Cores and Peripheries Reconsidered:
Economic Development, Trade and Cultural Images
in the Eighteenth-Century Habsburg Monarchy

Klemens Kaps
University of Linz
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This article explores the relationship between economic development and the trans-regional division of labor in the eighteenth-century Habsburg Monarchy. Using world-systemic models and postcolonial approaches, I offer a critical revision of traditional narratives on the economic history of the Habsburg dominions as a point of departure for a reconsideration of regional disparities in the Habsburg dominions. I examine the relationship between the geopolitical power position of the Monarchy and the socioeconomic transformations towards proto-industries and commercial agriculture in the course of the eighteenth century, with a focus on trade as a major factor which affected the way in which domestic market formation and economic interregional entanglement influenced the emergence of a split between cores and peripheries in the Habsburg dominions. In the last part of the article, I examine the discourses and cultural images which shaped the political-institutional framework regulating these exchange relations. I observe that orientalist metaphors about the Eastern peripheries were a symptom of the way in which some policy instruments were designed in favor of the core areas over the peripheral regions.

Keywords: economic history, Habsburg Monarchy, trade, cameralism, cultural images

Introduction: Theoretical Considerations

The term internal periphery is usually associated with concepts such as uneven regional development, spatial disparities, social inequalities, and development policies. In contrast with neoclassical approaches to regional disparities, the internal peripheries approach assumes a causal link between economic conditions in developed core areas and underdeveloped peripheral regions. The emergence of a trans-regional division of labor according to which peripheries provide the raw materials which are turned into consumable finished commodities in the core areas leads to increasing levels of income, wealth, and productivity, rendering peripheries dependent on the cores. Starting from this basic assumption of world-system analysis and by adopting its key notions and concepts (such as ceaseless capital accumulation, unequal division of labor, and the commodification of social spheres), the internal peripheries’ approach has been characterized by a greater flexibility to include political, social, and cultural factors.1

Classical world-system analysis conceives the political predominantly in relation to the structural rhythms of the whole system, and it seems that the economic sphere in particular dominates political decisions. The internal peripheries approach, for its part, as it was developed by the followers of Hans-Heinrich Nolte,2 takes into account the political sphere as an autonomous though not completely independent variable. While the systemic character of economic development within the center-periphery framework is maintained, the state is an actor which can pursue modernization policies and learn from the core regions. Thus, transfers of ideas, knowledge, and technology from core areas to peripheral zones can, to a certain extent, balance out the unequal flows of capital, commodities, and labor that generally characterize this relationship. Competence accumulation (one of the four elements of Nolte’s world-system, alongside hierarchy, expansion, and competition) is a key variable for the change in the developmental conditions of interconnected political spheres.3

Alongside the political, the cultural sphere is also defined in an innovative way by the internal peripheries approach. A particularly interesting phenomenon is that of stereotypes and images of the other, understood as a condensed form of identity perception between different regions, states, and world regions. While one can read and interpret these cultural artefacts from a spatial perspective and decode the different hierarchies between cores and peripheries inherent in them, there is also potential for a social reading of such constellations. Referring to postcolonial categories of dominants and subalterns, Dipesh Chakrabarty stresses the relevance that these images have for the researcher interested in social differences between various societies.4

Edward Said’s orientalist paradigm is a prime example of how the spatial and the social approach can go hand in hand in an attempt to decode a “Western style of domination restructuring and having authority over the Orient” from the late eighteenth century to the early twenty-first.5 Said clearly underlined that stereotypes and pejorative images of the other acted not only as representations of core-periphery dichotomies, but could shape this chasm between different world regions and states. It is important to point out that orientalist or differently coined pejorative descriptions and ascriptions can also be found within empires and states or between different regions, as Larry Wolff’s classic work Inventing Eastern Europe has amply demonstrated, where the categories of East and West are used to put forth a discourse about the alleged backwardness of Eastern Europe.6 Based on these considerations, this article explores the connections between economic regional disparities and the trans-regional division of labor, with a focus mainly on trade relations and their political regulations, which were influenced by cultural images and stereotypes in eighteenth-century Habsburg Central Europe.

The Position of the Habsburg Monarchy in the World-System in the Eighteenth Century: A Critical Revision

The economy of the Habsburg Monarchy in the early eighteenth century was defined by Immanuel Wallerstein as a rising semi-periphery, albeit his definition rested on geopolitical rather than economic factors. At the end of the War of the Spanish Succession, the Vienna-based Habsburg Emperor Charles VI acquired all the Spanish European dominions except for the Iberian Peninsula, including the Austrian Netherlands, Naples, Sardinia (which in 1720 was replaced by Sicily), and the Duchy of Milan in Northern Italy (which was attached to the Duchy of Mantua, acquired in 1707, and together formed Austrian Lombardy). This notable territorial expansion in northwestern and southern Europe, i.e. in both the Atlantic and the Mediterranean, was endorsed by the Treaty of Rastatt in 1714 and was understood as compensation for the withdrawal of the Habsburg claims to the Spanish throne. The geopolitical gains made by the Habsburg Monarchy are even more remarkable if set against the context of their successful wars against the Ottoman Empire, waged in coalition with other European states between 1682 and 1699 and again between 1716 and 1718. The peace treaties of Karlowitz/Sremski Karlovci (1699) and Passarowitz/Požarevac (1718) brought yet more territories to the Habsburgs, with the incorporation of central Hungary, Transylvania, the Banat of Temesvar/Timişoara, Little Wallachia, and Northern Serbia as far as Belgrade.7

While Wallerstein’s narrative avoids considering the economic development of the Habsburg regions, he interprets its geopolitical expansion as precarious and short-lived. Lost wars with Spain and France and then with the Ottoman Empire and Prussia between 1733 and 1763 brought about major territorial losses and hampered the rise of the Habsburg Monarchy to the status of a great world power. Using classical arguments, Wallerstein sees the loss to Prussia of most of Silesia, the wealthiest province in the Habsburg Monarchy (first in 1742 and then confirmed by peace treaties in 1748 and 1763), as the reason why the Habsburg Monarchy lost the struggle for hegemony between the two semi-peripheral states and remained a second-rate regional power until its disintegration at the end of World War I.8

One could raise several questions concerning this narrative. While it is an undeniable fact that, in terms of territorial growth, the Habsburg Monarchy had peaked in 1718, the shrinking size of the Habsburg dominions was neither linear nor irreversible, as the acquisitions of Galicia (1772), Bukovina (1775), and Venice (including Dalmatia, 1797/1815) eloquently show. Even the loss of Silesia was not the end of Habsburg power aspirations in Central Europe. Silesia had a diversified proto-industrial economy, especially engaged in the production of iron and linen, and it was perfectly connected with world markets as remote as the British and Spanish Atlantic dominions, where slaves were dressed in Silesian linen cloths.9 The political impact of the cession of Silesia to Prussia was immediate, as the substantial (and growing) Silesian tax revenues were now redirected to Berlin.10 But apart from this kind of fiscal shift, the economic consequences of the loss of Silesia were quite limited. Trade relations, including the transit trade that created access to world markets through Hamburg, and the interregional division of labor continued largely unabated throughout the second half of the eighteenth century. 11

Furthermore, the loss of Silesia posed no obstacle to the economic development or administrative and economic reform of the Habsburg dominions. On the contrary, this event triggered political and economic reforms in the Habsburg Monarchy, which was gradually turned into an integrated internal market, for which the custom reform of 1775 was an important step. This reform abolished all internal custom tariffs between Austrian and Bohemia, with the exception only of those areas heavily involved in international transit trade, such as Tyrol and the Austrian Littoral around Trieste.12 In conclusion, Wallerstein’s interpretation of the Habsburg Monarchy as a declining or, at best, stagnating semi-periphery after 1748 has to be challenged on various grounds, both geopolitical and economic. The analysis must take a closer look at economic development in the Habsburg dominions, paying particular attention to how the status of the Habsburg Monarchy as a rising semi-periphery coexisted with persisting and reinforced regional differences within its dominions.

The Emergence of an Internal Economic Core: The Expansion of Proto-industry in the West

The status of the Habsburg Monarchy as a rising semi-periphery can be even more clearly detected in economic than in geopolitical terms. Over the course of the eighteenth century, the quantitative growth and qualitative expansion13 of proto-industrial enterprises turned Bohemia and substantial regions of Austria into producers of semi-finished and manufactured commodities. This created the foundation for the mechanized industrialization of these regions in the nineteenth century, the first wave of which set in after 1825.14 Proto-industry, often labeled “industrialization before industrialization,”15 is defined as the production of manufactured goods for trans-regional markets in a production process that is characterized by a comparatively high degree of division of labor. Conversely, these industries did not use steam-powered machinery, and they relied heavily on the part-time, in particular seasonal labor of the rural population.16

The two models which largely shaped proto-industrial economies were manufactories and domestic industries, organized either as putting-out systems (Verlag) or as small commodity production (Kaufsystem), juxtaposing a central production site including clear organizational hierarchies and differentiated salaries with decentralized workshops, chiefly located in peasant households. Both forms could operate separately but often were combined for the organization of the production process of one commodity. Raw materials provided by middlemen to peasant-workers were turned into semi-finished products in household-based workshops before they were further transformed into consumable commodities in manufactories. This pattern meant that a substantial part of the production process shifted from urban centers to rural areas due to the abundant rural workforce, lower wages, and the lack of guild regulations.17 However, it has been argued that a general uniform pattern of proto-industrialization cannot be detected, and that differences existed in the roles of markets and corporate institutions such as guilds and manors (Grundherrschaft).18

To be sure, the establishment of proto-industries in the Habsburg dominions did not begin in the eighteenth century, but far earlier. Clear examples of this include the production of linen textiles in Vorarlberg, Bohemia, and Upper Austria, iron production in Bohemia, Carinthia, Upper Styria, and Southern Upper Austria (including the production of pig iron in the region between Vordernberg and Innerberg in Northern Styria and the production of scythes, knives, and sickles in Upper Austria), glass manufacturing in Bohemia, and the weaving of woolen cloth in Bohemia and Silesia.19 The second half of the seventeenth century bore witness to the foundation of new enterprises, such as the silk spinning mill at Count Sinzendorf’s Walpersdorf manor (1666), the highly successful and long-lived wool manufactory in Linz (1672), the tobacco manufacture in Enns (1676), and the mirror manufactory in Neuhaus (1701). Some of these factories, however, did not survive long.20

