Promotion of National Industrial Development and International Competitiveness by Cartels

For companies oriented toward their home markets, and for companies from small states, national cartels provided a means of protection from foreign competition. For example, governments in Scandinavia and Switzerland regarded them as a way to avoid tariffs that might have provoked trade retorsions by more powerful partners.^{Footnote 13}

Late industrializers often combined tariff protection with well-known methods of promoting industrialization in order to achieve a quick catch-up with the industrialized core. One of the best-known examples is Argentina’s import-substituting industrial growth aimed at industrial self-sufficiency. The Great Depression intensified this strategy, which Argentina had first adopted in the late nineteenth century.^{Footnote 14} Similarly, the young states in the Danube Valley all pursued a development path aiming at economic autarchy. Late industrializers among them applied industrial policies focused on import substitution in order to enhance economic autarchy, reduce dependency from international trade, and improve their balance of trade. Beyond tariff protection and public investment preference for local producers, cartels could be used to promote national production; for example, in Yugoslavia, no foreign competitors were allowed to bid on public investments if the three national producers of light bulbs each submitted offers. In this way, a national cartel was practically admitted as a means of promoting infant industries.^{Footnote 15}

Export cartels under the supervision of public authorities proved to be powerful instruments of industrial promotion as well. The best known example may be Japan’s Important Industry Control Law of 1931, in which mandatory cartels and compulsory trade associations were used as tools to achieve political objectives of political stability and recovery from a decade-long economic crisis.^{Footnote 16} Export cartels were regarded as useful instruments for small or undeveloped countries, even well after World War II. The example of Finland demonstrates that cartels helped “unimportant producers become significant players in world markets and promoted economic and technical development in their home country, thereby supporting the transformation of a small, peripheral and agricultural country into a modern industrial nation.”^{Footnote 17}

Direct Forms of Crisis Management: Cartels under the Direction or Supervision of Public Authorities

Compulsory cartels, that is, state-enforced cartels, were not only used in countries with more coordinated economies.^{Footnote 18} During the Great Depression, even the most liberal countries, such as the United States, which had been pursuing antitrust policies since the late nineteenth century, recognized the imperative to let cartels organize entire sectors of industry as a means of crisis management. For example, Section 5 of the National Industrial Recovery Act, issued in 1933, offered a temporary exemption from antitrust laws. The act introduced a cartelization of the U.S. manufacturing industry sanctioned and enforced by the government: more than 150 different trade practice provisions were set up to handle the standardization of products and packaging; restrictions on advertising; and setting up barriers to entry, production quotas, and pricing restrictions.^{Footnote 19} Meanwhile, the British government strengthened their companies’ position within international cartels, such as by fixing tariffs on a level useful for British members in negotiating with the international light bulb cartel.^{Footnote 20} The British Coal Mines Act, issued in 1930, gave the Board of Trade the right to elaborate a plan for the extraction, delivery, and sale of coal if there were no private economic cooperation to coordinate the industry regionally and nationally. In the absence of a cooperative solution, there was little hope for the survival of the particularly fragmented British coal mining industry, which faced competition from Poland, Germany, France, Belgium, and the United States.^{Footnote 21}

There is not enough information on what influenced private businesses’ ability and willingness to promote national cooperation because of the crises. Technological development or barriers to international trade certainly constituted tangible constraints and challenges for companies and national cartels attempting to work out local answers to crises of the magnitude of the Great Depression. Nevertheless, it is imperative to look beyond competition policy to consider the wider national institutional framework in order to recognize how and why competition policy worked as it did, why corporations preferred some solutions to others (not all of which were cooperative), and whether they strove for structural answers to crises.

Therefore, this study takes up the suggestion of Matthias Kipping, who introduced the quality of interfirm relations as an additional variable to explain the significant differences in the need for and the success or the failure of government intervention in different countries.^{Footnote 22} Industrial policy will be understood here as any state action aimed at restructuring efforts and improving directly the competitiveness of national industries. The qualities of interfirm relations, understood as the structure of competition, cooperation, coordination as well as cultural factors, determines:

• • the level and the outcome of the cooperation between the independent firms in the sector concerned;

• • the extent of “rent sharing” with downstream producers, and;

• • the need for further state involvement in order to resolve disputes among firms in the interest of the national economy.

Hypothesis

The parliamentary debates that preceded the issue of the cartel law in Hungary in 1931 and the explanation to the law made it obvious that cartels were expected to contribute to the stabilization and recovery of the economy. However, the wider national institutional framework influenced the rules of the game, especially interfirm relations, in ways that the largest producers were not induced to work out long-term cooperative solutions. This article sets out to identify which elements of the wider national institutional framework caused this problem.

Sources

This article is based on archival material from Ganz & Co., one of the oldest and largest machine-building companies in Hungary. Ganz produced everything from screws and engines to ships and power stations. It was Hungary’s largest producer of electro-technical machinery and one of the largest producers of railway rolling stock. Between 1927 and 1948, the company was a leading member of some twenty cartels covering a wide range of products such as cast steel parts for railway rolling stock, ships, bridges, iron constructions, and electrical installations. Although the national cartel register, set up in 1931, was destroyed, the cartels of Ganz & Co. provide a good survey of the learning process within the machine-building industry because they encompassed nearly its entire product range and included all the major producers and stakeholders.

