Lexi Webster
The Great Depression was a prolonged economic recession that followed the crash of the United States stock market in 1929. The precise causes of the Great Depression are disputed, but it is generally agreed that several factors led to this period of downturn. The Austrian Credit-Anstalt bank failure of 1931 was one of the first major bank collapses that initiated the Great Depression. The bank's financial problems started the financial crisis in Austria, with a run on the banks and a subsequent attack on the Austrian shilling. The initial problem of the bank was insolvency, which led to the problem of illiquidity as the public became unwilling to hold its liabilities.
| Characteristics | Values |
|---|---|
| Date of collapse | 11 May 1931 |
| Size of bank | Second largest bank in Austria |
| Austrian banking sector's total assets | 27% |
| Austria's GDP | 16% |
| Unemployment rate | >25% |
| Rate of economic decline | >20% |
| Date of Austrian Schillings devaluation | 5 May 1934 |
| Percentage of Austrian Schillings devaluation | 28% |
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What You'll Learn
The Creditanstalt bank was the largest in Austria
The Creditanstalt bank, founded in 1855, was the largest bank in Austria. It was founded by Salomon Mayer von Rothschild and his son Anselm Salomon von Rothschild, with support from Austrian finance minister Karl Ludwig von Bruck. By 1867, the bank had established branches in Pest, Brno, Brașov, Lviv, and Trieste.
The bank's circumstances were dramatically affected by Austria-Hungary's defeat in World War I, the subsequent dissolution of the empire, and the formation of the First Austrian Republic. In 1919, Creditanstalt had to sell its operations in what became Czechoslovakia to the Prague-based Böhmische Escompte-Bank. In 1920, its branch in Ljubljana was reorganized as a fully-fledged Yugoslav bank, and it also sold its branches in newly formed Poland. Deprived of its international outlook, the bank then focused on the Austrian market.
In 1926, Creditanstalt purchased the Viennese operations of Anglo-Austrian Bank, which had become a British bank following recapitalization by the Bank of England. This transaction made the Bank of England, through its British subsidiary the Anglo-International Bank, a significant shareholder of Creditanstalt.
In 1929, Creditanstalt purchased a distressed peer under pressure from the Austrian government led by Johann Schober. This acquisition added to the bank's problems, and its performance began to falter in 1930. By May 1931, the bank was in serious trouble and had to ask the government and the national bank for help. On May 11, 1931, Creditanstalt publicly announced that it was unable to publish its financial statements for 1930, immediately triggering panic. The bank's collapse caused a domino effect that spread throughout Europe, triggering a deflationary spiral between 1931 and 1933.
The failure of Creditanstalt, which represented 27% of the Austrian banking sector's total assets, caused the collapse of the Austrian stock market and contributed to the Great Depression. The Austrian government stepped in to save the bank, and a rescue plan was drawn up to cover the losses by the Austrian state, the reserves, the shareholders, the Rothschilds, and the national bank.
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The bank's collapse triggered a Europe-wide crisis
The collapse of the Creditanstalt bank in May 1931 triggered a Europe-wide crisis. The bank was the largest in Austria, and its failure caused a domino effect that spread across the continent. The crisis was a result of financial, fiscal, macroeconomic, political, and international imbalances. The bank's failure led to a run on the banks in Austria and a subsequent attack on the Austrian shilling, causing the collapse of the Austrian stock market.
The impact of the Creditanstalt crisis was felt beyond Austria, particularly in Germany, Hungary, and other countries in Central and Eastern Europe. The crisis contributed to the great deflationary spiral in Europe between 1931 and 1933. The failure of the bank also had a significant impact on Germany, which was the world's largest capital importer between 1924 and 1929. The crisis triggered Germany's exit from the gold standard and extensive losses in the U.S. financial system, further exacerbating the Great Depression.
The Austrian government's handling of the crisis had dire consequences for the country's economy and employment. Unemployment rates surged above 25%, and the money supply shock exerted a strong downward pressure, resulting in economic decline rates of more than 20%. The crisis also led to the devaluation of the Austrian schilling by 28% in May 1934, which stopped the decline in Austrian shares.
The Creditanstalt crisis was not an isolated event but rather a culmination of factors, including the bank's insolvency, the business depression, and management errors. The instability in the Austrian banking system was also influenced by the break-up of the Austro-Hungarian Empire, hyperinflation, the Franc Speculation of 1924, and a maturity mismatch between the bank's assets and liabilities. The failure of Creditanstalt exposed the vulnerabilities in the European banking sector, which was already struggling with undercapitalization and overstretching.
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The Austrian government tried to save the bank
The Austrian government's efforts to save the Creditanstalt bank, one of the country's largest, exemplify the challenges faced during the tumultuous economic climate of the early 1930s. By May 1931, the Creditanstalt bank found itself in a precarious position, burdened by financial losses and a fragile liquidity situation. Recognising the potential fallout from the bank's failure, the Austrian government, despite its laissez-faire economic stance, took decisive action to prevent a full-blown collapse.
The government, led by Chancellor Otto Ender, orchestrated a rescue plan that distributed the burden of covering the bank's losses across various entities. This included the Austrian state, the Oesterreichische Nationalbank (the national bank), the Rothschild family, and the bank's shareholders. The plan aimed to stabilise Creditanstalt and prevent a crisis that could reverberate throughout the Austrian financial system.