In the eighteenth century, proto-industry expanded dynamically and structurally, leading to the growth of production but also to a diversification of industrial activities in the Habsburg dominions. As early as the 1720s, an economic boom led to the foundation of a range of new textile manufactories in Lower Austria. The Second Oriental Company, using its monopolistic privileges, established cotton manufactories in Gross-Siegharts in 1720 and in Schwechat, near Vienna, in 1724.21 In Bohemia, the foundation of new enterprises had started even earlier, for instance with the establishment of a wool manufactory at the manor of Ossek in 1697, the foundation of a cloth manufactory in Plánice in 1710, and the starting of a linen weaving firm by the English merchant Robert Allason in Rumburk in 1713. The Rumburk plant was also equipped with bleaching facilities, and by 1724 it had produced 157,124 pieces of linen measuring 84–110 ells each.22 In 1715, Johann Joseph Count Waldstein founded a wool mill on his estate of Dux-Oberleutensdorf/Duchcov-Horní Litvínov.23 The establishment of new textile enterprises resulted in a rise in the the overall production. Output of woolen cloth manufactured in Bohemia grew from 6,715 to 39,000 pieces (valued at 700,000 florins) between 1717 and 1731, more than a five-fold increase.24 At the same time, this period of growth also involved the qualitative upgrade of the Bohemian economy. Regional raw materials were being turned into consumable commodities in-house, as prescribed by the prevailing mercantilist doctrines, which tried to avoid the outflow of money towards foreign producers.25

Textile production, which would become the leading industrial sector in the eighteenth and early nineteenth centuries, grew in terms of gross production and variety. Linen and woolen cloth manufacturing, which had a long tradition in the Habsburg dominions, were joined by new activities such as cotton processing in the first half of the eighteenth century and, later, by silk production. Other traditional industries grew as well. In 1730, the Habsburg Alpine provinces produced as much iron as Great Britain.26 The proto-industrial growth of Bohemia, Upper and Lower Austria, and Styria relied chiefly on the mobilization of aristocratic capital, while capital imports by foreign merchants and investments by the state, including the imperial family, played an additional role.27

While wars such as the War of the Polish Succession (1733–36), the Austro-Ottoman War (1736–39), and the War of the Austrian Succession (1740–48) not only led to geopolitical setbacks for the Monarchy, but also affected its economic development in a negative way, these were only brief interruptions in an overall tendency towards growth initiated in the 1720s and early 1730s. This is clearly underlined by the foundation of new firms after these wars came to an end. For example, the wool mill in Kladubry in Bohemia was set up in 1749 with the financial support of Emperor Francis Stephen and Queen Maria Theresia. In 1755, a linen manufactory was set up in Potštejn in Bohemia, again with the support of the imperial-royal couple.28 In the 1750s and 1760s, new manufactories for woolen cloth, linen, and silk were founded in Carinthia. While the woolen factory in Linz had to be financially supported by the state in 1754, the growth in textile production was further boosted when the state started cancelling the concession of industrial privileges between 1761 and 1764.29

Early statistics on industrial activity can be used to estimate the industrial development of the Habsburg dominions in the late eighteenth century. Cotton production, which was liberalized in 1763, grew with the foundation of a number of factories in Lower Austria. While the production value of cotton had amounted to 1.2 million florins for the entire Monarchy in 1766, by 1781 this value had soared to 3.5 million florins in Lower Austria alone.30 While the cotton manufactory in Schwechat had processed 30 tons of cotton in 1730 and 50 tons in the 1750s, in 1781 the cotton manufactories in Lower Austria processed an aggregate total of 420 tons of cotton. Employment rose five-fold between the middle of the century, when the Schwechat manufactory employed 20,000 spinners and weavers in a putting-out system, and 1781, when the workforce employed in cotton production amounted to 100,000 workers in all of Lower Austria. While cotton import restrictions imposed in 1784 hindered the growth of the sector, expansion surged again after 1797, and production remained high until the deep recession in the Habsburg economy after the end of the Napoleonic Wars and the lifting of the continental blockade.31

Growth can be detected in other industrial sectors. Wool production in Bohemian rose dramatically in the second half of the eighteenth century, as the increasing employment figures demonstrate. Between 1731 and 1775, the number of workers employed in Bohemia’s wool industry doubled, while between 1775 and 1788 this labor force increased by a further 80 percent. After that date, employment numbers shrank slightly due to technological improvements that reduced the number of workers needed per loom. In Bohemia and Moravia, the workforce employed by the wool sector more than doubled between 1775 and 1788 (increasing from 80,000 to 152,000, spinners excluded), while the overall demographic growth amounted to barely 20 percent. This expansion of the workforce went hand in hand with the rising number of manufactories that organized putting-out systems. In the Brno district, for instance, in 1775 there was one cloth factory, while in 1789 the number had risen to four, all which were located in the Moravian capital city of Brno itself. The growth in output was significant. In 1797, the overall production of woolen goods in Bohemia amounted to 5.5 million florins, which represented 20 percent of manufacture production value in the province. These figures represent a nearly eight-fold increase in current terms compared to 1731 figures and roughly four-fold in real terms.32 The production of woolen goods, mainly cloth, also grew in other provinces, such as Carinthia and Upper Austria, where only one manufactory (in Linz) was allowed to operate. In terms of workforce, this factory peaked in 1790 with 2,289 factory employees and 47,947 putting-out workers.33

Linen production also underwent considerable growth in the second half of the eighteenth century in traditional regions such as Bohemia, the Mühlviertel (in the north of Upper Austria), the Waldviertel (in the north of Lower Austria), and Vorarlberg, all of which benefitted from the disappearance of Silesian competition after 1742. Only with the growing production in cotton textiles and shrinking production costs per fabricated unit caused by mechanization in the early nineteenth century did the expansion of linen production come under pressure.34 Overall textile production in Bohemia grew by an annual average of 3.7 percent in the late eighteenth century.35 Glass production expanded as well, and as many as 52 glassworks existed in Bohemia in 1752.36 Iron production also grew in the second half of the eighteenth century. Towards the end of the century, production was expanding at an average growth rate of 2 percent per year, and growth accelerated further between 1796 and 1803, when the rate hiked to 4.5 percent, not far from that of Great Britain (6.9 percent annual growth between 1796 and 1806).37 Despite this, the Habsburg iron industry lost its leading position on European markets. While in 1767 Styria turned out as much pig iron as the whole of England, by 1780 all the Habsburg Alpine provinces, where 80 percent of all iron production under the Habsburgs was located, were only producing as much as one-third of the British iron output. First and foremost, however, this reflects the dramatic growth of the British economy due to rapid industrialization since the 1760s.38

In sum, over the course of the eighteenth century, most of the western provinces of the Habsburg Monarchy bore witness to steady and dynamic growth in the proto-industrial sector, which crystallized in both the increasing output of existing industries and the emergence of new industrial sectors. Although the leading export products, namely glass, linen, and iron, had lost ground on the Western European markets by the end of the Napoleonic Wars,39 the Habsburg economy was able to increase the share of manufactured goods among its exports between 1800 and 1807 (from 44 percent to 61 percent), which indicates the international competitiveness of Habsburg proto-industry.40

The examples of enterprises and scattered quantitative evidence thus demonstrates that proto-industry gained a stronghold in the western regions of the Habsburg Monarchy over the course of the eighteenth century. However, this does not mean that there were no hierarchies or disparities between the Austrian and Bohemian lands. By 1790, of 280 manufactories in the western Hereditary Lands, half were located in Lower Austria alone and a further 30 percent were found in Bohemia. This clearly indicates that growth and economic transformation also led to spatial stratification within the core areas of the Monarchy.41 To be sure, the hierarchies between western core areas were smoother than those separating cores and peripheries, as we shall see below. Also, agricultural activities were far from absent in the regions undergoing proto-industrialization: The workforce employed in agriculture amounted to 78 percent in Bohemia in 1756 and 75 percent in the Austrian provinces in 1790.42

Apart from the availability of capital, the factors that determined the success of the process of proto-industrialization and the emergence of core areas was the presence of ecological resources, such as wood and water, and a plentiful rural workforce. While skilled workers were often recruited abroad from the Austrian Netherlands, France, and England, strategies to lower wages included employing women and children and a bound work force of beggars, orphans, and prisoners, who were sent by the government to work in sweathouses beginning in the late seventeenth century.43 Economic policies were also of crucial importance. The legal division between local crafts (Polizeigewerbe) and the production of manufactured goods for the trans-regional trade (Kommerzialgewerbe), defined in 1754, created ways around guild restrictions and thus facilitated the establishment of manufactories in urban areas.44 After the international economic crisis of the early 1770s, the abolition of internal custom duties in 1775 lowered transaction costs in the western provinces, triggering a new boom the effects of which were finally consolidated with the protectionist trade policy implemented in 1784 and 1788. This led to a sweeping expansion of proto-industrial production during the 1780s and 1790s.45 Finally, the limitation of serfdom in 1781/82 enhanced the mobility of the rural workforce, which had a particularly deep impact in Bohemia, where demesne lordship (Gutswirtschaft) was especially significant.46

The Emergence of a Core-periphery Dynamic between the West and the East in the Habsburg Monarchy: Trans-regional Division of Labor Embodied by Trade Relations

In contrast with the western core regions, the eastern territories of the Monarchy did not participate to an equal degree in the process of dynamic proto-industrialization over the course of the eighteenth century. This is clearly visible in the dominant position of agricultural activities in these territories. On average, in Hungary, Transylvania, the Banat, Galicia, and Bukovina, around 90 percent of the population worked in agriculture as late as 1790.47 In the aforementioned statistics no manufactories feature in Hungary or Galicia in 1790. However, administrative sources reveal the existence of some factories in both territorial complexes. 34 such factories, dedicated to the production of textiles, glass, and porcelain, existed in Galicia in 1773 and 11 in 1808.48 In addition to this, an extensive linen-processing sector, based mostly on the putting-out system, existed in the barren Carpathian Mountains in the south of Galicia. Although the goods produced were rather crude in quality, in the region around Andrychów in the western district, this rural population also produced linen commodities for foreign markets in Western Europe and the American colonies overseas, while a small fraction of their output also was sold on markets in Bohemia and Austria in the 1780s.49 The data suggest that the number of manufactories in these regions contracted between the 1770s and the early nineteenth century, which is confirmed by other sources documenting the increasing competitive pressure posed by Bohemian and Austrian proto-industrial goods on the Galician market. The tendency, therefore, is the exact opposite of the one that unfolded in the core regions of the Monarchy.50

Similarly, Hungary was not limited exclusively to agricultural activities, as the mining plants (especially copper), iron, and linen production in Upper Hungary underline. And proto-industrial activities stretched far beyond what today is Slovakia, so that in three phases (between the 1710s and the 1730s, during the 1760s, and again between 1784 and 1789), manufactories were founded in a vast range of branches (including textile production, chemical and paper fabrication, and ironworks) in the Hungarian territories. However, the number of these companies was smaller, the quality of their products lower, and their production means less advanced than in the Bohemian and Austrian core areas.51 Thus, by 1770, in Hungary (not including Transylvania) there were 19 manufactories compared with 58 in the Bohemian and Austrian provinces.52 Most of these plants, which had been chiefly founded between 1765 and 1770, were gone by 1784 because of the arrival of Bohemian and Austrian proto-industrial goods. At a later stage, new textile manufactories were founded in Hungary, but the quality of their products never reached the standards of those being produced in the western core areas.53 In any case, proto-industrial production in Hungary covered a rather tiny fraction of the regional demand, as the rising export figures of the western regions to Hungary and Transylvania demonstrate. Thus, in 1784 86.9 percent of Austro-Bohemian exports to the Hungarian territories consisted of manufactures, while this value amounted to 89.1 percent in the case of Galicia. Among the most relevant commodities sold in Hungary and Transylvania, woolen products ranked first (2.2 million florins), followed in importance by linen (1.3 million), silk (1.2 million), and processed mining products (618,702 florins). Conversely, imports to Austria and Bohemia essentially consisted of foodstuffs and raw materials (61.6 percent in the case of Hungary and 92.3 percent in the case of Galicia).54 This clearly underlines the status of Hungary and Galicia as internal peripheries within Habsburg Central Europe, as they provided consumer markets for finished commodities and raw materials and foodstuffs necessary to the core areas, which these areas needed for the creation of these products, both in terms of direct means of production and as nourishment for workers.

