National Bank of Hungary

Under the peace treaties that ended the First World War, the Austro-Hungarian Monarchy's former central bank, the Austro-Hungarian Bank, was abolished. From August 1921, the functions of the central bank were temporarily taken over by the Royal Hungarian State Central Bank until the new Hungarian central bank was established. After the World War, one of the conditions of the loan from the People's League to control runaway inflation and consolidate the economy was the establishment of the Hungarian National Bank (MNB). The law to this effect came into force on 27 April 1924 and, following the successful subscription of shares, the MNB began operations in June 1924.

From its creation to the Great Depression of 1929-1933

The MNB, like the former Austro-Hungarian Bank, was both a central bank and a commercial bank. In its role as a central bank, it had a monopoly on banknote issuance until the end of 1943 and was responsible for maintaining the value of banknotes and ensuring the supply of banknotes as backing. The ore backing for the banknotes had to be gradually increased from an initial 20% to 33,3 %. At the end of 1924 the coverage rate was well above the expected level of 54 %. After the MNB was established, it successfully stabilised the value of the koruna. As a first step, the koruna was pegged to the pound sterling, and from 1 January 1927 a new currency, the pengo, was introduced at a value of 1 pengo = 12 500 paper koruna. The MNB's role as a commercial bank also changed. While the Oesterreich-Magyar Bank, as a commercial bank, was allowed to grant mortgage loans, this was not part of the MNB's powers, and it was only authorised to grant short-term loans. The change was in line with the central bank's role and international practice at the time. The main business remained lombard lending and bill discounting. Bill discounting fulfilled both a commercial banking and a central banking function, since most of the bill discounting was related to the discounting of commercial bank bills, while the discounting of corporate bills was limited to a strictly defined group of companies and represented a much smaller proportion. It was through the interest rates on bill discounting that the MNB was able to influence market interest rates and credit demand. Special rules also applied to the relationship between the State and the MNB: the MNB was the sole manager of State revenues and expenditures (the provision did not apply to State-owned enterprises) and the State and State institutions could only carry out gold and foreign exchange transactions through accounts with the MNB. The MNB was not allowed to finance the budget deficit directly, but it was allowed to grant Lombard loans backed by government securities.

In the years following its establishment, the Great Depression of 1929-1933 marked a turning point in the MNB's activities, after the initial successful years. The crisis spread to Hungary in 1930 and worsened considerably following the collapse of the Austrian Creditanstalt in May 1931. Foreign loans became increasingly difficult to renew and the MNB was forced to sell large amounts of gold to buy foreign currency. This reduced the MNB's scope for issuing banknotes and its ability to refinance commercial banks. The loss of depositors' confidence in banks also led to a massive withdrawal of deposits in Hungary. In addition to the MNB's multi-stage interest rate hikes, the government imposed a moratorium on deposit repayments, followed by temporary restrictions on deposit withdrawals, and the introduction of foreign exchange pegs in response to the crisis. While the restrictions on deposit withdrawals lasted only for a few months, foreign exchange pegs were introduced in a number of countries and have been maintained on a permanent basis. In Hungary, the MNB became the central depository for pegged foreign exchange management. Only financial institutions mandated by the MNB were allowed to carry out transactions in foreign currency within the limits set by the MNB, and from December 1931 the government introduced a full foreign payments moratorium, with the exception of payments related to the People's League loan. The value in pence of other foreign payments had to be deposited with the MNB, and foreign payments could only be made - to a limited extent - with the MNB's permission. These transfers were managed by the MNB through the Foreign Loans Fund established for this purpose. The Foreign Loans Fund allowed foreign creditors to receive the value of their claims in pence, from which they could only purchase in pence. In addition, a broad foreign exchange service obligation was introduced, where the service was also to be made to the MNB.