The government's intervention, however, could not halt the downward spiral. Despite their efforts, Creditanstalt's woes triggered a wider European banking crisis, with the bank officially declaring bankruptcy in May 1931. This event set off a domino effect, leading to the collapse of other major banks in Austria and Germany, including Landesbank der Rheinprovinz and Danat-Bank. The European banking crisis of 1931, fuelled by a complex mix of financial and macroeconomic factors, played a significant role in the Great Depression, impacting employment and economic decline.
The failure of Creditanstalt exposed the underlying fragility of the Austrian banking system and the country's economy, which was still recovering from the aftermath of World War I and the dissolution of the Austro-Hungarian Empire. The bank's extensive industrial holdings and its role in day-to-day financing for a significant portion of Austrian industry meant that its troubles had far-reaching implications. The Austrian government's attempt to save the bank underscores the delicate balance between adhering to economic ideologies and addressing urgent economic crises.
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The failure was caused by insolvency and illiquidity
The failure of the Creditanstalt bank, also known as the Credit-Anstalt crisis, was caused by insolvency and illiquidity. On May 8, 1931, the bank informed the Austrian government and the national bank that its balance sheet for 1930 showed a loss of AS 140 million, or 85% of its equity. This was due to the effects of the business depression, management errors, and the fundamental instability of the bank and the Austrian banking system at the time.
The initial problem was insolvency, which led to the issue of illiquidity as the public lost confidence in the bank and became unwilling to hold its liabilities. The Creditanstalt bank was the second-largest bank in Austria, and its failure had a significant impact on the Austrian economy and employment, with unemployment rates surpassing 25%. The crisis also contributed to the collapse of the Austrian stock market and a money supply shock that resulted in economic decline rates of more than 20%.
The failure of the Creditanstalt bank was also influenced by the hyperinflation of 1923-1924, which affected all Austrian banks. After this period, Austrian banks struggled to restore adequate capital endowments, and their ventures became increasingly debt-financed. By 1930, the Creditanstalt bank's debt/equity ratio had risen to 9.44, indicating a significant increase in debt compared to equity.
Additionally, the bank's extensive industrial holdings and its ties to the rest of Europe contributed to its failure. A significant portion of the Austrian industry relied on the Creditanstalt bank for day-to-day financing, and the bank had borrowed money from Great Britain and the United States on a short-term basis. Any failure to renew these loans would have threatened the bank's survival.
The collapse of the Creditanstalt bank triggered a domino effect that spread throughout Europe, leading to a deflationary spiral between 1931 and 1933. It is considered one of the biggest bank failures ever and played a significant role in the global economic depression of the early 1930s.
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The collapse led to a global financial depression
The collapse of the Creditanstalt bank of Vienna in May 1931 triggered a domino effect that spread throughout Europe, leading to a financial depression. The bank was the largest in Austria, with extensive industrial holdings, and its failure caused a run on the banks and a subsequent attack on the Austrian schilling. The Austrian government, already facing economic challenges due to the aftermath of World War I and the breakup of the Austro-Hungarian Empire, struggled to contain the crisis. The impact of the Creditanstalt collapse was felt beyond Austria, particularly in Germany, Hungary, and other Central and Eastern European countries.
The failure of Creditanstalt was a result of insolvency, which led to illiquidity as the public lost confidence in the bank. Additionally, the bank's management made serious errors, and the Austrian banking system was fundamentally unstable at the time. The collapse of Creditanstalt contributed to a Europe-wide crisis, triggering a deflationary spiral between 1931 and 1933. This period saw a wave of bank failures and economic decline, with unemployment rates in Austria surpassing 25%.
The impact of the Creditanstalt collapse extended beyond Europe. The financial crisis of 1931, of which the Creditanstalt collapse was a significant part, contributed to the global economic depression of the early 1930s. By the end of 1931, the depression had spread worldwide, and the globalized financial system that had existed until 1914 was broken. The United States, which had been a major lender to European countries, also faced economic challenges, and President Roosevelt took the country off the Gold Standard in April 1933.
The Creditanstalt collapse and the subsequent financial crisis had far-reaching consequences, leading to a global economic depression and a breakdown of the globalized financial system. It took decades for the world to recover and return to a more interconnected economy. The complex interplay of financial, macroeconomic, and international factors during this period underscores the fragile nature of global economic stability.
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Frequently asked questions
The collapse of the Austria Creditanstalt bank, the largest bank in Austria, triggered a deflationary spiral in Europe between 1931 and 1933. The bank's failure caused a domino effect that spread throughout Europe, leading to a Europe-wide crisis.
The Creditanstalt bank collapsed in May 1931 due to its inability to publish its financial statements for 1930, triggering panic. The bank's circumstances were affected by Austria-Hungary's defeat in World War I, and it struggled to restore adequate capital endowments after the hyperinflation of 1923-1924.
The Great Depression was initiated by the crash of the U.S. stock market in 1929, known as "Black Thursday". This was followed by a series of economic contractions, including banking panics and a drop in lending. Economists and historians generally agree that several factors, including the gold standard, tariffs, and contracted monetary policies, contributed to this prolonged economic recession.
The Great Depression had devastating consequences, with families suffering and marriage rates falling. It led to prolonged periods of low wages and unemployment, and cycles of recession and depression. It was characterised as a disaster due to its length, depth, and impact on people's lives.