This position of Hungary and Galicia as export markets for the Bohemian and Austrian proto-industries was not a new phenomenon emerging in the 1770s and 1780s. According to commercial statistics for 1735, Bohemia exported woolen cloth for a value of 1 million florins, which constituted one sixth of the total exports, to a range of countries and regions, which included Poland, Hungary, and Transylvania.55 With the increasing woolen production and the diversification of proto-industrial activities in the Austrian and Bohemian provinces, these export figures rose significantly. According to the Hungarian trade statistic, 56.6 percent of overall imports in 1748 were composed of semi-finished and finished commodities, a value that grew slightly to 61.5 percent by 1782.56 These structural changes were intrinsically linked to a massive quantitative expansion of commodity exchange. While the exports of the western Hereditary Lands grew modestly between 1733–39/41 and 1743/52 from 2.1 million florins by annual average to 2.5 million florins, afterwards they increased rapidly to 6.6 million florins between 1767 and 1780.57

This growth tendency continued in the following decades, so that exports of the western regions to the Hungarian territories reached an annual average of 9.8 million florins between 1783 and 1785 according to the statistics of the Austro-Bohemian customs union (and a much lower 7.2 million florins according to the Hungarian statistics in 1783/84).58 By the end of the Napoleonic Wars in 1814, this value had more than doubled. While the increase over this rather long period was clearly more modest than it had been in the previous decades, downward effects of the wars have to be taken into account. A dynamic growth of the western regions’ exports to the Hungarian territories, nevertheless, set in precisely in the immediate post-Napoleonic years, reaching 25.1 million florins in 1815 and 34.7 million florins in 1816, but this value could not be exceeded in the following years, as 31.3 million florins was the top export value in 1822.59

Apart from Hungary, the exports from the western regions also expanded to the Galician market, the annexation of which in the first partition of Poland-Lithuania in 1772 led to a politically-induced competitive edge for the Habsburg proto-industry on a formerly external market. This institutionally supported advantage translated into an overwhelmingly rapid expansion of exports, as the fivefold increase of the western regions’ exports to Galicia in only four years (between 1779 and 1783) from 343,043 to 1,706,197.21 florins demonstrates.60

In any case, foreign export markets were still more relevant to the western Habsburg proto-industry, claims and narratives on Habsburg protectionism notwithstanding. While in 1783, 17.2 million florins of foreign exports clearly exceeded the 11 million florins of commodities sold on domestic markets, in 1818, 31.3 million florins of foreign exports took the lead over 28.1 million florins of domestic exports, and in 1822 the corresponding figures were 42.2 million against 31.4 million florins, pointing to a growing ratio in favor of foreign export markets after the end of the Napoleonic Wars. Domestic markets were only more important temporarily in 1816 and 1817 (with margins of 5.5. and 4.8 million florins respectively).61 However, domestic markets are statistically underestimated, as all market transaction within the western regions forming part of the customs union were not registered anymore due to the prevailing custom regimes.

Nevertheless, these figures underline a steady growth in foreign exports at the turn of the eighteenth and nineteenth centuries. This growth was strong in the 1780s, when the exports of commodities produced in the Hereditary lands to international markets rose from 17.2 million to 19.1 million florins between 1783 and 1787 (thus by a rate of 2.6 percent as an annual average). This expansion was exceeded between 1816 and 1822 (with a 6.3 percent annual average growth rate), despite the postwar depression and the often-noted effects of increasing competition from British manufacture imports on the European continent.62 Only during the war and the continental blockade did foreign exports grow far less dynamical (by 1.5 percent as an annual average between 1787 and 1814), although there were strong oscillations during the long war, with some years already exceeding the value of 1814.63

Apart from distortions these data may hide because of the irregular adaption of prices,64 the export figures suggest that the western regions of the Habsburg Monarchy enlarged the exports of their commodities at quite a substantial rate, which only for the late eighteenth century and early nineteenth century meant an overall increase of exports both on domestic and international markets by a factor of 2.6 (from 28.3 million florins in 1783 to 73.6 million florins in 1822).65 This enlargement of sales was thus an important factor explaining the industrial transformation of the western regions of the Habsburg Monarchy, even if not all of them participated equally in this developmental process.

Still, while this expansion of Bohemian and Austrian proto-industrial exports to the eastern peripheries was an undeniably important element of these regions’ growth and their economic transformation, this does not necessarily mean that the imbalance of trade structures led automatically to a quantitative imbalance in trade. Quite the opposite took place, at least concerning the Hungarian territories. While the surplus for the Hungarian lands in trade with the custom unions between the Bohemian and Austrian lands had amounted to 1.6 million florins in 1743 and 1752, it rose dynamically to 2.9 million florins between 1767 and 178066 before reaching spectacular values of 7.2 and 6.7 million florins in 1783 and 1784 respectively.67 Only after the turn of the century did this tendency reverse, so that after the Hungarian trade balance surplus with the western provinces (which by then included Galicia) hit a record value of 13.6 million florins in 1814, the deficit for the western regions shrank rapidly (to 5.8 million florins in 1815) before turning into substantial surplus values between 1816 and 1818 (13.1 million florins in sum). But already in 1822, the trade balance tilted again in favor of the Hungarian part.68 The trade balance between the Hereditary Lands and Galicia, in turn, showed a clear albeit not spectacular advantage for the western regions (here including Tyrol and the Littoral) of 169,806 florins in 1779, which rose dynamically to 797,729.63 florins four years later.69

Thus, the direct and imminently measurable advantage that the western core areas of the Habsburg Monarchy reaped from the structurally unequal trade with the Eastern peripheries differed according to time and space and was quite relative regarding the Hungarian territories in the eighteenth century. However, although the Hungarian territories seemed to earn a lot more money from their commodity exchange with the western provinces, this may simply have been a form of necessary compensation for Hungary’s heavily negative balance of payment.70 In addition, negative trade accounts meant neither that Hungarian consumer markets were not beneficial for the western proto-industry nor that this relationship did not hamper Hungary’s chances for proto-industrial development in the period.

Microeconomic data reveals the significance of domestic consumer markets for the expanding proto-industrial enterprises in the Bohemian and Austrian lands. In 1773, the manager of the estate of Buchlau/Buchlov in Moravia, Prosper Count Berchtold, directed a petition to the Court Chamber in Vienna requiring an import ban or at least a high import duty for Prussian glass to newly acquired Galicia. Berchtold sought to recover an export market for the glass manufactory on his estate which he had lost in part to a newly established glass mill in Prussian Silesia.71 A similar petition sent the Bohemian nobleman Prince Auersperg through the Galician governor to Maria Theresia in February 1774. Auersperg was lobbying to lower the Galician import duty for the fustian produced on his estate of Tuppadl/Tupadly in Bohemia. Auersperg argued that this measure was compensation for the high transport costs he had to incur when exporting his textile products to the Galician markets, on which, he quickly added, the success of his entire fustian manufactory depended.72

These examples testify to the significance of the eastern peripheries’ consumer markets for the business success of the Bohemian and Austrian proto-industry precisely in its phase of expansion in the second half of the eighteenth century. And these cases also indicate clearly the role of political measures supporting this division of labor. Here again, the 1770s did not represent a new turning point. The Viennese Court had used one of his few central policy instruments, that is custom policy, to support the emergence of regionally differing and specialized economies. In 1754, the Hungarian import tariff for finished commodities from Bohemia and Austria was reduced from 30 percent to 3 percent, while duties had to be paid on Hungarian products, both industrial and agrarian, of up to 30 percent when these products were exported to the west.73 This tariff remained in force even after internal custom duties were abolished between the Bohemian and Austrian provinces in 1775, largely due to the persistent refusal of the Hungarian nobility to accept the modes of property taxation implemented in 1749 in the Bohemian and Austrian provinces.74 But still within this fiscal logic, the Court institutions pursued a very clear economic policy favoring western proto-industry to the detriment of the Hungarian periphery.

In addition to providing consumer markets, the peripheries also offered important raw materials for proto-industry, such as wool, hemp, flax, gall oak, and potash, as well as foodstuffs, mainly grain and meat. In order to guarantee provisions for the western producers and work force with these commodities, the Court institutions imposed sound high tariffs and even bans on the export of these goods abroad. This led to the increased sale of these commodities on the Habsburg domestic markets in the west, and it may also have lowered prices and led to a loss of income and profits from export abroad. This was even more severe, as the domestic market in the western provinces could not absorb the whole export production of the Hungarian territories, for example in the case of grain.75 Although not quantifiable, this loss severely damaged the development of the economy of the Hungarian territories, even in a purely peripheral framework.

