European banking crisis of 1931
It triggered the exit of Germany from the gold standard on 15 July 1931, followed by the UK on 19 September 1931, and extensive losses in the U.S. financial system that contributed to the Great Depression.
The causes of the crisis included a complex mix of financial, fiscal, macroeconomic, political and international imbalances that have nurtured a lively debate of historiography.
[2]: 831 The banks were generally undercapitalized and overstretched following rapid balance sheet expansion in the late 1920s,[2]: 838 with a preponderance of short-term debt, much of it foreign.
[2]: 833 This unusual feature of the German financial system was a direct legacy of the hyperinflation of 1921-1923, which durably impaired the role of capital markets and made the country abnormally dependent on short-term foreign lending.
[8]: 193 Similar patterns could be observed in other Central European countries that had suffered from hyperinflation, particularly Austria, Hungary, and Poland,[9] to a lesser extent Romania,[10] and much less so Czechoslovakia.
German stock prices started declining with the "Black Friday" of 13 May 1927, and GDP growth slowed substantially in 1928 and turned negative in 1929.
"[1]: 75 In spite of the apparent abundance of data, however, German public authorities' knowledge about the true state of banks' financial condition was systematically deficient.
[13]: 40 In Austria, Creditanstalt was widely viewed as a pillar of financial stability given its history of market dominance and prudent management led by the Rothschild family.
Its traditional strength, however, ironically became a vulnerability as the government leaned on it to absorb struggling banks, including Allgemeine Bodencreditanstalt and Union-Bank.
In 1930 and early 1931, the project of an Austro-German Customs Union generated additional friction, restricting the willingness of Austria's international creditors and especially France to support the country in moments of turmoil.
[1]: 81 From mid-June,[14]: 873 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.
[7]: 596 On 15 July 1931, the Reichsbank suspended the convertibility of the Reichsmark, effectively taking Germany out of the gold standard, and imposed capital controls.
[8]: 198-199 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.
[15]: 36 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,[13]: 24 , 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.
[4]: 353 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.
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.
[4]: 351 At the Lausanne Conference of July 1932, an agreement was outlined on a three-year suspension of German reparations,[17] but that was rejected by the U.S. Congress in December 1932, triggering defaults by France and the UK on interallied war debts.
[2] 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.
