European banking crisis of 1931

Crisis

On 11 May 1931, Creditanstalt publicly announced that it would not be able to publish a financial statement. On 6 June 1931, the German government announced it would be unable to pay reparations as previously planned, triggering a parliamentary crisis. 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, which brought some relief even though France initially opposed it. On 22 June 1931, the Reichsbank introduced restrictions on its domestic bill discounts, with the aim of disincentivizing transfers of money abroad by German firms – but this had a catastrophic effect, creating financial squeezes even for essentially sound firms.

From mid-June, 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. On 4 July 1931, Danat-Bank ran out of discountable bills. The Reichsbank had to discontinue its liquidity assistance on 10 July 1931. On 13 July 1931, Danat publicly disclosed its inability to meet commitments, triggering a general panic as the public feared the Reichsbank was reaching the limits of its liquidity assistance capacity. The government declared a general bank holiday, starting on 14 July 1931. On 15 July 1931, the Reichsbank suspended the convertibility of the Reichsmark, effectively taking Germany out of the gold standard, and imposed capital controls. From 16 July 1931, some banking transactions were again authorized but with severe limits and restrictions, partly loosened on 20 July.

Meanwhile, the Reichsbank sponsored several mechanisms to facilitate the revival of interbank transactions. On 18 July 1931, it established a temporary Transfer Association (German: Überweisungsverband) to allow the system's core banks to transact among themselves without being bound by the general restrictions on payments: this started with 11 institutions, and expanded to 44 by 4 August 1931, after which the bank holiday restrictions were fully lifted and the Überweisungsverband was disbanded. Then, on 28 July 1931, the Akzept- und Garantiebank AG (later known as Akzeptbank) was set up to make interbank bills acceptable as collateral by the Reichsbank through credit enhancement. Its capital of 200 million Reichsmark was subscribed (albeit at 25 percent) by the government (40 percent), the Deutsche Golddiskontbank (a Reichsbank subsidiary, 10 percent), Deutsche Bank und Disconto-Gesellschaft (10 percent), Deutsche Zentralgenossenschaftskasse, Bank für Industrie-Obligationen, Deutsche Rentenbank-Kreditanstalt, Prussian State Bank, and Dresdner Bank (6 percent each), and other Berlin-based joint-stock banks (10 percent). The Akzeptbank's early activity was mainly focused on the largest problem banks, namely Danat-Bank, Dresdner Bank, Landesbank der Rheinprovinz as well as Bremen's Schröder-Bank, and lent to the Deutsche Girozentrale to support the network of savings banks.

The Reichsbank's subsidiary Deutsche Golddiskontbank acquired equity in the ailing joint-stock banks, and consequently became the owner of a 91-percent stake in Dresdner Bank (in which Danat-Bank had been forcibly merged), a 69-percent stake in Commerzbank (into which Barmer Bankverein was similarly merged), and a 35-percent stake in Deutsche Bank und Disconto-Gesellschaft. By contrast, the non-branch banks, Berliner Handels-Gesellschaft and Reichs-Kredit-Gesellschaft, neither requested nor received public financial assistance, although the latter was state-owned.

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. France remained on the gold standard until 1936, with a severe deflationary effect.

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. In the Kingdom of Yugoslavia, several banks became insolvent and were liquidated, acquired, or nationalized. In France, a new wave of deposit withdrawals from small and mid-sized banks occurred between July 1931 and January 1932, albeit on a slightly smaller scale than the previous one in late 1930,, and triggered the collapse of a significant bank, the Banque Nationale de Crédit which was restructured in early 1932 as the Banque Nationale pour le Commerce et l'Industrie. In Spain, Banco de Cataluña failed on 7 July 1931 together with two subsidiaries, Banco de Reus de Descuentos y Préstamos and Banco de Tortosa, causing a credit contraction in the whole of Catalonia.

Germany made "standstill agreements" with major creditor countries in August and September, following a conference in London on 20–23 July. The general bank holiday was lifted after three weeks on 5 August 1931. 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.

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." It remains debated, however, to what extent an alternative expansion strategy 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.

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 effects on other countries, particularly the United States, which was uniquely exposed due to the structure of German post-WWI reparations. At the Lausanne Conference of July 1932, an agreement was outlined on a three-year suspension of German reparations, but that was rejected by the U.S. Congress in December 1932, triggering defaults by France and the UK on interallied war debts. Ultimately, losses of U.S. investors in German debt amounted to 13 to 16 percent of U.S. 1931 GDP, and the German debt problem would only be settled in 1953 with the London Agreement on German External Debts.

At its low point in 1932, German economic output had fallen 39 percent from its 1929 level. The large joint-stock banks were fully reprivatized in 1937. Capital controls were kept for an extended time period.

The crisis had major consequences for the development of prudential banking supervision in Germany, which had been essentially nonexistent (except for savings banks) before 1931. On 19 September 1931, a decree established the office of Reichskommissar für das Bankgewerbe (lit. 'Imperial Commissioner for Banking'), for which Chancellor Heinrich Brüning appointed Friedrich Ernst. In 1934, this was transformed into the Aufsichtsamt für das Kreditwesen, by new comprehensive banking legislation (German: Kreditwesengesetz of 5 December 1931). Initially, the Reichsbank was associated with the supervisory process through a newly established Supervisory Office. However, that role was transferred to the Economics Minister (German: Reichswirtschaftsminister) upon a legislative revision in 1939, and the Aufsichtsamt für das Kreditwesen itself was dissolved in 1944 with its duties taken over by the economics ministry. After World War II, banking supervision was devolved in West Germany to the Länder, until a national banking supervisor was re-established in 1962 as the Bundesaufsichtsamt für das Kreditwesen, which again cooperated closely with the Deutsche Bundesbank. Another decree on 6 October 1931 granted legal personality to the Sparkassen and reinforced their public supervision.

Historiography

The financial crisis of 1931 has long been identified as a major contributor to the global economic depression of the early 1930s. 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 in reference works such as those by Karl Erich Born or Gerd Hardach, and more recently by Thomas Ferguson and Peter Temin.

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 by several critical weeks. In 2004, Isabel Schnabel 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". 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. 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. 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."

The long-accepted causal link between the Creditanstalt collapse and the events in Germany has likewise been questioned in more recent historiography. Separately, recent research has demonstrated that France also experienced a major 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. It was corrected by the rediscovery of a unique collection of balance-sheet data for most French banks, gathered by Crédit Lyonnais between 1901 and 1939, known as the Album.