While this commercial pattern between the Austro-Bohemian lands and Hungary and Galicia could be interpreted as reflecting regional specialization, in fact, it was an expression of the imbalances and spatial inequalities produced by this specific form of interregional division of labor. The impact of the unequal trade relations can be illustrated by the regional differences in income level. In 1785, a rough estimate shows that average per capita income in Austria (28 florins) and Bohemia (24 florins) was well above that in Galicia (11 florins), while the difference with Hungary (20 florins) was less strong.76 This reflects widening interregional disparities after 1750.77

It is important to underline that the dichotomy between cores and peripheries does not solely depend on the importance of agricultural and proto-industrial activities, as this would be a problematic oversimplification of production processes and relations. In fact, as Maxine Berg has pointed out, no successful proto-industrialization process could take place in the absence of a highly productive and commercialized agricultural sector.78 It is thus rather the inefficient agricultural sector of the eastern Habsburg internal peripheries (which relied on extensively managed large estates, harsh conditions of serfdom, and a traditional three-field cultivation system) that hampered its progress. In contrast, the agricultural modernization of the western regions was well underway by the end of the eighteenth century.79

Cameralism and the Creation of the Other: Images, Stereotypes, and the Civilization Discourse

The perception of these internal disparities and dependencies followed various currents of economic doctrines of the Enlightenment, among which cameralism was the most important.80 Originating in the second half of the seventeenth century in the states of the Holy Roman Empire and often described as the Central European version of mercantilism, cameralism was initially mainly concerned with fiscal arguments concerning how to increase the prince’s revenue. However, cameralist thinkers gradually developed a sophisticated theoretical system on economic development between the late seventeenth century and late eighteenth century. In their thinking, the more intense effort of the work- force occupied as central a role as trade, both domestic and international. While cameralists advocated a protectionist trade policy to spur the proto-industrial development of the domestic economy, they were strong supporters of internal market integration through the abolition of monopolies and internal custom duties and the construction of roads and canals. This stance was linked to a particular concern with space in the writings of later cameralists such as Johann Heinrich Gottlob von Justi or Josef von Sonnenfels, who claimed that market integration should lead to diminishing regional disparities as production factors could move freely over the state territory. Nevertheless, this should not be confounded with a free market space, as cameralists defined economic relations always within state territories and, subsequently, ascribed a major role to the state in shaping processes of economic development.81

In the Habsburg Monarchy cameralist thinking was present from the late seventeenth century, embodied mainly in the idea of “universal commerce” (Universalkommerz), understood as domestic market integration, represented by thinkers such as Wilhelm Schröder, Johann Joachim Becher, and his brother-in-law Philipp Wilhelm von Hörnigk, who at the same time was also the secretary of another influential cameralist, Cristobal Rojas y Spínola.82 In the course of the eighteenth century, Justi and Sonnenfels delivered a remodeled influence on the economic policies of the court and its institutions.83

Based on these arguments, I will examine here the degree to which cameralist thinkers shaped the institutional prerequisites of the internal division of labor differentiating between cores and peripheries. In particular, I consider whether this regionalization and spacialization of economic processes were linked to cultural images and stereotypes in the sense of Said’s and Chakabarty’s orientalist and postcolonial theories.

In order to trace back these images and discourses, I examine descriptive statistics, so characteristic of political discourse (Polizeiwissenschaft) in German-speaking states, and official documents. Austria over all, if she only will, a key cameralist treatise written by the above-mentioned Philipp Wilhelm von Hörnigk in 1684, presented a picture of the relative economic subordination of the Habsburg Monarchy to the core areas of Western Europe, such as the Netherlands and France. Although in von Hörnigk’s famous work no internal disequilibrium is detected in the Habsburg economy, it nonetheless contains the first hints at the regional imbalances. Thus, von Hörnigk points to the production of woolen and linen textiles in Silesia and Upper and Inner Austria, praising the “diligence” of Silesian weavers, while Hungary is labeled a “true bread, lard, and meat pit.”84

These early differences between a proto-industrial West and an agrarian East became progressively more acute and were more directly linked with economic factors over the course of the eighteenth century. In 1770/71, the Council of War ordered a series of reports in order to assess the military capacity of the Monarchy’s population. The political comments in the reports concerning Bohemia and Austria pointed out differences in the degree of development and occasionally linked these differences to the ethnic identities of Slavs (Czechs, Slovenes) and Germans. While work ethos, social discipline concerning housekeeping and alcohol consumption, and health conditions were scrutinized, in the western regions of the Habsburg Monarchy these differences were not mapped according to orientalist models.85 In other words, these differences in the degree of development did not lead to the construction of stereotypes, which suggests that the imbalances between internal cores and peripheries within the western half of the Monarchy were not as severe as between the West and the East.

The disparities between western cores and eastern peripheries were, in turn, visible in the discourse. Between the 1780s and early 1820s, several statistical works were published that constructed a pejorative image of eastern territories such as Hungary, Transylvania, the Banat, Croatia, and Galicia. In particular, the native populations (Magyars, Slovaks, Romanians, Serbs, Croats, Poles, Ruthenians, and Jews) were accused of laziness, drunkenness, leading a dirty lifestyle, bad housekeeping, irresponsible use of money, and, as follows, indebtedness.86 In contrast, German settlers were praised for their well-built houses and their diligence. These descriptions were brimming with openly pejorative adjectives. Serbian peasants settling in the military frontier in Croatia were compared to “wild animals” by the statistician Andreas Demián in 1804.87 Serbs, Croats, and Vlachs (Romanians) were labeled “natural men” (by Demian and Martin Schwartner), who needed “civilizing” before they could partake of economic progress.88 Also, Galicia was targeted by the civilizing discourse after its annexation in 1772. In the 1780s and up to the end of the Revolutionary and Napoleonic Wars, Poles, Jews and Ruthenians were repeatedly labeled backward, “dirty,” and “lazy.” Their low cultural status required that they be civilized before they could become part of enlightened mankind and participate in the Monarchy’s wealth-generating projects. The invention of a new province, as pointed out by Larry Wolff,89 went hand in hand with the portrayal of a backward space which “had not yet become as advanced as its neighbours”90 and which, it follows, had to be “lifted up” and “civilized” by the Habsburg authorities.91 At the peak of this discourse, Galicia was compared to “El Dorado,” Peru, India, and Siberia, i.e. it was symbolically identified with non-European colonies.92

Cultural Images and the Interregional Division of Labor

As these examples clearly illustrate, the core-periphery-dichotomy in Habsburg Central Europe was translated into a definition of the peripheral “other” in pejorative cultural terms. This “other” was dirty, did not work assiduously, was prone to drinking too much, spent too much, and in general had only a low cultural status. This orientalizing discourse explained regional development differences according to a culturalist agenda: it is the culture inherent to peripheral societies which makes them poorer than core regions. Consequently, the dominant narrative claimed that these obstacles had to be removed before any successful catch-up with core regions could occur.

However, a critical analysis of these discourses and their relation to expressions of economic interests and self-representation of the core areas exposes them as a mercantilist agenda expressed in orientalist terms. One prime example is trade. A government report dated March 1, 1762 stated, “The true commercial relationship between Hungary and the German Hereditary lands seems to respond to the principle ceteribus paribus; Hungarians, as favored subjects, should not become too rich in terms of money, but should remain prosperous in terms of natural products, so that these can be the food of Austria, which, desirably, should increase its population, industry, and manufactories.”93 Only a few years later, the Commercial Council claimed that proto-industrial production in Hungary was to be limited to the absolute bare minimum in order to maintain the “natural trade so profitable for the state.” Hungary should be confined to the proto-industrial activities that posed no competition to the western core areas, but should, above all, deliver the materials necessary for proto-industrial production in Austria and Bohemia.94

This is a restatement of the mercantilist principle according to which money should not cross the borders of the state, so it can add to the wealth of the prince and his subjects. Interestingly, however, in this, case the principle is applied to territories that were part of the Habsburg state, although they had been left out of the administrative and fiscal reforms implemented after the end of the War of the Austrian Succession in 1748. While this was one of the reasons why Hungary had been excluded from the abolition of custom tariffs between Austria and Bohemia in 1775, custom policy had farther-reaching goals, such as maintaining the structural differences between a proto-industrial west and an agrarian east, which contradicted cameralist concepts, which in theory envisaged equilibrated regional development.95 A practical institutional consequence of this discourse was the already mentioned unequal custom duties that were levied on western against Hungarian products after 1754.

This stance of leading court institutions was eventually also shared by the monarch. Queen Maria Theresia, who in 1765 had stressed the “usefulness” of the foundation of manufactories in Hungary and had even issued a decree that liberated state subsidies and permitted privileges to be granted to newly founded manufactories in Hungary,96 changed her position dramatically in 1767, after failing to persuade the Hungarian nobility to accept property taxation in exchange for easing custom duties. In 1771, she stated that as long as the Hungarian nobility did not accept taxation, no support or official recognition was to be granted to manufactories in Hungary that potentially would threaten the sales of Bohemian and Austrian proto-industrial plants. Here, the unequal custom duties were reaffirmed.97

Although during Joseph II’s reign between 1780 and 1790, the Viennese Court declared its willingness to support the development of proto-industry in Hungary, the measures imposed earlier where not derogated. The abolition of the Hungarian import custom duties on western industrial products between 1786 and 1793 strengthened the position of the core areas’ proto-industrial enterprises on the Hungarian markets even further. The court, however, now supported the immigration of skilled workers to Hungary, granted subsidies to selected manufactories, and eliminated the internal customs barrier between Hungary and Transylvania in 1784. This policy, however, was abandoned after Joseph’s death. At the same time, the protectionist foreign custom regime introduced in 1784 and reinforced four years later also strengthened the position of Bohemian and Austrian proto-industrial enterprise in Hungary against foreign competitors. Despite the (in any case limited) measures for fostering proto-industrial activity in Hungary, as late as the early nineteenth century, Hungary was still an agriculturally-dominated economy, which confirms its status as an internal periphery.98

Galicia, which was incorporated into the Bohemian and Austrian customs regime in 1785, was given a similar role in the internal division of labor.99 Even before the First Partition of Poland-Lithuania, the local Commercial Council in Austrian Silesia defined the neighboring territory as “a second America” and hoped to “attract Cracow, L’viv and Kamieniec-Podolski’s trade to Austria.”100 Colonial imaginary, therefore, provided a readymade pretext for an argument in support of the application of mercantilist policies in a territory over which political control should be established. After imperial troops had occupied the new province in summer 1772, the merchant guild of Inner Austria addressed the Court Chamber to express its interest in “being among the first to draw benefits from this new successful acquisition” and expand trade with the northeastern province, as the provincial governor reported to the Court Chamber in Vienna.101 In fact, single entrepreneurs and proto-industrial activities were granted custom privileges in the first years after the annexation of Galicia, while the import of foreign competitors was forbidden, as mentioned above.102

However, while the Court Chamber was eager to promote the export of Bohemian and Austrian manufactures to Galicia, it handled Galicia’s custom policy carefully. Already in 1774, export tariffs were lowered to only 5/12 percent, and in 1776 import duties for Galician commodities to the western regions were cut from 20 to 4 percent.103 After attempts to persuade Prussia to sign a trade agreement that would have guaranteed Galicia’s exports on the Vistula River to Gdańsk failed, the new province was incorporated into the Austro-Bohemian customs union in 1785.104 While no institutional barriers prevented Galicia from integrating economically with the western regions from that moment, Galicia’s trade structure was further peripheralized.105

This was clearly in line with the perception of the bureaucracy, which by and large considered Galicia “destined to agriculture by nature,” as the provincial councilor Ernest Traugott Kortum stated in 1786.106 In addition, custom policy was only one instrument with which to regulate regional economic development and supra-regional competition. As in the case of Hungary, in Galicia crafts and industrial policy was another one. Thus, while granting loans, subsidies, and privileges to single proto-industrial businessmen in Galicia between the 1770s and the early 1790s, the bureaucracy up to the monarchs carefully ensured that these new plants not create additional competition for the Austrian and Bohemian firms on the Galician market so that support was only granted after assuring that these initiatives put forward were complementary to, and did not pose a competitive risk to, existing manufactories in the Bohemian and Austrian core regions.107 In some cases, the impact of pejorative cultural images on the arguments backing the rejection of funding applications is visible, for example when Emperor Joseph II turned down a funding petition for support for a silk manufactory with this claim that “Galicia is not a country where silk manufactories can be a successful business.”108 In the 1790s, the state withdrew its support entirely owing to financial shortages.109

In sum, while both custom and industrial policies were not at all designed to harm the eastern peripheries, they persistently were characterized by a prevalence of the interests of the Austrian and Bohemian core regions and their proto-industry, both in terms of maintaining consumer markets in the periphery as well as by obtaining resources, in particular raw materials, for their production. The state policy was thereby influenced by a pejorative perception of the peripheries’ economy and society, which started as a description of poverty and underdevelopment but all too easily ended up in a justification of the imbalances and an explanation and at the same time dismissal of them as the result of cultural or ethnic factors. From this, it was only one step to the instrumentalization and operationalization of this discourse in order to reinforce the institutional arrangement that supported the core regions’ economic dominance over the eastern peripheries.