The data collected present an encompassing picture of the cartels in which Ganz & Co. participated.^{Footnote 23} The sources I used include the actual contracts registered by the secretary of Trade as well as internal and external correspondence, all in the archives of the Industrial Secretariat of the Hungarian General Credit Bank (HGCB). The investigation of the Nehézipari Központ (Directorate of Heavy Industry), a department within the Ministry for Industry, as related to the cartels in which the companies under its supervision participated, provided clues to the fate of these cartels after World War II. Quota allocations by cartels still registered as operating correspond to the development of market allocation as registered before the war. These data were counterchecked and complemented by secondary literature. The archives of Ganz & Co., however, contained no detailed records of negotiations with outsider competition or noncompliance. In the absence of a time-series for sales and revenues for all cartels, the presentation of the cartels in this article focuses on the interrelation of these contracts and the multiple relations among private and public companies.

The source material is complemented by parliamentary debates over the regulation of cartels; newspaper articles; various publications of the Magyar Gyáriparosok Országos Szövetsége (Federation of Hungarian Industrialists), the leading lobby organization of Hungarian industrialists; and negotiation transcripts between HGCB (the bank was the main shareholder of Ganz & Co.) and Weiss Manfréd Works (WM), another large machine-building company.

The Specific Challenges of the Machine-Building Industry

Before 1914 growth of Hungary’s machine-building industry was based on the development of an export-oriented agriculture and the growth of the country’s transport and communication infrastructure. Following the milling industry, machine building was hit hardest by the dissolution of the Austro–Hungarian market because production capacities were calibrated to serve the monarchy or the market of the Hungarian kingdom. With the agricultural crisis and the dire straits of public finance, demand on the home market was limited for the foreseeable future. At the same time, the machine-building industry found it difficult to ship its surplus production abroad. Wartime demands resulted in global overcapacities, thus competition was fierce and prices dropped after the war. Indeed, in the mid 1920s, Ganz Electric Ltd. profited only from exports to Romania and Yugoslavia, while deliveries to another thirteen countries in Europe, South America, South Africa, India, and Egypt were continued only to use up production capacities and maintain consumer relations.^{Footnote 34} Adjustment to the new borders proved to be extremely difficult, as it required large investments to catch up quickly with wartime developments in Western Europe and the United States.

Hence, after the war, Hungary’s machine-building industry was in the throes of a deep structural crisis. Due to reconstruction financed by inflation and to reparation deliveries, high demand temporarily veiled the urgency of technological innovation and structural change. Market conditions started to change as early as 1920, although the crisis was felt only during the latter part of the decade. As noted above, this crisis eventually overlapped with the Great Depression, hitting the machine-building industry especially hard.

During WWII, the needs created by the war economy again led to extensive growth and, to a lesser extent, technical improvements in the machine-building industry. The wartime devastation was considerable,^{Footnote 35} but the prospects for recovery after 1945 were even less auspicious than after WWI because of the Soviet Union dismantling of Hungarian factories. The reparations and political constraints on international trade put the Hungarian industry on a path of development^{Footnote 36} geared more toward the needs of the Soviet economy than local factor endowment. In the long run, this weakened competitiveness far more than the wartime destruction.

Market Structure

The machine-building industry represented one of the leading sectors in Hungary’s late nineteenth-century industrialization; in 1896, no fewer than 126 factories existed with an overall workforce of 34,371.^{Footnote 37} In 1936, 168 companies employed a workforce of 29,382, or 11.8 percent of all industrial employees, making machine building the fourth largest industrial sector after textiles (24.5 percent), mining (15.8 percent), and food and beverages (12.7 percent).^{Footnote 38} Agricultural equipment and vehicles constituted the leading export product groups. Electrical machinery developed into a highly export-oriented third pillar of the sector; in 1936, machines and equipment represented 9.4 percent of the value of Hungarian exports while electrical machinery represented 5.2 percent.^{Footnote 39} Ganz & Co. (which acquired Ganz Electric Ltd., the former electro-technical department of Ganz & Co., an autonomous enterprise since 1906, in 1929) and Weiss Manfréd Works each had a work force of around 10,000 employees. The two companies, along with M. Kir. Állami Vas-, Acél- és Gépgyárak (Royal Hungarian Iron and Steel Works and Machine-Building Factory; MÁVAG) and Hofherr-Schrantz-Clayton-Shuttleworth Magyar Gépgyári Művek Rt. (Hofherr), produced the vast majority of the machine-building industry’s output.^{Footnote 40}

Cartel agreements reflected the oligopolistic structure of this industry and its strong ties to commercial banks. Due to the small market and the low level of standardization, bulk production was rare, which made it difficult to reach cartel agreements in the first place. Significantly, the cartel of the leading Hungarian producers of electrical machinery—Ganz & Co. and three subsidiaries of foreign companies (AEG Union, Hungarian Siemens-Schuckert Works, and Hungarian Brown Boveri Works)—proved to be a particularly long-lasting cartel, probably because it only agreed on terms of delivery for electrical installations.

