100 florins banknote, obverse in German – 1880
During the negotiations on the compensation between Austria and Hungary in 1867, the question of the central bank was not touched to prevent further complications and to maintain the present conditions up until an agreement on a future legal regulation was reached. Until such a regulation was passed, the central bank was allowed to exercise its exclusive rights of issue in Hungary unreservedly.
In 1878, after years of prolonged negotiations, the central bank was successfully transformed into an institute in which Austria and Hungary had an equal share. The "Austro-Hungarian Bank" acted as a central bank for both parts of the Empire. Whereas the governments of Austria and Hungary mainly disagreed on questions of liability for their national debts (at the rate of fl 80 million), the management of the central bank focused on preventing any further influence of the governments on the business practices of the bank. The first issuing right (1. Privilegium) of the Austro-Hungarian Bank that was finally drawn up reflected a compromise between these conflicting interests.
The unity of the bank administration was represented by a general meeting and the general council, the dualistic character of the institute by two managements and two head offices in Vienna and Budapest.
The transition from a silver currency to the gold standard was part of the far-reaching currency reforms necessary for the Austro-Hungarian Bank. This transition was preceded by a long debate on monetary policy.
After a transitional phase of eight years, the gold crown replaced the silver florin (fl) as a legal currency in 1900. In everyday business the new banknotes proved to be a popular currency. Hence, the gold coins themselves could be locked into the safe of the bank.
Altogether the 1880s and 1890s proved to be a successful synthesis of growth and reduction in prices. The per capita national product increased, whereas it was possible to lower and stabilize the price level. These facts made it easier for the central bank to support the strong impulse that came from the banking sector with regard to the new boom of industrialization.
The Debreczen branch office of the Austro-Hungarian Bank
The Villach branch office of the Austro-Hungarian Bank
20 kronen banknote, obverse in German – 1907
The provisions of the third issuing right (3. Privilegium) of September 21, 1899, contained, among other things, changes which reduced the autonomy of the Austro-Hungarian Bank in favor of governmental influence. For example, the state was given the right to access to the money of the central bank.
On the other hand, important innovations could be found in the issuing right of 1899; these innovations of banking operations in effect became the basis of a successful foreign exchange policy of the Austro-Hungarian Bank, as was evidenced by the fact that Austro-Hungarian currency stayed on the gold parity until 1914 with very little fluctuation of its external value.
The political development of the time was quite the opposite. The conflicts of different nationalities began to paralyze the work in parliament increasingly. In 1911 even the election of the new Imperial court (Reichsrat) could not change the situation in 1911. In March 1914 the parliament was prorogued. Now, the Stürgkh government ruled without control by the parliament. The expansion course which caused the annexation of Bosnia was continued, which led to the incidents of August 1914.
Salzburg branch of the Austro-Hungarian Bank
The expansionist foreign policy of the Austrian government gave the management of the central bank sufficient time to reflect on the consequences of the forthcoming military conflict. All experts involved realized quite soon that the government would primarily resort to the central bank to finance the fast increasing cost of warfare. Already during the crisis in the Balkans in 1912 the management of the central bank had to contribute to the plan to cope with the crisis.Despite its profound skepticism about the optimism of the generals "that, considering the state of the art of war technology, a war in Europe would surely be over within three months," the management of the bank was not able to defend the stability of the monetary system.
Just a few days after the declaration of war, it turned out that the monetary devaluation would be very large indeed. The army command ordered that all requisited goods should be sold at double their price. After this bombshell of an announcement, the upward trend of prices was further fueled by a considerable shortage of products and a continuously expanding money supply. During the war, the money supply increased thirteenfold, and the price level rose to sixteen times the peacetime level.
About 40% of the cost of war were financed by the loans of the central bank and about 60% by war loans.
The longer the war continued, the more clearly the real economic burden for the monarchy emerged. Decades of work effort to build up the improvement of productivity were now paralyzed by concentrating the resources on the armed conflicts. By the end of the war, the real income of workers was reduced to one fifth of what it had been in the last year of peace.
Pen-and-ink technical drawing of the new Head Office of the Austro-Hungarian Bank in Vienna, 1913
What artists and scientists of the fin de siècle had already realized became clear to everyone by the end of war: The old order had broken down, and coping with the new situation was not easy.
When it tried to find stable reference points, the central bank encountered considerable problems, mainly because of the fact that the Imperial and Royal Monarchy fell apart into several successor states from the end of 1918. In spite of all efforts undertaken by the bank management to maintain relations with the administrations of each of the recently founded states, they failed to prevent the currency separation.
As a reaction to the political separation, a separate "Austrian management" was set up. Lacking a reliable guarantee to be able to conduct business independently, the management was compelled to provide the Republic with the financial resources it needed to cover the immense expenses of the budget. The central bank finally financed about 75% of the federal budget deficit between 1918 and 1922.
After a period in which the crown was massively overvalued, the rates of exchange began to react to the imbalance of the Austrian economy. In the first six months of 1919, the dollar rose against the crown, augmenting from around 16 crowns to nearly 30 crowns. By the end of 1921 the crown had already risen to 5,275 crowns to the dollar. The decrease of the external value corresponded to the galloping national inflation. The more the crown rate decreased, the more the money press ran. Only the signing of the Geneva Protocols on October 4, 1922, which provided a complete stabilization program supported by a loan guaranteed by the League of Nations, was able to stop the upward trend of prices. But Austria obligated itself to dismiss 100,000 government officials.
The end of the Austro-Hungarian Bank itself had been foreshadowed for a long time. The Treaty of St. Germain-en-Laye 1919 ordered the complete liquidation of the Austro-Hungarian Bank as well as other painful provisions for the young Austrian republic. The reparations commission in Paris nominated commissioners, who were charged with executing the entire liquidation while safeguarding the interests of all successor states.
The last ordinary general meeting took place on July 14, 1921. And the last meeting of the general council of the Austro-Hungarian Bank was held on December 15, 1922, and was chaired by Governor Alexander Spitzmüller.