Conclusions

Habsburg Central Europe was characterized by profound dichotomies between core and peripheral areas after the middle of the eighteenth century. While proto-industrial regions in the west managed to expand their economic profile in terms of both quantitative growth and qualitative development, extensive agrarian production in eastern peripheries did not undergo a comparable transformation. While the East-West-dichotomy is an oversimplification obscuring the presence of peripheral spaces in the west, such as raw material extraction and low-productive agriculture, and core areas in the east, such as craft production sites, it is, to some extent, justified by the fact that peripheral spaces in the west could expect to fare a good deal better than core areas in the east as far as future development was concerned. The East–West split is attested to not only by the productive profiles of each region, but also by their mutual exchange relations. Western regions largely exported manufactured products to the Hungarian and Galician territories in the east, while mainly importing foodstuffs and raw materials. Even if this exchange relation did not bring the western core regions imminently measurable gains in terms of commercial balance surplus, the core regions benefitted by these enlarged consumer markets and the relatively cheap acquisition of raw materials and foodstuffs. This relationship was heavily supported by the court institutions and their customs, trade, and industrial policies. Cultural perception is the other face of this coin and does nothing but confirm the analysis. First, the perception of spatial differences intensified over the course of the eighteenth century, as economic factors were translated into a culturalist narrative defining the eastern peripheries’ status. These stereotypes covered a wide range of clichés: a low work ethos, high alcohol consumption, a tendency to spend more than means would warrant, widespread social poverty, all condensed into narratives surrounding the idea of the “natural man” and the “wild animal.” Subsequently, a civilizing mission was advocated, a mission the alleged goal of which was to create the conditions necessary for these regions and their populations to participate effectively in economic progress. This discourse clearly demonstrates an orientalist logic, as spatial disparities are blamed on the attitude of the peripheral population, rather than on structural economic factors, including power relations. The official and statistical discourse of the government, for its part, assumed and displayed these power relations in policies concerning trade and proto-industry, where the interests of core areas prevailed over those of peripheries. The pejorative cultural images of the eastern peripheries not only expressed the hegemony of the core areas, but effectively contributed to maintaining the peripheral status of some regions within the Habsburg economy in the late eighteenth century.

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Nolte, Hans-Heinrich, ed. Europäische innere Peripherien im 20. Jahrhundert. Edited by Michael Salewski and Jürgen Elvert. Historische Mitteilungen im Auftrag der Ranke-Gesellschaft, Beiheft 23. Stuttgart: Steiner, 1997.

Nolte, Hans-Heinrich, ed. Innere Peripherien in Ost und West. Compiled by Klaas Bähre. Stuttgart: Steiner, 2001.

Nolte, Hans-Heinrich. “Innere Peripherien: Das Konzept in der Forschung.” In Innere Peripherien in Ost und West, edited by idem and Klaas Bähre, 7–31. Stuttgart: Steiner, 2001.

Osterloh, Karl-Heinz. Joseph von Sonnenfels und die österreichische Reformbewegung im Zeitalter des aufgeklärten Absolutismus: Eine Studie zum Zusammenhang von Kameralwissenschaft und Verwaltungspraxis. Lübeck–Hamburg: Matthiesen, 1970.

Otruba, Gustav. Der Außenhandel Österreichs unter besonderer Berücksichtigung Niederösterreichs nach der älteren amtlichen Handelsstatistik. Der niederösterreichische Arbeiter 1. Vienna: Kammer für Arbeiter und Angestellte in Niederösterreich, 1950.

Otruba, Gustav. “Staatshaushalt und Staatsschuld unter Maria Theresia und Joseph II.” In Österreich im Europa der Aufklärung: Kontinuität und Zäsur in Europa zur Zeit Maria Theresias und Josephs II., vol. 1, edited by Grete Klingenstein and Richard Plaschka, 197–249. Vienna: Verlag der Österreichischen Akadedmie der Wissenschaften, 1985.

Otruba, Gustav. “Schlesien im System des österreichischen Merkantilismus: Die Auswirkungen des Verlusts Schlesiens auf die österreichische Wirtschaft.” In Kontinuität und Wandel: Schlesien zwischen Österreich und Preußen, edited by Peter Baumgart and Ulrich Schmilewski, 81–118. Sigmaringen: Thorbecke, 1990.

Said, Edward W. Orientalism: Western Conceptions of the Orient. London: Penguin, 2003.

Sandgruber, Roman. Die Anfänge der Konsumgesellschaft: Konsumgüterverbrauch, Lebensstandard und Alltagskultur in Österreich im 18. und 19. Jahrhundert. Vienna: Verlag für Geschichte und Politik, 1982.

Sandgruber, Roman. Ökonomie und Politik: Österreichische Wirtschaftsgeschichte vom Mittelalter bis zur Gegenwart. Vienna: Ueberreuter, 1994.

Sandl, Marcus. Ökonomie des Raumes: Der kameralwissenschaftliche Entwurf der Staatswirtschaft im 18. Jahrhundert. Cologne–Weimar: Böhlau, 1999.

Špiesz, Anton. “Die Wirtschaftspolitik des Wiener Hofes gegenüber Ungarn im 18. Jahrhundert und im Vormärz.” In Ungarn-Jahrbuch 1 (1969): 60–73.

Tremel, Ferdinand. Wirtschafts- und Sozialgeschichte Österreichs. Vienna: Deuticke, 1969.

Vári, András. “The Functions of Ethnic Stereotypes in Austria and Hungary in the Early Nineteenth Century.” In Creating the Other: Ethnic Conflict and Nationalism in Habsburg Central Europe, edited by Nancy Wingfield, 39–55. New York: Berghahn, 2003.

Wallerstein, Immanuel. The Modern World-System II: Mercantilism and the Consolidation of the European World-Economy, 1600–1750. New York: Academic Press, 1980.

Wellmann, Imre. “Maria Theresias Handelspolitik mit besonderer Rücksicht auf die Agrarproduktion.” In Jahrbuch für Österreichische Kulturgeschichte 10 (1984): 257–318.

Wolff, Larry. Inventing Eastern Europe: The Map of Civilization on the Mind of the Enlightenment. Stanford: Stanford University Press, 1995.

Wolff, Larry. “Inventing Galicia: Messianic Josephinism and the Recasting of Partitioned Poland.” Slavic Review 63, no. 4 (2004): 818–40.

Hungarian Historical Review Volume 9 Issue 3 (2020): 385-389 DOI: 10.38145/2020.3.385

Andrea Pető, Alexandra M. Szabó, and András Szécsényi

There was a significant debate in the Hungarian journal of social sciences and culture Kommentár in 2008 initiated by Gábor Gyáni as to whether Hungarian Holocaust research had or had not been successfully integrated into international discourse after 1989.1 One element missing from the debate was that after 1989, main concepts and the language of the discipline derived from the Western side of the (fallen) Iron Curtain. The histories of the Holocaust survivors had been only descriptive in nature, while the experiences of Jewish communities, the members of which had lived under communism was of predominant focus. There was no theoretical inquiry in Holocaust scholarship as long as the objective fact-finding was taking place, expanding on questions as to when, where, and what had happened to which actors. Historical inquiry, however, needs to extend further to explain the uncovered events and experiences.

For instance, a significant element missing from the scholarship in its entirety is gender analysis, and this observation brings to the fore the lack of discussion on methodology and the consequent absence of acknowledging developments. Hungarian scholarship of Holocaust historical inquiry with a central aim evolving around gender analytical perspectives is still nonexistent, yet there are some contributions about women and the Holocaust in the English language, for instance by Andrea Pető.2 This special edition of the Hungarian Historical Review lines up studies which draw on new modes of analyses and frameworks with the aim of achieving knowledge production on a whole new level about the Holocaust in Hungary.

The lack of innovative theoretical frameworks and other new approaches in understandings of the history of the Shoah in the Hungarian context explains the current poor state of institutionalized Hungarian Holocaust research. The consequences are not only prevalent in academia, but also in the public sphere (which influences science policy) and in shifts in public memory of the Holocaust in Hungary.

However, the current struggles for memory are far from a memory policy based on democratic consensus and development. Since illiberal states do not have an ideology but only a memory policy, the weak domestic institutionalization of Hungarian Holocaust research with low international recognition has contributed to the successful reinterpretation of the Holocaust remembrance paradigm by illiberal actors. Scholarly attempts against this were and are still being made, such as the relevant scholarly volume published on the occasion of what is referred to as the 70th anniversary of the Holocaust in Hungary, which was published in Hungarian and English by CEU Press3 (a year of anniversary that is misleading as it suggests that the Holocaust in Hungary began with the German occupation in 1944 instead of with the labor service system and with the earlier deportations of Hungarian Jews, such as the deportation of Jews to Kamianets-Podilskyi in 1941, where an estimated 23,000 Jewish deportees were massacred in two days). At the same time, historical research workshops operating in Hungary mostly outside the system that ensures scientific standards and outside the international scientific frameworks are growing, and they are pursuing ad hoc research in parallel with the existing research infrastructure in support of the present government’s politics of memory.

