Fifteen years after its initial edition, Cambridge University Press brings out a paperback reprint of Schubert's account of the 1931 Credit-Anstalt (CA) crisis. The collapse of one of Europe's most eminent banks forced Austria off the gold standard and marked (at least chronologically) the beginning of the banking and currency crises that swept through Europe during 1931. Since first publication in 1991, financial crises have not lost their interest and relevance, quite the contrary. The 1990s became the decade of the ‘twin crises’ (Kaminsky and Reinhart), i.e. the joint occurrence of banking and currency crises. Research has consequently burgeoned, not only on contemporary but also historical episodes. The relative importance of banking and currency problems in the German crisis of 1931 continues to provoke considerable debate in the profession. While frequently cited, the CA crisis has been studied far less often and Schubert's account is still the only one written from an economist's point of view. It is therefore highly welcome to see a second edition of this book, offering the opportunity to reread the episode in the light of recent theoretical advances and experience.
Schubert starts off with a diary of the crisis. Before 1931, the CA enjoyed considerable international reputation and was by far the largest Austrian bank. The shock was therefore considerable when it informed the government on 8 May 1931 that losses had wiped out 85 per cent of the share capital. A government-sponsored rescue plan did not prevent a general bank run when the problems were made public on 11 May. Liberal lending by the Austrian National Bank (ANB) saved the other Austrian banks, but the drain on the CA continued as the true extent of the losses (finally larger by a factor of seven) became known. The massive rediscounting and the government's underwriting of the CA losses were perceived as a change in policy regime. The following currency crisis ended only with the introduction of exchange controls and the de facto abandonment of the gold standard in October 1931.
Schubert distinguishes between the fundamental and proximate causes of the crises. While management errors, a forced merger with the Bodencreditanstalt (BCA) in 1929, and two years of recession were the last straw, the difficulties originated in the post-war hyperinflation and a business model that ignored the break-up of the Habsburg monarchy and continued a risky involvement in the successor states. In the tense political and economic climate of the 1920s the combination proved fatal. Unlike in the German case, the run on the currency appears as the logical consequence of the banking crisis since the increase in the money supply and rising government debt were perceived as incompatible with a stable exchange rate: a classic conflict of goals. In the end, the Austrian authorities decided to sacrifice the fixed exchange rate in order to save the banking system.
After evaluating financial market efficiency and the economic fallout, the final two chapters return to the central issues of the book: policy response and policy lessons. For a practising central banker like Schubert, these questions are of course critical and his analysis is fascinating to read. While criticising, Schubert shows considerable understanding for the decision makers, whom he concedes lacked information and experience. Both the ANB and the government appeared overwhelmed by the events and their hesitant and inconsistent measures did not re-establish public confidence. On the international level, the two potential LLRs, the newly established Bank of International Settlements and the League of Nations, did not perform much better. Schubert agrees with the general criticism of ‘too little, too late’, but concedes that both institutions were rather coordinators for national aid than genuine LLRs. Furthermore, the crisis was the result of fundamental imbalances and the solution thus primarily within the responsibility of the Austrian authorities.
Would other policies have yielded better results? After having identified a series of policy mistakes, Schubert hesitates to develop explicit ‘what if ’ scenarios. What would have been the benefits of following the strategy Germany pursued later in 1931 (forced mergers, bank holidays, exchange controls)? Would direct aid to the industries hit by the CA failure have been preferable? Instead, Schubert draws some general conclusions for today. He is optimistic and believes that deposit insurance, bank supervision and improved communications technologies have made an event like the CA failure much less likely, although banking remains a highly leveraged sector and internationalisation and innovation create new challenges for regulators. Some of the critical issues mentioned by Schubert, like the liquidity risks posed by securitisation, sound particularly familiar to the reader in 2007.
Fifteen years into its life, Schubert's book offers an analytical, highly readable and lucid account of the CA crisis. It can be hoped that the new edition will provoke new research on this critical episode in financial history. A first set of questions could concern the sources of the problems at the CA. Other Austrian banks, pursuing similar strategies in Central Europe, fared considerably better. Why did the CA accept the merger with the BCA in the first place? Because they knew of the problems to come, as Schubert seems at times to suggest, and looked for an implicit government guarantee? And more speculatively, was the strategy of the CA fundamentally flawed or the Great Depression just too large an outlier for any stress test? The answers would have important implications for policy evaluation. The second set of questions concerns the international impact of the CA failure. While the episode marked the beginning of the anno horribilis 1931, little is known on links or causality. Casual remarks in the literature are divided, but analyses are rare. In his conclusion, Schubert sides with the sceptics, but a true economic analysis of the international contagion still waits to be done.
