1818–1878

First “Privilegium” conferred by Emperor Francis I, July 15, 1817 

Ludwig van Beethoven – Shareholder of the “privilegirte oesterreichische Nationalbank” 

The imperial patent of July 15, 1817, gave the privilegirte oesterreichische National-Bank the exclusive right to distribute banknotes unrestrictedly. Moreover, this issuing right (1. Privilegium) also gave the OeNB certain rights to conduct discount transactions.

On January 19, 1818, the permanent bank management was set up. Among the first governors and directors of the privilegirte oesterreichische National-Bank were leading personalities of Viennese society, such as the bankers Johann Heinrich von Geymüller and Franz von Eskeles.

Large sections of the bourgeois population of the "Vormärz" period (1815–1848) signed shares of the Austrian central bank , as the share issued to Ludwig van Beethoven proves (see picture).

Within the countries unified under the Habsburg monarchy, which were mostly rural areas, some regions turned out to be centers of commercial growth. It also became necessary to set up a system of economic trade among these regions. Money transactions played a vital role in this market integration. The privilegirte oesterreichische National-Bank systematically established a network of branches to guarantee an even money and credit supply. Starting from the main branch in Vienna, this network included the early industrial regions and trading centers in Central and Eastern Europe as well as the northern Mediterranean region.

As a matter of principle the bank was intent on keeping the share of government securities on the assets side of its balance sheet as low as possible. The preferred assets were trade bills and coin. The bank proved its usefulness for the economic upturn of the monarchy by conducting the bill of exchange business. The silver reserves guaranteed a coverage of the banknotes in circulation for those cases when the public wanted to re-exchange the notes for silver coins. In 1818 the bank had assets of fl 11.5 million, and direct (or indirect) public debt came to fl 2.2 million. Although the bank`s management made a long and valiant effort, it did not succeed in preventing the share of public securities from rising.

The head of the government used to remind the central bank management of its "patriotic responsibilities" in more or less polite words. So the bank was ultimately compelled to buy public securities in times of crisis. In effect these "patriotic responsibilities" amounted to an advance to the treasury at several occasions: 1820 (fl 20 million), 1821 (fl 30 million), 1831 (fl 12 million). The circulating banknotes were covered by silver reserves and coin stock of the bank; so the cover ratio fell from 74.6% (1818) to 10.3% (1831).

The rise in the number of banknotes in circulation contrasted with the bank management`s responsibility; an inflation of the circulation had to affect the flow of money transactions.

The articles in the founding patent of the privilegirte oesterreichische National-Bank could not guarantee continued autonomy from the government. Independence had to be resecured day by day. This challenge was met by the governors and bank directors. The basic issue was: to what extent may banknotes be issued on the basis of public debt? The government finally succeeded in reducing the independence of the issuing bank by shifting the influence on management away from other shareholders toward the government with the renewal of the bank`s issuing right (Privilegium) in 1841.

The industrial and trade boom increased those political forces in the Habsburg monarchy which upheld the principles of liberalism. Censorship and authoritarian dictate were an unsuitable response. During the Revolution of 1848 the old order faced a coalition of bourgeois liberals and socialists. Leading personalities of the bank of issue supported the constitutional aims of the 1848 revolutionaries.

For nearly 100 years the Rothschild Bankers played a leading role on the Viennese banking market. During the "Vormärz" period, Salomon Mayer von Rothschild was involved in all essential transactions concerning the rehabilitation of public finances.

 

The policymakers at the central bank had a particular interest in observing the development of the premium which had to be paid when exchanging banknotes for silver money. Any increase in the premium was equivalent to a devaluation of the notes distributed by the privilegirte oesterreichische National-Bank. Such a rise had to be prevented, since an increase in the premium was seen as a harbinger of growing inflationary pressure.

Seen in the overall economic perspective, the rise in the premium was equivalent to a decline in the terms of trade. While the deterioration of the terms of trade caused an expansion in the export volume, the profits from foreign trade grew at a slower rate than economic growth. Thus the silver premium influenced the price competitiveness of Austrian foreign trade.

In the course of the year 1850, exporters and importers were confronted with exchange rate fluctuations which reached nearly 33% of the annual average exchange rate. These fluctuations noticeably affected the ability of those companies to make profits that did not succeed in gaining admission to the stock market to protect themselves against risks.

When trying to stabilize the silver premium, the central bank came up against a limit, for the premium was not only dependent on the central bank`s issuing activity; the silver premium also reflected the silver price (expressed in terms of gold) and the evaluation the consequences of increased fiscal deficits had on money markets. For example, the crises in the years 1848/49 (revolution), 1850 (Prussian-Austrian conflict) and 1853 until 1856 (general mobilization on the occasion of Crimean War) had caused the silver premium to rise.