Demonstrating the lack of new research directions in Hungary that are prevalent in international Holocaust scholarship, Andrea Pető called for the organization of a conference entitled The Hungarian Holocaust: Victimhood and Memory, together with Gábor Gyáni, Edit Jeges, and András Szécsényi and in cooperation with Central European University and the Humanities Research Center of the Hungarian Academy of Sciences in Budapest on December 18, 2017. A selected number of presentations were considered for publication in Századok, the most prestigious Hungarian historical journal, for its special section dealing with the Hungarian Holocaust. The selection of conference speakers and publications mirrored the work of mostly young researchers who, despite the dwindling research infrastructure, had carried out methodologically innovative work based on archival research. The introduction to this section in Századok was censored for discussing “illiberal memory politics,” although the authors took a clear stand against this suppressive act.4 The presentation of this special issue, which took place on September 25, 2019, was met with unprecedented interest at Central European University, indicating that the Holocaust continues to be a subject of major scholarly and public interest.

Despite the controversial nature of memory politics and the lack of proper infrastructure, a new generation of researchers worked on this special issue to present new approaches and findings, thus taking an important step towards international exchange by elevating Hungarian Holocaust research onto the international stage and bringing innovative research methods from the international pool into Hungarian scholarship.

The articles in the present volume contribute to historical understandings which primarily work from the perspectives of the victims of the Holocaust. Based on the division of historical inquiry by Raul Hilberg, the Hungarian historiography of the Holocaust focuses on one of categories suggested by Hilberg: perpetrators, victims, or bystanders. This mainstream allocation, however, has been widely criticized in recent decades by many researchers worldwide, and they have offered new approaches which shift the focus to the behaviors, interactions, and dynamics among societies and communities involved in the Shoah, together with closer study of the psychological and sociological perceptions of these groups. This paradigm shift has emerged only recently in Hungarian scholarship, another significant reason as to why Hungarian historiography has only rarely constituted a serious part of the international discourse.

In recent decades, there have mostly been descriptive, fact-finding monographs published that are based on archival sources and avoid the use of private or narrative sources.5 A group of Hungarian Holocaust researchers who mainly belong to the new generation would like to break from this approach and widen the perspective of inquiry. The papers in this issue seek answers to questions concerning how Jews, who were deprived of their basic rights, forced to serve in labor service, and then, in 1944, compelled to live in ghettos and yellow star houses or deported to concentration camps, lived and survived under these extreme conditions. The histories presented here also consider how the survivors remembered their pasts in the immediate postwar setting with a specific focus on the modes in which these experiences were later recounted.

The approaches and viewpoints presented by our authors are of a wider scale. Some papers belong to the field of microhistory, while others closely examine and reflect on specific oral historical sources and narratives. The interpretations largely rest on contemporary and postwar narrative sources (memoirs, diaries, and other notes), in addition to the archival documents, which touch primarily on questions pertinent to individual life stories.

István Pál Ádám examines the case of the butchers of Budapest and considers how the governmental and municipal administration of the late Horthy-era impacted the leftists and the Jewish butchers from the issuance of the 1939 anti-Jewish law. Ádám examines the ways in which the butchers of the capital were forced to change their strategy in the postwar democratic society of Hungary. Tamás Csapody examines diaries, some of them incomplete, written by six inmates of the camps in and around Bor. They were Hungarian citizens of Jewish and other free church denominations who had been deported from Hungary in 1943 and 1944 and taken to the lager-system of Bor (Serbia), later to be brought back to Hungary in the second half of 1944 and then (some of them) taken to German concentration camps. He provides insightful content analysis and examines diaries written by six inmates, one of which is being presented for the first time in this volume. Heléna Huhák analyzes the spatial experiences of some of the inmates who were deported from Hungary to Bergen-Belsen in 1944–1945. She draws on diaries, memoirs, and correspondence in order to explore perceptions of space formed in the memories of camp inmates. Edit Jeges examines survivor accounts by Polish and Hungarian Jewish women and reflects on the nature of her primary sources. She also considers the further potentials of digital storytelling as a source and the importance of survivor memory at a time when fewer and fewer survivors remain among us. Borbála Klacsmann summarizes the roles and the activities of the Government Commission for Abandoned Property regarding the restitution of Hungarian Jews in the first three years of the postwar period, providing specific examples from Pest County through personal accounts and correspondence. Alexandra M. Szabó examines Jewish women’s experiences of miscarriages before, during, and after the Shoah through a specific case study in order to draw attention to the significance of such corporeal events from a social historical point of view. Her study considers the implications of the silence concerning women’s experiences in Holocaust research to show that gender analysis substantially adds to further knowledge production. In his case study, which partly overlaps with Huhák’s paper, András Szécsényi also concentrates on one space, a German DP camp. Szécsényi tries to reconstruct the spatial experiences of György Bognár, a former inmate of Bergen-Belsen who was taken to the Hillersleben DP camp after liberation. The paper explores space perceptions based on Bognár’s diary and the maps he drew, which Szécsényi compares with his own in-person experiences of the sites (or what remains of them). Ferenc Laczó’s paper presents German historiography from recent decades on the Hungarian Holocaust by exploring the relevant findings and conclusions of the most important German histories. Through his findings, he seeks answers to questions concerning why there has been so little institutionalized cooperation between the German and Hungarian research communities.

We would like to dedicate our work to the memory of Randolph L. Braham (1922–2018), who, as the pioneer in Hungarian Holocaust research, was a true inspiration and supportive friend of the scholars whose works are part of the present volume.

Petr Popelka

Business Strategies and Adaptation Mechanisms in Family Businesses during the Era of the Industrial Revolution The Example of the Klein Family from Moravia

 

Family businesses are a central topic in the history of business, especially in the early phases of the industrialization process. This case study attempts to identify the business strategies and the adaptation mechanisms used by a family business during the era of the Industrial Revolution. The main aim of the study is to explore which adaptation mechanisms and strategies were used during the Industrial Revolution by large family firms in the Lands of the Bohemian Crown. The study focuses on a model example, the Klein family, which ranked among the foremost entrepreneurial families in the Bohemian Crown Lands. The Kleins initially rose to prominence through their road construction business. They later built private and state railways and also diversified into heavy industry. I delineate the main stages in the development of the family firm, discuss a number of key microeconomic factors which influenced the Kleins’ business activities, and describe the factors which ultimately led to the downfall of this once-successful firm.

Keywords: business history, family firm, Industrial Revolution, capitalism, Lands of the Bohemian Crown, business strategies, adaptation mechanisms, Gebrüder Klein, Klein von Wiesenberg

The Problem of Continuity and Adaptation

In his influential study of the family, businesses and capitalism, Jürgen Kocka states that the spirit and practice of capitalism are based on non-capitalist structures and processes which have a long-term influence over capitalism. He identifies the family as one of the key elements which contributed to the formation of capitalism. Kocka writes that family structures, processes and resources encouraged the emergence of industrial capitalism and helped resolve certain problems faced by capitalist industrialization. In his view, this role was particularly evident in the early phase of industrialization.1

Many years have elapsed since the publication of Kocka’s above-cited article, and many studies have explored the relationships between business and the family. Although scholars may differ in some of their conclusions regarding this relationship, there nevertheless exists a general consensus that the family played an exceptional role in business throughout the nineteenth century.2 In the European historiography on business history, over the course of the past decade there was a marked increase in the interest in the history of family businesses; many studies of family businesses focus on the nineteenth century, the era which witnessed the formation of modern family business practices. Many phenomena have been analyzed with regard to nineteenth-century family businesses; among the most important are issues of succession within family firms, business strategies applied by family businesses, and the construction of social networks.3

The central topic of this study (and indeed this entire issue of the journal) concerns enterprises in adaptation. This topic is intricately intertwined with the question of continuity in business, a question that has not yet been fully addressed by Czech historiography with regard to nineteenth-century businesses. Existing studies suggest that the development of the entrepreneurial classes in the Bohemian Crown Lands was in fact characterized not by continuity, but rather by discontinuity. This finding has been demonstrated by historical research mainly in terms of the transition between business practices in the proto-industrial era and the industrial era. Businesses which emerged under the protectionist conditions that prevailed during the period of enlightened absolutism and the Napoleonic Wars generally found it difficult to adapt to the conditions of economic liberalism that characterized the early phase of industrialization. There were, moreover, certain specific features which affected developments in individual sectors. In some sectors, the technological changes brought by the Industrial Revolution necessitated such hugely increased volumes of investment that it was practically impossible to manage a smooth transition from traditional manufacturing methods to modern mechanized production; many established businesses failed to deal with this challenge. The thesis of the discontinuity between proto-industrial and industrial business practices has been confirmed by Czech historiographical research focusing on the mining and metallurgical industries, and to some extent also by research into textile production.4 Family firms involved in glassmaking or textile production based on the factor system achieved a higher level of continuity between the proto-industrial and industrial eras; in both these sectors there were some family businesses which spanned several generations. However, even in these industries not all entrepreneurs proved able to adapt to the new circumstances.5

The issue of continuity in the entrepreneurial classes of the Bohemian Crown Lands during the era of industrialization has been addressed in Czech historiography by a small number of studies that focus on specific groups of entrepreneurs who were active in particular sectors (M. Myška on metallurgy, J. Matějček on mining, J. Janák and B. Smutný on textile production, J. Janák and F. Dudek on sugar refining). These studies all reveal the dynamic changes experienced by the entrepreneurial classes during the course of the Industrial Revolution.6

Research on family businesses may well offer insights into the issue of business continuity during the era of industrialization; this remained the most widespread form of enterprise throughout the nineteenth century. Modern research has shown that, by their very nature, family businesses display a strong tendency towards continuity; this is reflected in the existence of family firms spanning three (or more) generations during the era of industrialization. Among the more recent studies describing this phenomenon is an article by Michael Schäfer that explores the situation in Saxony.7 However, Czech historiography unfortunately still lacks an equivalent study drawing on broad-based collective biographical research and focusing specifically on family businesses, in spite of the fact that a number of new business encyclopedias offer an excellent information resource.8 Case studies nevertheless confirm that family firms represented a significant source of business continuity during the era of industrialization in the Bohemian Crown Lands. On the other hand, these studies also suggest that only a few of these family firms managed to maintain their continuity for more than three generations. In most cases, the firms suffered either as a result of a failure to handle generational transitions successfully or as a consequence of external circumstances; this was particularly typical in the turbulent first half of the twentieth century.9

This article examines the business strategies and adaptation mechanisms adopted by family firms in the Lands of the Bohemian Crown during the era of the Industrial Revolution.10 I focus on a model example, the Klein family, which ranked among the foremost entrepreneurial dynasties in the Habsburg Monarchy.11 In his Sozialgeschichte Österreichs, Ernst Bruckmüller describes the Kleins as an Austrian example of the possibility of a quasi-American form of social advancement.12 This description alludes to the fact that the Kleins represented one of the few examples of self-made men in Central Europe during the Industrial Revolution. Within the span of a single generation they managed to work their way up from relatively humble origins to the pinnacle of the entrepreneurial elite.13 The present study examines the development of the Kleins’ family business with a particular focus on how they responded to the challenges posed by the changing business environment.