Even prior to WWI, the large Hungarian commercial banks often initiated industrial cartels and acted as administrative centers.^{Footnote 41}

From the late 1920s onward, the banks started to tighten the industrial groups, which were defined as companies belonging to their “sphere of influence” through capital relations (e.g., share capital, regular credits) and interlocking directorships.^{Footnote 42} The Industrial Secretariat of HGCB was established in 1929, and of Pesti Magyar Kereskedelmi Bank (Hungarian Commercial Bank of Pest; PMKB) in 1936. These were the banks’ administrative units. The banks gradually extended their control especially over smaller companies, through close oversight of credit repayments and product and price policies.^{Footnote 43} They also advanced their compensation deliveries^{Footnote 44} with bilateral clearing agreements and established export offices for their companies. To improve their financial stability, the HGCB and the PMKB advocated exclusive supply agreements among the companies in their respective industrial groups. Agreements like this complemented the cartel of cast iron producers for narrow gauge rolling stock. For example, Ganz & Co. agreed to buy steel for all products covered by the cartel agreement exclusively from Magyar Acélművek Rt. (Hungarian Steel Works Ltd.), which belonged to the interest group of HGCB as well.

The establishment and survival of cartels depended largely on whether the largest privately owned machine-building producers and the state-run MÁVAG factory could come to terms. HGCB and PMKB, the two leading commercial banks, could not only enhance the negotiation power of smaller manufacturers from their sphere of influence but also could facilitate agreement and—with more or less success—guarantee the smaller members’ compliance with the cartels’ rules. After a failed attempt in 1929, HGCB reached an encompassing agreement between WM and small machine-building companies in its sphere of influence in 1936; this created mutual respect for each other’s range of production and restraint from enlarging their production profiles. WM was to agree on similar terms with the Hofherr-Schrantz-Clayton-Shuttleworks Ltd. and Magyar Acél Rt. (Hungarian Steel Works Ltd.) and agreed on seeking agreement with Ganz & Co. as well.^{Footnote 45} No evidence has been found that the agreement became binding in early 1937, although three of the six sub-agreements were apparently signed at that time.^{Footnote 46}

The rivalry between PMKB and HGCB and among the largest companies in their industrial groups occasionally obstructed national agreements, as exemplified by the manufacturers of agricultural machinery,^{Footnote 47} which was the main branch of seven companies and constituted an important part of the production profile of eighteen more companies.^{Footnote 48} The low purchasing power of the Hungarian agricultural sector in 1927 led to the largest producers agreeing to compensate Ganz & Co. to not develop production of agricultural machinery of its own.^{Footnote 49} In the same year, the largest producers of agricultural machinery each agreed to specialize in only one or two groups of machines. For example, to stop production of its threshers, the MÁVAG factory made its partners promise that in exchange they would buy thresher components from MÁVAG. However, the First Hungarian Factory for Agricultural Machinery (EMAG) blocked this agreement, which counted on PMKB’s financial support for price competition.^{Footnote 50} In the absence of an agreement, all companies continued to launch new products in order to fill gaps in demand on the traditional markets and make a narrow profit in export. Only Hofherr succeeded in exporting a growing share of its production during the Great Depression and extending their deliveries well beyond the Balkans—the traditional markets of Hungarian agricultural machinery—to France and Italy.^{Footnote 51}

Conduct

Coordinated specialization was advocated in the mid-1920s in the press as imperative for the survival of machine-building companies.^{Footnote 52} However, the leading companies’ conduct was very similar in how they reacted to the border changes after World War I. They individually sought compensation for diminished sales by diversifying their range of products in order to minimize the fixed costs of operation. Weak demand and unused production capacities reduced economies of scale and counteracted specialization.

Starting in the mid-1920s, large commercial banks, and most of all HGCB and PMKB, took the lead in concentrating business and creating cartels in the machine-building industry in order to restore the financial stability of the companies with which they had close ties. (HGCB’s interest in this respect became especially pronounced during the Great Depression when the bank itself was about to collapse.)^{Footnote 53} The primary goal of the mergers and acquisitions by the banks were mainly to reduce competition, not to improve the innovative capacities of the companies.

Similarly to the machine-building industry, creating cartels in the milling industry was recognized as a strategic option to compensate for the loss of the Austro–Hungarian market and to catch up with overseas competitors’ technology, especially of U.S. enterprises. Although the Hungarian government strongly supported these efforts, negotiations failed because of personal controversies and interest conflicts among the companies. The larger companies also doubted whether cartels could provide efficient control of prices at reasonable costs. They advocated instead for vertical integration, which promised higher savings and more efficient market control. Nevertheless, a milling trust merging the biggest companies of the sector and the provincial mills they controlled never came into being.^{Footnote 54} This episode illustrates the entrepreneurs’ reluctance to cooperate in the second half of the 1920s, even when faced with challenges that questioned the survival of their companies. One explanation for this reluctance may be timing. More than one-third of the cartels in the machine-building industry were created after the mid-1920s. Leading producers were more agreeable about cartels after their positions were consolidated. However, the constraints of the small home market resulted in overcapacities; measured by pre-1913 prices, the volume of production reached only 82.8 percent, so output had not yet climbed back to pre-war levels before the Great Depression.^{Footnote 55}