As a capital city and royal seat, Vienna had a very special position. This position had become stronger with the robust construction activity which followed the razing of the bastions and the city wall. The influence of people from all countries of the monarchy turned Vienna into a multilingual city. The city`s economy drew mainly on business and trade; the settling of industry took place only very hesitantly.

Together with the Viennese stock market, the Austrian central bank moved into a building designed by architect Heinrich Ferstel. Café Central – the epitome of the Viennese café for decades – was founded on the ground floor of this building.

In the mid-1800s private banks and wholesale houses were no longer able to cope with the rapidly increasing need for financial intermediation of the Habsburg monarchy. New forms of capital formation were needed. Joint stock banks were supposed to fulfill this need. In thirty years of business activity, the central bank had after all proved that a respectable dividend could be distributed to shareholders on the basis of a solid management. The OeNB was an example of an economically successful joint stock bank; its dividends were between 4.8% and 6.5% in the years 1855 until 1868.

The first private joint stock bank authorized by government was set up on the initiative of the House of Rothschild. The "K.K. Privilegierte Creditanstalt für Handel und Gewerbe" (a credit institution catering to trade and industry) intended to practice its business activity primarily in the field of railroad construction companies (Lombardian-Venetian state-owned railway) and the iron industry (Prague Iron Industry Company). After the Creditanstalt, the Bodencreditanstalt was founded in 1863 and the Anglo-Oesterreichische Bank followed in 1864. In the course of the so-called "Grundentlastung," many members of the high nobility had a substantial amount of liquid funds at their disposal and were among the major shareholders of the new joint stock banks. These banks made the financial resources of the Viennese financial center increase rapidly.

This growth confronted the central bank with a task that grew increasingly more difficult: With its limited range of policy instruments, it had to secure sufficient liquidity and had to prevent an inflationary expansion of the money supply.

The very close and personal contact between managers of the central bank and leading participants of the Viennese financial center made an informal agreement in critical situations easier. However, when disagreements among the managers of the central bank arose, it was occasionally necessary to push through resolutions that had not been taken unanimously. The words of the long-standing governor, Joseph von Pipitz, and secretary general Wilhelm von Lucam exerted great influence in that small circle of persons whose business dominated the Viennese money and capital market.

The third issuing right (3. Privilegium) was extended on the basis of the law of December 27, 1863 (Imperial Law Gazette no. 2 ex 1863). The most significant innovation was to re-establish and to fix the central bank`s independence from government. Furthermore, a limit on the amount of banknotes in circulation was introduced according to the system applicable under Peel’s Act. According to this system, the circulation of banknotes that exceeded the fixed amount of fl 200 million had to be covered by precious metal. That body of laws was named the "Bank Act" by analogy to Peel’s Act in 1844.

By the end of the year 1866, however, nothing had remained of the independence as provided in the Bank Act or of the prohibition to issue banknotes to fund the state. This was the result of the public administration’s reliance on central bank funding during the war in 1866. Due to such a breach of the provisions of the sole issuing right, the public administration was obliged to pay compensation. And it had to comply with the central bank on the law of March 18, 1872, as well: The central bank was permitted to distribute banknotes up to a maximum of fl 200 million; any further issues in excess of this amount required full coverage in silver or gold.

The economic self-confidence of the Hapsburg monarchy was epitomized in the project of a world fair in the year 1873. The management of the issuing bank was very concerned about the skyrocketing prices on the Viennese stock market during the runup to the world fair. The business practice of the Viennese stock market had not been calculated to cope with a sudden setback. The deals on the forward market, orientated to price advances, were covered by only a very low amount of securities. Furthermore, the bull market caused a rapid increase in value of the underlying securities, steadily enlarging the room for manoeuver to make stock transactions.

If prices slumped under such conditions, liquidity would automatically become insufficient, and that would make prices fall further as a result of distress sales. However, producing and trading companies that kept away from the stock market would not have to expect cash squeezes. Prices started to fall when the world fair had not come up to the expectations it had made with its glittering opening. The downtrend on stock market first occurred in individual cased, and then the whole stock market was seized by a decline: the Big Crash of 1873.

The first heavy stock market slumps occurred in April 1873; on May 9, the bankruptcy of the House of Petschek necessitated a temporary interruption of trading. According to contemporary estimates, the loss in the year 1873, caused by decline in prices, came to around fl 1.5 billion.

The issuing bank reacted very carefully. It is true that the temporary suspension restrictions on the amount of notes in circulation, provided in the regulations in 1872, suited the issuing bank. But even at the climax of the crisis, the money supply exceeded the limit provided for in the Bank Act by only 1%. The leading banks and the trade and industry companies as well got through the crash without substantial losses, even though the prices of their shares were well below the level of 1872.

What had been planned as the apex of the industrial expansion proved to be its end. The anticipated success failed to materialize. After years of strong growth, a period of stagnation followed.