The Credit-Anstalt Crisis of 1931.

This book is a revision of a doctoral dissertation at the University of South Carolina under the supervision of Professor Michael Bordo, by an economist at the Austrian National Bank who also teaches at Webster University in Vienna. Its analysis of the financial crisis of May 1931 which deepened and spread the international bank run that ricocheted from Austria to Germany, Britain, Japan, the United States and ultimately the gold bloc provides a most welcome illumination of the originating events and the policies followed in trying to handle them. The author well understands the ambiguities in distinguishing between solvency and liquidity, proximate and ultimate causes, the insured and the insurer, domestic and foreign crisis, although he may not be sufficiently guarded in recognizing remaining ambiguity when he states that certain conclusions emerge clearly.

Early chapters lay out the lugubrious background of Austrian economics and finance in the immediate postwar period: the amputation of the Treaty of Trianon leaving the country an economic basket-case; post-war inflation; the League of Nations stabilization with its 1922 Protocol that required League approval for Austrian borrowing and any departure from gold; Austrian bank and speculator participation in the 1924 attack on the French franc that produced thirty bank failures in Austria when the squeeze engineered in Paris caught out the bears and their lenders, and weakened the remaining thirty-six; the failure of the Bodenkreditanstalt in 1929 and its absorption, engineered by the government, by the Credit-Anstalt, without adequate provision for its bad loans; inadequate bank supervision by the national bank and the government; and the practice, in Vienna as in Germany, of banks supporting their stock price, as the depression deepened, running down both reserves and the deposit/capital ratio. Too little attention, perhaps, is paid to the fall in world prices that began after the New York stock-market crash in October 1929, with its impact on industry profits, export values, and the necessity of Austrian banks to lend to their industrial associates to keep them afloat. Bad loans mounted sharply but the mass of depositors believed that hidden reserves would suffice to offset any possible impairment of capital. The publication of the Credit-Anstalt's balance sheet for the end of 1930 on May 11, 1931 was a shock for which markets and authorities at home and abroad were unprepared: a loss of 140 million schillings, 7.5 percent of the balance sheet and almost five-sixths of the bank's capital and reserves. By regulation, the balance sheet had to be published during May. In a footnote on p. 25 Schubert suggests that if the information had been made public in February or March, the crisis would have come then, whereas if it could have been delayed to July or August it is unclear what would have happened because the German crisis, with possible repercussions on Austria, would have supervened. This notion, however, ignores the possibility that the Austrian crisis triggered that in Germany.

As one would expect of a student of Bordo, there is considerable, on the whole inconclusive, discussion of monetarism in the crisis, with attention to the supply of and the demand for money, of high-powered money, deposit-currency ratios and the like, plus comparisons on an annual basis with some data for the United States (Friedman and Schwartz), Sweden (Jonung) and Germany. Changes between 1930 as a whole and 1931 on the same basis are not helpful in isolating what happened when. Such weekly and monthly data for Austria are for the most part limited to 1931 and do not throw light on 1924 or 1929.

The heart of the book is Chapter 7 on the lender of last resort, both domestically and internationally. The surprise is that the internal crisis subsided after four days, as the Austrian National Bank, contrary to its statutes which allowed it to discount only commercial bills, took on a large amount of finance bills. This was an excellent example of the Bagehot-thornton rule of lending freely in crisis. The monetary expansion, however, frightened domestic and foreign depositors, driving them into capital flight, buying foreign exchange, gold and even foreign currency, but not into runs on other Austrian banks. The motive Schubert mentions was fear of inflation and concern for the fiscal policy of the government which stood behind the national bank. Then came the need for an international lender of last resort, which the Bank of England, the Bank of International Settlements (newly established) and the New York Fed could not, and the Bank of France would not, provide on anything like the Bagehot scale. The account is packed with information new to me: the fact that two British negotiators for foreign creditors demanded that the Austrian government guarantee the external liabilities of the Credit-Anstalt before agreeing to an extension for two years of foreign credits; and that the New York Fed claimed that it could participate in the rescue operation only by discounting prime commercial paper, of which there was virtually none, etc.

Schubert is perhaps a little too ready to agree with other analysts: with Eichengreen who claims that no amount of short-term credit could have prevented the collapse; with Garber that crisis could have been met by depreciating the schilling, despite the League of Nations 1922 protocol; with public-choice analysts that in helping in such a parsimonious way foreign "bureaucrats" were serving personal interests. He does not make clear whether he believes in the "too-big-to-fail" doctrine (the CA had more than 50 percent of Austrian deposits). Moral hazard, adverse selection, asymmetric information all play roles in the lender-of-last-resort discussion. When it comes to explain the origin of the crisis, complexity dominates. It remains unclear whether a simple last-resort lending operation, along the lines of the 1961 BIS swap operations, with short-term credit still outstanding after six months converted into long-term debt would have saved the Austrian schilling and stopped the wild-fire world-wide spread of deflation.