Furthermore, cartels aimed to keep prices on the domestic market at a level that allowed its main members to be reimbursed for production costs and to maintain production facilities. However, it was expensive and difficult to establish controlling mechanisms that could force cartel members to comply with agreements, as the temptation to cheat was too great because of extreme demand contraction.^{Footnote 56} For example, competition by Hofherr induced WM to leave the cast steel cartel, and Ganz and Győr kept their agreement alive only to obstruct MÁVAG, which was their largest public competitor. It is no wonder that in the early 1930s, the Industrial Secretariat of the HGCB complained time and again that many companies did not wish to join cartels or broke away from them.^{Footnote 57} Thus, during crises, cartels remained volatile organizations, as seen by the number of cartels that dissolved. In 1932, out of the 267 agreements registered with the Hungarian Ministry for Trade since the year before (when the Cartel Act made registration compulsory), 171 cartels had dissolved.^{Footnote 58}

The financial benefits of cooperation may not have been sufficient either. Whatever profit member companies could expect was reduced by the cartel fee—in 1931 it was 0.25 percent of yearly turnover, or at least 1,000 pengő; in 1934, it 0.50 percent of yearly turnover, or at least 1,200 pengő. ^{Footnote 59} Furthermore, profits were reduced by the share due to the banks if they initiated the cartel; occasionally, a honorarium for business advice of the banks; and the costs of the cartel administration, including bills of exchange or deposits, in some cases advanced by the banks, as a security payment for liabilities and penalties for violations of cartel rules.

Performance of the Cartels as Instruments of Crisis Management

Agreeing to fixed prices definitely helped their members survive. Leading members especially profited from separate exclusive sales agreements with smaller members.^{Footnote 60} However, only companies participating in different cartels were able to fully profit by evening out price fluctuations, such as in 1931 when the price index of cartel products in the machine-building industry (and the leather industry) sank to the lowest among industrial products covered by cartels (83 percent of 1913 prices). In comparison, 1936 the price index reached 111 percent of 1913 prices.^{Footnote 61} In December 1936 Ganz & Co. complained that consumer prices were difficult to keep at a level that covered operating costs when they were squeezed by cartel producers of coal, steel, and electricity, which could establish prices at will.^{Footnote 62}

Price development points to the gradual recovery of the Hungarian economy after the Great Depression as well as toward a greater tendency for cooperation. In 1935 output reached only 58 percent of 1913 quotas, and even in 1938, 36 percent of production capacities still lay idle.^{Footnote 63} In 1935 stagnation of the home market and rearmament purchases may have induced the Láng factory to agree with Ganz & Co. and Martos & Herz on the allocation of the delivery of engines according to particular ranges of motive power. The three companies were members of HGCB’s industrial group, which obviously encouraged this cooperation. In the same year, HGCB got Ganz & Co. to agree with the Láng factory for mutual restraint on the production of specific products; instead, these were to be ordered from each partner. This particular agreement was related to the turbine agreements they each had with Brown Boveri Works.^{Footnote 64}

As mentioned earlier, there is not enough data on the cartels of Ganz & Co. to measure the cartels’ effects on the machine-building industry’s output, prices, profit, or production structure. However, the cartels did help their members during the Great Depression and influenced the position of individual companies. For example:

• • The agreements on the terms and conditions of delivery and payment ultimately reduced the amount of bad debt.^{Footnote 65}

• • The profit originated from different sources, such as higher sales prices and reduced costs of preparing offers especially for public customers, marketing, or transport due to the allocation of consumer groups.

• • Irrespective of long-term effects on the company and the branch level, the financial compensation for refraining from production helped to compensate for the costs of maintaining production facilities.

• • The commercial banks’ relation to a large number of companies in various sectors helped machine-building companies to (jointly) set up agreements with their suppliers, thereby reducing production costs.

• • The Industrial Secretariat of the HGCB stated that the Great Depression hit the machine-building industry particularly hard because orders from public authorities and state-owned companies plummeted.^{Footnote 66} Many of these constituted unique constructions, such as whole power stations not covered by cartels. Cartel agreements that usually covered mass products served to maintain price levels at least in their product segments. Cartels simultaneously contained outsider competition and made better use of production capacities, and thereby retained profitability for the partners.

Despite these short-term advantages, the cartels in which Ganz & Co. participated failed to bring about structural change; that is, an adjustment to territorial change and technological innovation, even though these were the very reasons for the cartels’ existence as given in their preambles (mission statements).

The Construction of the Cartel Agreements

Part of the explanation for why the cartels failed to provide long-term solutions is found in the construction of the cartels themselves, which reflected the strategies of their leading members. Most cartels in which Ganz & Co. participated only agreed on setting prices, dividing the home market according to members’ market power, and obstructing outsider competition. Contracts seldom extended beyond setting up a common sales agency. Cartels only made limited attempts at industrywide rationalization and specialization, which would have allowed a co-ordinated reduction of production capacities, a focus on research and development for a narrower range of products, and lower costs of stock holding.^{Footnote 67} Furthermore, members were usually free to expand to export markets, except for a few agreements such as on railroad switches. These actions thwarted attempts to reduce the scope of production and production of specific goods. It thus diminished economies on both production and sales organizations.