The Early Years of the Klein Family Business

Although the early history of many companies is frequently associated with some form of “founding fathers myth,” depicting the first generation of the company’s owners in a heroic light and serving a purpose of legitimization, the beginnings of the Klein family firm were not auspicious.14 The father of the founding generation, Johann Friedrich Klein (1756–1835), attempted to implement numerous business plans, but mostly without success. In addition to his main business as a cloth trader, he also attempted to acquire an inn, which was a traditional source of income. The family’s bleak prospects after the state bankruptcy in 1811 led Johann Friedrich’s sons to leave home at an early age.15 The first to leave, in 1812, was the eldest son Josef Engelbert (1792–1830), followed soon afterwards by the second eldest son Engelbert (1797–1830). Both worked as laborers on water management projects at the Moravian estate of Eisgrub (today Lednice, Czech Republic), where they gained their first experiences in the construction trade. In 1816, along with their younger brother Franz (1800–1855), they capitalized on their skills, winning their first contract to rebuild a short stretch of road. The contract was relatively minor, but it nevertheless gave the brothers their first experience in road construction. This was soon followed up by a number of other small-scale contracts for road rebuilding, river regulation, minor building work in towns, and similar jobs.16

In 1826, Josef Engelbert Klein won the largest contract of his life, and this launched the Kleins’ long involvement in building the main road network throughout Moravia and Silesia. The family’s first major transport infrastructure project was the construction of a state road in the western part of Austrian Silesia, a contract which generated tens of thousands of gulden in profits. The project was huge in its scale, so it required not only experience in road construction, but also organizational acumen and a good deal of physical strength. Josef Engelbert therefore decided, as he had in the course of previous projects, to involve his younger brothers, including the adolescent Libor Klein (1803–1848). The brothers invested the profits back into their business, but the project brought them much more than just capital; above all, they acquired essential know-how regarding the organization of labor on large-scale road construction projects. They assembled a team of skilled workers and laborers, and they acquired the necessary tools, horses and carts. They also learned how to negotiate with the state authorities, and they gradually built up a network of influential social contacts.17 This gave them a comparative advantage over competing bidders for similar public contracts. Helped by their policy of offering generous discounts and their growing reputation as reliable operators, the Kleins managed to participate in the majority of important road construction products in Moravia and Silesia during the 1830s and 1840s.18

The Kleins’ experience in road construction in the first half of the nineteenth century was an important factor that helped them win contracts in an area that proved to be much more lucrative, namely railway construction. The family firm was involved in a number of projects connected with the first steam railway built in the Habsburg Monarchy, the Emperor Ferdinand Northern Railway (Kaiser Ferdinands-Nordbahn). The projects involved earthworks and the construction of both brick and timber structures. The Kleins had many years’ experience in this kind of job thanks to their road construction contracts. However, nobody in Austria had any experience in rail-laying, so this work was initially carried out by experts from abroad. From 1837 to 1856, the Kleins built around 340 km of railways for the Kaiser Ferdinands-Nordbahn, plus a number of station buildings and guard-houses.19

When the Austrian state decided to invest its own funds in the construction of a network of major rail routes, it was able to choose from a number of established contractors. In addition to the Klein brothers, other key firms operating in this sector included companies owned by the Bohemian entrepreneur Adalbert Lanna, the Italian businessman Felice Tallachini, and the Moravian Fleischmann brothers.20 However, this small circle of firms gradually lost its monopoly in the 1840s. The railway construction sector became highly competitive, and some of the later state contracts were divided up among several companies. Despite the fierce competition that developed in the sector, the Kleins managed to retain a highly influential position in the following decades – helped not only by their know-how, but also by their skill at forming consortiums with other major building contractors, especially Adalbert Lanna, Johann Schebek, and Karl Schwarz. The smaller contractors found it very difficult to compete with these strong, established firms, and the Klein brothers continued to be involved in numerous major railway projects throughout the Habsburg Monarchy from the late 1830s to the mid-1870s. In this period, the Kleins participated in the construction of over 3,500 km of railways throughout the Habsburg Monarchy.21

The Kleins’ early entrepreneurial activities bear most of the hallmarks of the business strategies that were widespread during the early phase of industrialization. During this era, businesses’ strategies were rooted in close cooperation among family members, who provided a mutual support network and thus helped mitigate the initial risks associated with business ventures. The family also played a key role in the transfer of business know-how; the knowledge and skills that were put to use in many sectors were acquired empirically. Another important role of the family was in financing; the individual members of the family offered mutual financial support, and capital was generally loaned within the family or borrowed from individual creditors. Bank loans were taken out only if very large investments were necessary.22 Close cooperation among the brothers enabled the Kleins to win building contracts and successfully implement large projects which would have been beyond the capabilities of individuals acting alone.

The Investment Strategies of the First Generation of Kleins

During the early phases of industrialization, certain sectors were characterized by a marked lack of equality in business opportunities. This was not only an issue of starting capital; in the period leading up to 1848, business in the Austrian Empire was still heavily influenced by the existence of feudal structures. Well into the first half of the nineteenth century, ownership of a large aristocratic estate represented an important competitive advantage in many sectors of business. Among the most significant advantages were priority access to raw material resources (e.g. iron ore and coal); a monopoly on the ownership of forests, which were the primary source of fuel; the right to use water resources; and the ownership of large tracts of land. Ownership of raw materials meant that estate owners were not dependent on the fluctuating prices of these commodities. Estate owners could also exercise their rights vis-à-vis their subjects; in the first half of the nineteenth century, subjects were still required to perform compulsory labor duties (Fronarbeit) or carry out forced labor for inadequate wages.23 Estate owners also had easier access to credit, as the estate could be pledged as collateral on loans.

At the end of the eighteenth century and during the first half of the nineteenth, many capital-rich merchants, financiers and other businessmen in the Bohemian Crown Lands invested part of their profits in the purchase of estates.24 In the case of entrepreneurs during the early phases of industrialization, this did not necessarily represent a form of feudalization.25 For some entrepreneurs the acquisition of estates not only represented a safe way of investing their capital for the benefit of future generations; it was also a means of supporting their business activities. This motivation is clearly evident in several case studies of entrepreneurs in the first half of the nineteenth century,26 and the Kleins were no exception. Thanks to their successful road construction and (especially) railway construction business, the family was able to accumulate a huge quantity of capital in a relatively short period of time; by the 1840s, the Kleins had amassed many hundreds of thousands of gulden. This not only enabled the family members to embrace a new lifestyle, it also opened the door to new business plans.27

The Kleins’ investment strategy in the 1840s and 1850s was unusual when compared with the strategies adopted by other entrepreneurs, not only in its extent, but also in the family’s attempts to diversify into numerous different areas of activity. By hiring capable managers, the Kleins were able to expand their activities into sectors in which bourgeois families had not traditionally played a major role, yet which were of crucial importance in the burgeoning Industrial Revolution.

Inspired by their success in the highly lucrative railway construction sector, the Kleins decided to become involved in one of the most complex and capital-intensive industries of all: metallurgy. The decision to invest in metallurgical production forced entrepreneurs to implement adaptive changes in both the organization and financing of their businesses. The Kleins’ railway projects had put them in contact with some of the leading industrial managers of the era, employed in the services of both the state and private companies. These included the renowned expert on mining and metallurgy Franz Laurenz Riepl.28 In the 1830s, Riepl was appointed manager of the ironworks owned by the Austrian Chancellor Anton Friedrich Mittrowsky at the estate in Wiesenberg (today Loučná nad Desnou, Czech Republic). In 1844, with Riepl’s encouragement, the Kleins purchased the Wiesenberg estate (where they had been born as subjects) and, with the assistance of Riepl as the works manager, began to modernize the local ironworks in order to produce rails and other material for railway construction. By the middle of the century, the Kleins had modernized the local engineering works so effectively that they were capable of producing all types of machines with the exception of locomotives. The family hired a number of leading experts, and the ironworks and engineering works on the Wiesenberg estate ranked among the most important factories of their kind in the Bohemian Crown Lands for two decades.29

The Kleins’ involvement in metallurgical production in the 1840s and 1850s was exceptionally successful. In addition to building up a production base on their own estate, they also established new ironworks in Stefanau (today Štěpánov, near Olomouc, Czech Republic), in the close vicinity of the Kaiser Ferdinands-Nordbahn. The family made a huge investment in the Kladnoer Eisengewerkschaft at Kladno near Prague; together with Adalbert Lanna they established a modern ironworks which ultimately grew to become one of the largest such facilities in the Bohemian Crown Lands.30 In the mid-1840s, inspired by their close collaborator Franz Riepl, they expanded their activities into Hungary’s Temes County (today Timiş County, Romania), co-founding the Zsidowaer Eisenwerk Gewerkschaft (later the Nadrager Eisen-Industrie Gesellschaft). They satisfied momentary demand for metallurgical products by leasing and operating ironworks, particularly near Würbenthal in the western part of Austrian Silesia (today Železná, near Vrbno pod Pradědem, Czech Republic).31 The Kleins’ ironworks remained highly profitable for the family up until the economic crisis of the 1870s, ranking alongside their construction business as their primary source of income.

The Kleins’ activities in the iron industry led them to invest in another important sector, namely coal mining. Their attempts to acquire mines in the Ostrava-Karviná coalfield in order to supply coal for their Moravian ironworks ultimately proved unsuccessful, weakening the family’s position in the Moravian iron industry.32 This failure was caused not by inept strategy, but rather by the serious financial problems which the family faced as a result of the bankruptcy of the Viennese merchant Demetrius Zinner in 1855, to whom they had lent a large quantity of their liquid funds.33 The Kleins enjoyed greater success in the Kladno coalfield, where, in a joint venture with other bourgeois businessmen, they established the largest metallurgical conglomerate in Bohemia, including ironworks, coal mines and iron ore mines. The family also maintained a long-term presence in several mining companies operating in the Rossitz-Oslawan (today Rosice-Oslavany, Czech Republic) coalfield and the South Moravian lignite field; most of the coal was supplied to the family’s own businesses. From the 1840s onwards, the Kleins also began to establish new business ventures in other economic sectors, establishing modern mills, sugar refineries and textile factories on their own estate.

Another important facet of the family’s business activities was the purchase of various types of real estate, a practice they adopted even in the early years. The strategy of investing part of their available funds in real estate may have been related to their mental patterns of behavior, which were shaped by their experience of the state bankruptcy of 1811. The real estate thus acquired functioned not only as a store of value and a means of displaying the family’s wealth; it was also frequently used as collateral for loans taken out to finance the family’s new business ventures or to fund the family business directly. One important group of properties owned by the family consisted of the apartment blocks and building plots purchased in Vienna in the early 1870s, when the Gebrüder Klein empire was at its peak.34

Organizational Changes in the Family Business as an Adaptation Strategy

Organizational changes were essential for the successful development of family business. These changes can be traced on two levels: firstly in terms of the changing legal forms of the business and secondly in terms of the professionalization of management, as companies began to appoint managers from outside the family.

