French even more
because Germany was gaining such a big concession. [British
Prime Minister MacDonald at the time found France''s behavior
to be "inconceivably atrocious."] As it developed, the
moratorium, which Hoover formally extended to 18 months,
didn''t help and the banks went under anyway.
Of course this whole doomsday scenario, which plunged the
entire world into Depression by 1932, played right into the hands
of Hitler. By mid-July 1931, the British ambassador to
Germany, stationed in Berlin, couldn''t help but notice the
"unnatural silence hanging over the city, and particularly (an)
atmosphere of tension similar in many respects to that which I
observed in the critical days immediately preceding the war."
[Brendon] Germany was being swept up in "fatalism."
In the history of the era, the collapse of Creditanstalt stands out
amongst the other banking disasters because it was Austria''s
biggest and led directly to a run on institutions in Germany as
well. Soon thereafter business worldwide ground to a halt. [In
1932, for example, both German and U.S. industrial production
were just half the levels achieved in 1929.] Author Piers
Brendon adds that it also "exacerbated an already poisonous anti-
Semitism." And regarding what followed, historian Norman
Davies concludes:
"The effects of the Depression were psychological and political
as well as purely economic. Everyone from banker to bellboy
was perplexed. The Great War had brought death and
destruction; but it had also brought a purpose to life and full
employment. Peace appeared to bring neither. There were men
who said that life amidst the danger and comradeship of the
trenches was preferable to life on the dole.The anxieties
brimmed over into violence on the streets: left-wing battle squads
pitched into right-wing gangs in many European cities. It was
the season for charlatans, adventurers, and extremists."
In a few respects, not much different from today.
Sources:
"The Dark Valley," Piers Brendon
"Europe: A History," Norman Davies
"The Power of Gold," Peter Bernstein
"America: A Narrative History," George Brown Tindall and
David E. Shi
"20th Century," J.M. Roberts
"Manias, Panics, and Crashes," Charles Kindleberger
Brian Trumbore
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