By limiting coordination to a voluntary reduction of output and price agreements, the partner companies remained more like general-store enterprises and had little incentive to join forces in coordinated rationalization or research projects.^{Footnote 68} There is little documentation that companies established market regulations in one product group in order to concentrate and coordinate their R&D in another product group. Only the agreement between Ganz-Láng and Brown-Boveri in 1935 indicates thinking along these lines.^{Footnote 69}

The Wider National Institutional Framework: Revisionism and Economic Autonomy

The subsequent governments’ quest for revising Hungary’s new borders was obviously an important psychological determinant. In 1927 Prime Minister István Bethlen opined that the concentration, cooperation, and rationalization of industries would be needed for survival and competitiveness.^{Footnote 70} In 1929, however, leading members of the economic elite expressed the opinion that the Hungarian government had not set clear goals for economic development.^{Footnote 71} Certainly, liberal ideology and extremely limited budgets restricted the scope of any program for economic recuperation and modernization. When government decision makers at last recognized that coordinated efforts were imperative, the Great Depression thwarted any chance to attract foreign capital or use internal reserves to realize such coordinated programs.^{Footnote 72} Measures for industrial development and modernization of agriculture remained splintered and insufficient.^{Footnote 73} Revisionism aggravated political tensions in the Danube Valley and contributed to obstructing regional cooperation, which could have alleviated problems of market constraints. Hence, revisionist rhetoric and the absence of an economic policy that envisioned and promoted structural change make it understandable why cartels focused on preserving the status quo.

The territorial stipulations of the peace treaties made Hungary a small, open economy competing for foreign capital under much worse conditions than before 1914. The debt service forced Hungary to earn convertible currencies in international trade. Nonetheless, industry was supposed to support Hungary’s independence, provide jobs for the middle class and the rural poor, and make imports unnecessary to reduce the passivity of the trade balance.^{Footnote 74} Bolstering competitive export industries, such as the electro-technical industry or certain segments of the machine-building industry, was not a main objective of industrial promotion (laws No. III/1907 and No. XXI/1931 on the promotion of Hungarian industry). It is indicative that even in 1937, companies that represented approximately 50 percent of the annual production of weaving were granted subsidies, as compared with 43.32 percent in the paper industry and 24.39 percent in the machine-building industry.^{Footnote 75}

Tariff policies were aimed at import substitution, and occasionally tariff reductions were used to achieve better terms and conditions for specific export products in bilateral relations. The new tariffs specifically protected sectors that had had little chance to grow within the wider national institutional framework of the Austro–Hungarian monarchy; for example, they helped the textile industry to thrive, which had been impossible under Habsburg rule because of Austrian and Czech competition. However, tariff policies did not foster strategic export industries. It also allowed importation of products to near-market saturation limiting prospects of growth for emerging Hungarian producers.

The near-market saturation can be seen in the example of Hungary’s effort in the early 1920s to bolster agricultural productivity through eliminating obstacles to the importation of tractors. Machine-building and trading companies looked for opportunities to compensate for their diminished demand, so they were keen to take on the lucrative imports predominantly of U.S. products by Fordson or McCormick that were aggressively marketed in Europe.^{Footnote 76} In 1925, after years of intensive development, the company of Hofherr-Schrantz-Clayton-Shuttlework launched its first tractor, which became popular due to its simple but robust construction; by 1928 one-quarter of the tractors used in Hungary were produced by Hofherr.^{Footnote 77} In 1928 the Ministry for Agriculture finally launched a program to subsidize small landowners to buy Hungarian-made tractors. Unfortunately, the ensuing agricultural crisis meant that most of these buyers had no chance to amortize their purchases or to pay installments on their tractors. Their insolvency and the protection of indebted farmers by the government aggravated the financial troubles of tractor manufacturers during the Great Depression. Between 1932 and 1934, Hofherr sold no more than four tractors annually in Hungary.^{Footnote 78}

Monetary Policy and Export Promotion

It is hard to retrace a strategic promotion of export industries by monetary policy or coordinated export promotion measures. In 1931 Hungary reinitiated its control of foreign currencies while not depreciating the pengő, as the government feared inflation and hoped to reduce its foreign credits. This policy, however, was detrimental, as it neither had the flexibility needed to respond to market opportunities nor bolstered the competitive exports. Instead, it benefited imports.^{Footnote 79} Export subsidies, the return of VAT, and occasional price cuts on raw materials were meant to promote exports to countries with convertible currencies.^{Footnote 80} Entrepreneurs criticized the time needed, first to decide on which export promotion procedures to include and then to go through the cumbersome procedures when export promotion was finally employed starting in 1929.^{Footnote 81}

Nonetheless, Hungary remained unable to compete with the subsidies the most advanced industrialized countries could afford, and manufacturers without export experience had a hard time establishing contacts and getting orders during the Great Depression. The need to widen export markets for agricultural products during and after the Great Depression brought Hungary closer to Italy and Germany in the 1930s, ultimately allowing German industrial exports to severely curtail the Hungarian home market, including manufacturers of electro-technical and agricultural machinery.^{Footnote 82}

The Regulation of Cartels

Hungary’s competition policy did not provide efficient control over cartels. Moreover, the policy’s measures focused on administrative issues and prices, not on structural changes.

