Austro-Hungarian bank

The establishment of the Austrian National Bank (ONB), the central bank of the Habsburg Empire, was made possible by an imperial patent issued in June 1816. The ONB operated as a private joint-stock company, performing both commercial banking and central banking functions, and was also actively involved in financing the Austrian state. ONB had a monopoly on the issue of banknotes throughout the Habsburg Empire. Its initial 25-year licence was extended for a further 25 years in 1841 and for a further 14 years in 1862, until 1877. ONB opened a branch in Pest in 1851.

The 1867 Compromise did not provide for a central bank. Although the question of the establishment of an independent Hungarian central bank was the subject of continuous debate, a decision was not taken until 1878, after the expiry of the ONB's licence. The law adopted at that time did not provide for the establishment of an independent Hungarian central bank, but restructured the ONB along dualist principles. After the transformation, the bank was renamed the Austro-Hungarian Bank (O-MB).

O-MB remained headquartered in Vienna, but conducted its business through the Vienna and Budapest headquarters. O-MB was headed by the Governor, while the Austrian and Hungarian Lieutenant-Governors became the chairmen of the Vienna and Budapest head offices respectively. The main governing body of the bank was the General Council, which consisted of the Governor, the Vice-Governors and 12 Senior Advisers.

The bank's first operating licence was for 10 years, until 1887. From the time the O-MB was established, the banknotes were printed with German on one side and Hungarian on the other. The second extension of the licence in 1899 brought about a substantial change in the bank's governance, when six of the two members of the General Council had to be Hungarian nationals, as opposed to the previous two. At the same time, the rules for the distribution of the bank's income were also changed: the shareholders' share of the bank's income was substantially reduced and that of the governments increased. The last extension of O-MB's licence was granted in 1916.

In its role as a central bank, the amount of banknotes that could be issued by the O-MB was determined by the size of the ore base (gold or silver) owned by the bank: according to the 1878 rules, a maximum of 200 million forints of banknotes could be in circulation in addition to the value of the ore base. When the bank's licence was first renewed, in response to increased credit requirements, the banknote issue rules were changed so that 40% of the banknotes had to be backed by ore reserves. Up to a limit of HUF 30 million, foreign bills payable in gold could also be included in the ore stock. If the volume of banknotes put into circulation exceeded HUF 200 million, the bank was liable to pay tax at the rate of 5% on the surplus. In parallel with the banknotes, silver forint coins were in circulation, the exchange rate of which differed from that of the banknotes depending on the change in the price of silver. In the context of the currency reform of 1892, the Monarchy, like many other states, switched to gold coins, but in a mixed way: in addition to the issue of new banknotes denominated in gold koruna and the replacement of silver forint banknotes, the new gold koruna and the old silver forint coins remained legal tender. The main reason for this was the Monarchy's large silver reserves, which could thus be taken into account when determining the ore backing of the banknotes. In line with the semi-ordinary nature of the currency reform, the O-MB was under no obligation to exchange banknotes for gold at the request of the holder.

In its role as a commercial bank, O-MB was licensed to engage in a wide range of business activities and has been actively building its branch network since its establishment. Each branch operated in its own clearly defined region, and within each region it was also accessible through 'branches', which were closely linked to the branch. In 1892, the year of the currency reform, O-MB had 21 branches and 80 outlets in Hungary. O-MB's business activities shifted steadily towards Hungary, partly because alternative sources of finance were less available in Hungary than in Austria. Of OMB's main business lines, 88% of its mortgage lending before the First World War was in Hungary and 68% of its bill portfolio was in Hungary. The largest volume counterparties for the bill discounting business were financial institutions in the context of discounting, so that bill discounting was part of O-MB's central banking and commercial banking functions. There is no similar shift in the proportion of lombard loans, with the value of the securities portfolio behind Hungarian lombard loans increasing from 221Tt3 billion to 331T3 billion over the period.

During the First World War, the O-MB became the direct financier of the state's increased need for money due to war expenses. To this end, the O-MB's statutes were amended, and the requirement for a backing of banknotes with ore was abolished, as was the tax on unbacked banknotes. In addition, O-MB also financed public expenditure indirectly by lending 751TTC3T of the face value of the war bonds backed by the bonds. In this way, it made a major contribution to the inflation which was unfolding.

After the World War, even in the months following the collapse of the Austro-Hungarian Empire, it was not clear what the fate of the O-MB would be. In many of the successor states of the Monarchy, the O-MB's privilege to issue banknotes was terminated and its operations restricted by the new governments, but in Austria and Hungary this did not happen until the expiry of the O-MB's last privilege on 31 December 1919, with the exception of a brief period in the Soviet Republic. The peace treaties concluded with Austria in September 1919 and with Hungary in June 1920, which ended the First World War, included an obligation to liquidate the O-MB. The Reparation Commission appointed liquidation commissioners in July 1920. The liquidation process dragged on until 1922. In the meantime, pending the establishment of an independent Hungarian central bank, the Hungarian State Royal Institute of Legal Affairs took over the central banking functions on a temporary basis from August 1921.

Sources:

Sándor Jirkovsky (1942) Az Osztrák-Magyar Bank és az 1908-banankét-i 1908, In: Közgazdasági Szemle LXVI. évfolyam LXVI. kötet 85. p. 44-86.

György Kövér (1993) The Operation of the Austrian National Bank and the Precedents of the Establishment of the Austro-Hungarian Bank, 1851-1878, In: The History of the Hungarian National Bank I. Edited by Tamás Bácskai, pp.155- 257, Közgazdasági és Jogi Könyvkiadó

György Kövér (1993) The Austro-Hungarian Bank, 1878-1914, In: The History of the Hungarian National Bank I. Edited by Tamás Bácskai, pp.259-341, Közgazdasági és Jogi Könyvkiadó

Ágnes Pogány (1993) The Austro-Hungarian Bank during the First World War and the revolutions, In: The History of the Hungarian National Bank I. Edited by Tamás Bácskai,pp.343-411, Közgazdasági és Jogi Könyvkiadó

Ágnes Pogány (1993) The liquidation of the Austro-Hungarian Bank. In: The History of the Hungarian National Bank I. Edited by Tamás Bácskai,pp. 413-499, Közgazdasági és Jogi Könyvkiadó

Sándor Popovics (1926) The Fate of Money in War, The Hungarian Academy of Sciences, Budapest

Vargha Gyula (1896) The history of Hungarian credit and credit institutions, Pesti Könyvnyomda-részvény-társaság, Budapest

Founded in 1878

Date of cessation: 1922

Founders: Shareholders of the National Bank of Austria

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Main activity: central bank, bank

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Author: by Dr. Mérő Katalin