From the mid-1930s to the nationalisation of the MNB

In addition to the MNB-managed pegged foreign exchange management, foreign trade could be maintained through ad hoc MNB licences and bilateral clearing agreements with a number of countries, where the national central banks were the clearing agents. As the MNB did not want to devalue the peg, a complex, manually controlled system of currency mark-ups (individual exchange rate compensation) was also used to compensate for the depreciation of the peg in connection with individual export and import transactions, as a complement to the pegged foreign exchange management, with the aim of promoting exports. In 1935, at the initiative of the then new central bank governor, Béla Imrédy, the system was restructured and a differentiated, but uniform export and import foreign exchange mark-up system was introduced for each of the three groups of countries.

The preparations for the Second World War and the period of the Great War marked a major change in the role and policies of the MNB. With the expansion of its authority, from 1938 it was given the right to give its consent to the appointment of senior executives of major financial institutions and insurance companies. And, in relation to the territories occupied during the World War, its role was to take over central bank claims, liabilities and assets in those parts of the country and to convert the former national currencies into pence. In addition, the MNB was also responsible for the management of the pegged foreign exchange in these areas and extended its commercial banking activities to these areas.

The MNB also played a prominent role in the financing of the Győr war-preparedness programme, refinancing both the property tax levied on the financing and the loans issued, which meant inflationary financing. From 1938 onwards, amendments to the MNB's statutes allowed the MNB to open a direct current account for the State up to a certain amount. In October 1938, the Hungarian Institute for the Regulation of the Hungarian Money and Capital Market, a company set up specifically for the purpose of financing the war, was established, with the MNB as its main shareholder. Bills of exchange issued by companies involved in war production and by the State were largely refinanced by the MNB through this institute. As the war progressed, the proportion of the MNB's bill portfolio refinanced for the institution increased. The source of refinancing was inflationary banknote issuance, and the stock of banknotes in circulation was growing at an accelerating rate. As part of the war financing, the MNB also financed, partly directly and partly by refinancing public commitments, the growing amount of unpaid German debts accumulated under the German-Hungarian clearing agreements.

In 1944, after the bombing of Budapest, the MNB first moved to Veszprém, then during the Arrow Cross invasion, the German and Hungarian armies moved the MNB's gold reserves, valuables, documents and a significant part of its staff to Spital am Pyhrn, as Soviet troops approached. These were returned to Hungary in August 1946.

Inflation caused by the financing of war expenditure was further exacerbated after the war by reparation obligations, the Soviet army's issuance of banknotes until February 1946, and, most importantly, by the continued discounting of treasury bills issued to cover state expenditure and accepted by banks on a mandatory quota basis, as well as by the continued practice of direct financing of the state and the MNB's significantly increased discounting limit for commercial banks' corporate bills. From 1946 onwards, the MNB's supervision by the State was also tightened: it could only take decisions on major loan applications, depending on the amount involved, with the involvement of various State bodies.

The burgeoning hyperinflation reached its peak in July 1946, and the new currency, the forint, was introduced on 1 August 1946 as part of the stabilisation. Following stabilisation, the MNB operated under increasingly tight state control, and in December 1947 its Hungarian-owned shares were nationalised.

Sources:

Sándor Ausch (1955) The financing of the war and inflation in Hungary in 1938-1944, Közgazdasági Szemle, 2:10, pp.

János Botos (1999) The History of the Hungarian National Bank II. The independent central bank 1924-1948, Presscon Publishing House

Ágnes Pogány (2004) Hungary's foreign exchange and exchange rate policy in the "New Economic Order" 1935-1945, Századok 138:6, pp. 1305-1325.

Béla Tomka (2000) A Short History of Financial Institutions in Hungary 1836-1947, Aula Publishers

Founded in 1924

Termination time not set

Founders: the Hungarian State and the shareholders admitted to the public offering

Securities issued:

Decisive leaders:

Main activity: central bank, bank

Main products are not set

Seats:

Locations are not set

Main milestones are not set

Author: by Dr. Mérő Katalin