By the 1920s, the abuse of market power and immoral business practices were legally sanctioned by Laws No. XV/1920 and No. V/1923, although there was no state authority to determine what was the “right” or “just” price, or what was an “immoral business practice,” thus making it hard to enforce the laws.

Law No. XX/1931(known as the Cartel Act) declared cartels to be valid contracts protected by law if they were duly registered with the Ministry of Trade. The law was based on the “control of abuse” approach. No exact prerequisites were defined for an investigation of unfair competition; instead, a vague provision was given: “endangering the public welfare or the economy.” Jurisdiction was thus left without a clear-cut definition of cartel activities.^{Footnote 83} Additionally, the law covered mainly product cartels but made no provisions for service agreements.

Ganz & Co. participated in registered cartels that included all of its major product groups, which may indicate that confidentiality on production methods and other business secrets induced member companies to register.^{Footnote 84} Public control was greatly inhibited because cartels were allowed to keep details of their agreements, memberships, and market control secret.^{Footnote 85} Member companies were entitled to settle disputes through arbitration. Meetings of the Cartel Committee took place behind closed doors and its decisions were not to be published. However, from 1933 to 1938, the principle decisions of the committee could be published with the approval of the minister in charge of the cartels.^{Footnote 86} The Cartel Court, a chamber in the Hungarian Supreme Court (Kúria) was in charge of cases of public interest, that is, cases beyond the mere violation of law or business morality. The minister in charge of cartel affairs was entitled to order Magyar Királyi Jogügyi Igazgatóság (the Royal Law Committee) to file a case when cartel laws were infringed; investigations could not be requested by individuals or interest groups in order to avoid chaos, as stated by the government.

The judiciary’s cases were mostly confined to the administrative obligations of cartels and to decide whether an agreement was considered as a cartel.^{Footnote 87} The Cartel Committee did not hold cartel members accountable for initiating rationalization or specialization as specified by the mission statements of many cartels.

Cartel advocates’ successful reasoning in Parliament led to legislative complaisance toward cartel members’ business interests. The Committee of the House of Representatives stated that free competition proved inadequate for economic regulation;^{Footnote 88} competition also proved inadequate to harmonize the interests of all social classes. There were Parliamentary debates whether cartels were natural organizations of the capitalist economy at the state’s present stage of development. It was decided they were, and that they provided ample benefit for society, in particular consistent production, prices, and employment. In line with the opinion of representatives of the German Historical School—Gustav Schmoller, Robert Liefmann, and Rudolf Tschierschky—cartels were regarded as important parts of a stable economic order, means of a regulated competition that alleviated development, and coordinated answers to challenges.^{Footnote 89}

Cartels were considered instruments of economic power that could also influence international politics. Therefore, Parliament decided that it was preferable to regulate cartels rather than ban them.^{Footnote 90} Cartels were intended to protect industry even if tariffs should, in some distant future, no longer be implemented.^{Footnote 91} Prominent industrialists maintained cartels were key to Hungary’s economic autonomy.^{Footnote 92} Additionally, they argued that cartels helped to safeguard national wealth, maintained Hungary’s level of socioeconomic development, and protected consumers from even higher prices should foreign cartels take control over Hungarian companies.^{Footnote 93} Participation in international cartels was to ensure Hungarian companies access to markets and ability to earn convertible currencies.^{Footnote 94}

Conversely, Hungarian social democrats accused cartels of being responsible for high consumer prices, exploitation of workers, and political corruption.^{Footnote 95} Similarly, agricultural representatives held cartels responsible for increasing their production costs while provoking tariff barriers against Hungarian agricultural exports.

Cartel advocates such as directors of the Federation of Hungarian Industrialists in turn demanded the organization of cartels in agriculture as well, in order to facilitate this sector’s adjustment to the new market conditions.^{Footnote 96} The clash of interests was particularly obvious in a country in which before the Great Depression, half the population was still employed in agriculture and in which livestock and finished products of the food industry represented over 60 percent of the value of total exports, regardless of constantly deteriorating world market prices.^{Footnote 97}

During the Great Depression, agriculturalists, small-scale industries, and the middle class cried for state support to prevent (industrial) cartels from raising prices.^{Footnote 98} However, price controls through cartel legislation was ineffective as long as investigations remained haphazard; for 1936 only, the Committee for Price Analysis was entrusted with systematic data collection through Decree 7450/1936 M.P.^{Footnote 99} The difficulties faced in economic recovery can be seen in the Parliamentary debates of 1934–35 over the modification of the cartel law that went well beyond the issues of pricing. During debates prior to 1931, state control over cartels still had to be justified, but starting in the mid-1930s, a shift toward using cartels to more broadly coordinate the economy took place both in economic theory and in the implementation of the cartel law.^{Footnote 100}

Hence, the Cartel Act did not provide for making cartels a primary means of crisis management in the sense of coordinating industrial recovery programs, despite the expressed hopes during parliamentary debates that cartels would act accordingly; for example, in referring to analogous efforts of the British Labour government to reestablish competition in the coal, iron, and steel industries, as well as in the textile industry.^{Footnote 101} The cartel law as it was issued represented a turn in government’s role in crisis management: a ban on the abuse of monopolies was expected to restore the social peace that was threatened by income inequality and to maintain productive capacities in agriculture and manufacturing. Nonetheless, registration of cartels and development of price controls were to ensure the realization of these goals, not to publicly promote cartels’ attempts to initiate coordinated programs.

Compulsory cartels proved to be more efficient than state price controls to unify agricultural and industrial interests. In some segments of the food industry, provisions were made to keep new competitors from the market (e.g., vinegar, linseed oil producers) and compulsory cartels were established under direct government control (e.g., sugar, yeast). In the case of grain distillation in the 1920s, yearly national production contingents, producer quotas, quality requirements, price setting, and sales rights under public control were seminal to enhance exports.^{Footnote 102} Organizing the whole value chain of paprika production similarly helped to restore profitability and improve the quality of production in the 1930s.^{Footnote 103} Thus, compulsory cartels in the food industry seemed to prove that cartels could induce structural adjustment for agricultural recovery.

To sum up, in the interwar years regulation went from wartime central raw material allocation and compulsory cartels that facilitated the return to peacetime production from the prohibition of immoral business practices in the 1920s to the cartel law of 1931. This shows a gradual reduction of state intervention into the economy and the recognition of cartels as crucial means of competitive nationalism.^{Footnote 104} The prolonged stagnation after the Great Depression called for more direct government intervention via compulsory cartels. However, the authorities, though leaning evermore toward authoritarianism, doubted the efficiency and benefits of compulsory cooperation.^{Footnote 105} Consequently, compulsory cartels were only introduced in particular sectors of industry and a restriction of the number of companies in specific segments occurred only in 1938 and 1939, connected with the ouster of Jews from the economy (Laws No. XV/1938 on a more efficient provision of balance in social and economic life and Law No. IV/1939 on limiting Jews’ gaining ground in public life and in the economy; called shortly the first two laws on Jews).^{Footnote 106}

The State as Producer

In 1938 public corporations only accounted for 5 percent of Hungary’s industrial capital.^{Footnote 107} Nevertheless, the state could influence market conditions in various ways. One such way was membership in cartels. On the one hand, after large public companies entered into an agreement, the state could directly influence production, price, and marketing policy of all the agreement’s members.^{Footnote 108} On the other hand, the direct financial interests of the state and cartel rules may have restricted state control.^{Footnote 109}

The state-run MÁVAG joined various cartels (e.g., for bridge construction, iron construction, tubes, screws) prior to WWI. These cartels provided projectable market development and market protection.^{Footnote 110} Private companies were interested in MÁVAG’s participation so as to keep prices high and spread more evenly those public investments that had formerly been given exclusively to MÁVAG.^{Footnote 111} In the interwar years, railway rolling stock production suffered from substantial market loss due to the reduction of the Hungarian railway network, lack of investment funds for its encompassing modernization, and trade barriers to the former main markets in the Balkans. Beyond replacing war losses, starting in the late 1920s, regular orders on railcars represented the only substantial direct state investment into the modernization of the rolling stock. Per the British Trade Facilities Act, the electrification of the Budapest–Hegyeshalom Railway could only be financed with a credit issued on the London capital market.^{Footnote 112}

Given these conditions, the privately owned Ganz & Co. suffered from the competition from MÁVAG because the production profile of the two companies was too similar (railway rolling stock, tires, switchers, iron and bridge constructions, etc.). Both Ganz & Co. and MÁVAG had large unused production capacities. The declining number of locomotives produced by MÁVAG is indicative of the magnitude of market loss: in 1880–1899, there were 1,390 pieces manufactured; in 1900–1914, there were 2,242; in 1920–1929, there were 451; and in 1930–1939, there were 181.^{Footnote 113} Ganz & Co. survived only thanks to capital injections from General Electric and the German Allgemeine Elektrizitäts AG (AEG), so as to the development of the Ganz-Jendrassik diesel railcars and their successful exportation. Simultaneously, in 1935, the Rimamurány-Salgótarjáni Iron Works and Coal Mines (Rima) took over the majority of the shares of the Hungarian Wagon and Machine Building Ltd. (Győr), a large competitor of Ganz & Co., thus securing its survival.

During the Great Depression, MÁVAG faced reduced demand of its products, high costs in maintaining idle production facilities, cuts in state subsidies, and growing debts. It reacted to lowered sales in the same way as private companies: it enlarged its production profile. Starting in the mid-1920s, MÁVAG invested in car production (mainly trucks, undercarriages, and a few main components such as couplings); enlarged its production of small agricultural machines, engines, furnaces, and containers; and made various items in piece production.^{Footnote 114} By taking up the production of specific furnaces in 1938, MÁVAG endangered both Ganz & Co. and its agreement with the Röck and Láng factories that had been signed in 1935.^{Footnote 115} The Federation of Hungarian Industrialists and members of Parliament complained that MÁVAG misused its privilege as a public company to gain financial advantages and squeeze out private companies.^{Footnote 116}

In 1935 MÁVAG overstrained its quota against Ganz by 448,500 pengő in the seven cartels in which MÁVAG and Ganz were member companies.^{Footnote 117} In a few cartels, MÁVAG represented its interests through the Diósgyőr factory (e.g., steel for springs or international cartel for railroad switches). Cooperation in one cartel did not automatically mean cooperation in the whole line of production. MÁVAG had an agreement with Austrian and Czech manufactures related to market allocation for axles and wheel sets in order to extend its market share, but this was at the expense of Ganz and Győr. The Austrian and Czech partners recognized MÁVAG as the sole supplier of Hungarian public and private railways and as exclusive exporter to Yugoslavia and Bulgaria.^{Footnote 118}

In the documents consulted for this article, there is no indication of MÁVAG having initiated coordinated rationalization in the cartels in which it participated. It enlarged its product portfolio and occasionally used international cartels to protect (and ideally) to enlarge its share on the domestic market, crowding out private enterprises. Thus, MÁVAG did not contribute to the coordinated rationalization of production.

The State as Buyer

Leading cartel members succeeded in establishing preferential treatment by public authorities. These connections obviously reduced their effort in coordinating specialization and rationalization. In 1933, for example, only some 20 percent of the total production volume and orders above 50,000 pengő per transaction acquired by Ganz & Co. constituted sales regulated by cartels. Sales and orders acquired under regular competition constituted 30 percent, and deliveries to Hungarian and foreign public authorities without previous tender constituted the other 50 percent of Ganz’s sales. Even if a substantial part of those deliveries went into follow-up orders for installations and deliveries,^{Footnote 119} and public authorities tended to delay payment,^{Footnote 120} the importance of preferential customer relations is obvious.

The state administration did not make full use of their coordinating potential to further rationalization and standardization.^{Footnote 121} The Industrial Development Act (law No. XXXI/1931) made rationalization a central goal. However, tax reliefs for investments into rationalization were not obligatory but rested on the decision of the Országos Ipartanács (National Board of Industry), which provided opportunities for informed advice but also slowed down investments through red tape and differences in interest.

Rationalization was neither a clear-cut issue in crisis-ridden Hungarian industry nor a unanimously acknowledged goal; and high rates of unemployment, overcapacities, and indebtedness of many manufacturers neither encouraged companies to rationalize nor left much room for investments. Characteristically, in the 1930s member companies of the MGYOSZ (Federation of Industrialists) did not acquire subsidies and tax reliefs for rationalization.^{Footnote 122} Members of Parliament and MGYOSZ^{Footnote 123} warned against the consequences of rationalization for rates of unemployment, taking up the very argument used when justifying public subsidies for MÁVAG. Economists pointed out that rationalization had a natural limit set by market characteristics, not by what was technically possible.^{Footnote 124} Cheap labor hampered rationalization because such investments would have only paid in the long run.

In the interwar era, public investment did not play as an important a role in the development of machine building as it had before 1914 because of the dire state of public finance and the less advantageous terms of capital import.^{Footnote 125} Still, investments in communication and transport infrastructures offered one possibility to standardize production. In the Czechoslovak Republic, technical standards stipulated by the Systematic Electrification Act of 1919 allowed electro-technical producers to reduce costs by means of bulk production. For want of similar standards, the electrification in rural Hungary was characterized by scattered power stations and noncommunicating regional networks.^{Footnote 126} Electro-technical manufacturers produced many different types of machines at much higher costs.

Cooperation of suppliers was first proposed for the purpose of rearmament.^{Footnote 127} In the mid-1920s, two producers—the Magyar Általános Gépgyár (MÁG), owned in the 1920s by HGBC and Austro-Daimler, and MÁVAG—decided to cooperate in the manufacture of passenger cars, but this was soon abandoned. Product development of whole cars came to no more than prototypes and failed investments because the small home market reduced the scale and scope of production, thereby the room for price reduction and technological development (e.g. Magomobil passenger cars, Magosix taxis, both produced by MÁG). The Industrial Development Act of 1931 codified the necessity of standardization and identified public investment as a means to establish standards, but results were disappointing. Buses and trucks for public transport companies might have enlarged the home market and enhanced competitiveness by encouraging cooperation. The percentage of Hungarian buses used in public transport did indeed grow: from 0.05 percent in 1926 to more than 70 percent by 1938.^{Footnote 128} However, the total number of buses (675 in 1938) shows the limits of economies of scale. Experts in the Ministry for Trade declared in 1928 that the size of the market and the level of expertise of Hungarian manufacturers required production based on foreign licenses and a radical reduction in the types of undercarriages for buses and trucks. The War Department seconded the latter so as to simplify maintenance. Corresponding norms formulated as “guidelines” were, however, issued only in 1933.^{Footnote 129} Allocating orders for complete vehicles to single companies did not induce their specialization in specific vehicle parts, which would have improved productivity. Truck manufacturing developed similarly^{Footnote 130} until rearmament enforced cooperative production from 1938.