The Kleins’ business activities expanded rapidly during the 1840s, to the point where it was no longer possible for senior management positions in the family’s companies to be occupied solely by family members. This soon led to the type of transformation that has been described by Alfred D. Chandler: personal enterprise, in which the owner holds the leading position in the company, gave way to entrepreneurial enterprise, in which the owner takes the strategic decisions but delegates control over the company’s day-to-day operations to hired managers.35

This shift occurred most rapidly in the sectors in which the family members lacked the necessary experience and which required specialized knowledge in order to succeed. In such cases the Kleins recruited some of the most capable managers available. In addition to Franz Laurenz Riepl, these managers also included Alois Scholz and later Friedrich Klein in the iron industry and Anton Péch in the mining industry.36 Even in their construction business, which formed the basis of the family empire, the Kleins found it necessary to hire capable managers with technical qualifications. The shift from road construction to railway construction required the assembly of a stable team of technical and administrative employees, especially engineers and construction assistants. The Kleins recruited mainly talented graduates of technical colleges who already had some experience working in the construction industry, offering them considerable freedom in decision-making and ensuring their loyalty by paying better salaries than they would have earned in public-sector jobs. Many of these recruits became capable businessmen in their own right, who continued to collaborate with the Kleins even after they had left the company and set up their own firms. They included Johann Schebek (1815–1889), Karl Schwarz (1817–1898), the Theuer brothers, Osvald Životský (1832–1920) and Jan Muzika (1832–1882).37 Given the diversity of the Kleins’ business activities, they implemented the same policy of appointing experienced managers in most of their other companies, including the family estate and other large estates acquired at a later date.

Although the transition to professional management took place during the 1840s and 1850s, family members remained personally involved in supervising the business until the 1870s. This was the case both with the longest-lived member of the founding generation, Albert Klein (1807–1877), and with his nephew, Franz II Klein (1825–1882). The last construction project to be directly managed by a member of the family was the Buštěhrad railway near Kladno (1854–1855). Later, Albert and Franz II devoted their attentions solely to the high-level management of the family business, particularly issues of business strategy and financing. From the mid-1850s, construction contracts were generally undertaken in collaboration with other companies, with Gebrüder Klein responsible for the financial side of the project and providing the technical and administrative staff.

It is remarkable how long the Klein family business continued to exist in the form of a consortium (a loose association of individual family members rather than a distinct legal entity in its own right). The rules governing the family business were formally established in a family contract concluded in 1847; this contract codified the existing system of mutual relationships among the brothers involved in the business. This came at a time when the founding generation had already managed to diversify the family’s range of business interests significantly. The contract stipulated that the oldest adult male member of the family was to be the head of the family business and act as its authorized legal representative.38 He was to exercise overall control not only of the family’s jointly purchased estates, but also all their jointly conducted business activities, including the family ironworks. He was authorized to use jointly held funds in order to raise yields on the family estate and increase production at the ironworks. However, the head of the family business could be voted out of this post, and the position was not hereditary. If the head of the business died or was voted out, the new head was to become the next oldest adult male family member, i.e. the next eldest brother. The 1847 family contract effectively codified the practices that already existed within the family business, and it did not change the manner in which the business was conducted; this remained, as before, based on voluntary cooperation within a family consortium.

It was not until 1853 that the family firm was formally established. This can undoubtedly be viewed as an adaptation strategy, as the family was forced to take this step by external circumstances. A contract established the company “Gebrüder Klein,” whose field of activity was defined as all types of construction work. Throughout its existence, the company had the form of a general partnership, with the family members holding the position of partners.39 In the contract, the brothers undertook to run the business as a single entity, sharing both costs and profits; profits were to be distributed proportionately on the basis of the sums invested by each partner. The partners were liable to the full extent of their assets. However, the partners were not permitted to transfer to the company any liabilities in connection with their own private business activities. The head of the company was to be the eldest of the brothers. On the basis of this contract, the company was registered in Brünn (Brno), Vienna and Prague. Until 1878, the registered head office was in Brünn; in 1878 it was then relocated to Vienna.

Although Gebrüder Klein was a mere general partnership and never became a joint-stock company, until the second half of the 1870s it ranked among the largest and most capital-rich construction companies in the Habsburg Monarchy. It functioned as an umbrella organization for all the family’s business activities, not only its construction business, but also its activities in other sectors (the timber trade, coal mining, and the Viennese apartment blocks). This broad range of activities was reflected in the company’s financial profile. When established, it already had assets running into millions of gulden, and by 1870 its total assets exceeded 10 million. Gebrüder Klein’s strong capital base proved particularly essential to the development of the company’s core business, railway construction.40

However, not all of the family’s business activities were conducted via Gebrüder Klein. Leaving aside the numerous private business ventures of individual family members, unrelated to the family business as a whole, another important arm of the family business also remained separate from the company from the very outset: the ironworks in Zöptau (today Sobotín, Czech Republic) and Stefanau (today Štěpánov, Czech Republic). When these ironworks were at their peak (i.e. up until the early 1870s), they were the second highest producer of iron in Moravia (after the Vítkovice Ironworks) and the third largest producer of rails in the entire Habsburg Monarchy.41 In 1865, the ironworks (along with the family’s North Moravian iron ore mines) were reorganized in order to cope with rising production; they were removed from the control of the family estate to become the Zöptauer und Stefanauer Bergbau- und Eisenhütten Gewerkschaft. The family members remained the exclusive owners of stakes in the business, though they had no direct involvement in the day-to-day management; the ironworks, engineering works and iron ore mines were all entrusted to professional managers.

This organizational change in the family business laid the foundations for its further development. However, the firm soon had to contend with two major issues: a deep economic crisis and a generational transition.

The Loss of the Ability to Adapt: the Crisis of the 1870s and Its Impact

The second half of the 1860s can be characterized as the peak of the Industrial Revolution in the Bohemian Crown Lands; this was a period of rapid economic growth. The economic boom enjoyed by the Habsburg Monarchy in 1867–1873 (the so called Gründerzeit) was a hugely important time in the state’s development. It was accompanied by political consolidation, an increase in economic productivity, a banking boom, the formation of many joint-stock companies, and the rapid development of transport and communications infrastructure. The sectors of heavy industry that were involved in railway construction (namely mining, metallurgy, and mechanical engineering) enjoyed particular prosperity. Railway construction was the primary motor of the economy during this period.42

However, 1873 brought a turning point, which ultimately had an impact on all areas of the economy, but especially those areas that had prospered most during the preceding boom years. The railway fever which gripped the Habsburg Monarchy in the late 1860s and early 1870s came to a sudden halt in 1873. Although the railway companies soon felt the negative effects of the recession, existing railway construction projects continued under their own momentum until the 1870s. However, 1877 marked the end of this period; the railway construction projects that had already been underway when the recession began were now completed and entrepreneurs showed no interest in new projects of this type, which made significant demands on capital yet represented a high-risk proposition in the new economic climate.43 Construction companies, which had profited tremendously from the railway boom of the late 1860s and early 1870s, now faced an entirely different situation. In a very short time they were forced to adapt rapidly and deal with a slump in demand for transport-related projects, which had previously represented a major source of income. Most large construction firms experienced severe problems; in addition to Gebrüder Klein, other companies in the Bohemian Crown Lands which battled with an uncertain future included Adalbert Lanna, Karl Schwarz and Johann Schebek.

Throughout the boom years, Gebrüder Klein had benefited from its activities in key industrial sectors, but the company now faced a difficult situation. Until the mid-1870s the firm was still able to profit from its ongoing railway construction contracts. The last railway project in which the company is known to have been involved was the Salzkammergutbahn (1875–1877). The problem was that once the worst of the crisis was over, at the turn of the 1880s, Gebrüder Klein proved incapable of adapting to the new circumstances and reestablishing its former primacy as a railway builder. The company played no part at all in the construction of the new local railways. This inability to adapt appears to have been due to the generational transition within the company, which ushered in an entirely new situation at the turn of the 1880s.

During the economic crisis of the 1870s, large construction companies attempted to seek out new, alternative avenues for their business. The most promising areas included water management projects, infrastructure projects involving the modernization of urban areas, and trade. Adalbert Lanna’s company sought to compensate for the slump through its involvement in the river regulation projects on the Vltava and Labe (Elbe),44 while in 1878 Gebrüder Klein actually managed to win one of the largest contracts in the firm’s history, playing the leading role in a canal construction and land reclamation project in the northern Italian province of Ferrara. On completion of the work, Gebrüder Klein established an Italian subsidiary, L’Azienda Gallare, which operated the drainage system until the turn of the twentieth century. The second main area in which both the Kleins and Lanna invested during the recession was the timber trade. In the early 1870s, in connection with the building of the Erste Siebenbürger Eisenbahn, the Kleins became aware of huge areas of forested land in Arad County (formerly Hungary, now Romania). In 1873, Albert and Franz Klein (together with the Viennese entrepreneur Johann Sepper and Baron Peter Atzél de Borosjenő) established a timber company, and in 1879 they purchased several estates around the town of Borosjenő (today Ineu, Romania), where they remained involved in the logging trade until the mid-1880s.45

However, the Kleins’ business activities in the late 1870s and 1880s represented the swansong of this once-successful company. The family proved unable to replace the lost income from railway construction and the firm’s profits gradually dwindled. The company began to owe large sums to banks, and, unlike in previous years, it also issued numerous promissory notes to other businesses. Nevertheless, Gebrüder Klein’s decline was a gradual process. In the early 1880s, the company still owned assets totaling around 7 million gulden, primarily real estate (coal mines, large estates, Vienna properties), securities (mainly shares in rail companies), and money owed by various debtors.46

In addition to the recession, another major problem with which the company had to contend was the generational transition, the Achilles’ heel of family businesses.47 This transition came at the most inconvenient time. In 1877, Albert Klein died. The last living member of the founding generation, he had built up a network of excellent social connections and he possessed an undoubted business acumen. This loss was followed four years later by the death of Albert’s nephew and long-term collaborator Franz II Klein. Their sons had all the necessary qualities to take over the family business successfully: a university education, strong financial capital, and social prestige.48 However, they proved incapable of implementing the necessary innovations in the business and the company failed to adapt to the changing circumstances.49 This inability to adapt exacerbated two latent problems that were also present in many other family businesses besides Gebrüder Klein: the lack of new capital, and unresolved legal and property relations among the heirs.50

During the 1880s, the remaining family members withdrew from playing an active role in the business; this was reflected in the gradual decline of the various components of the firm’s assets. The Kleins even reduced their role in activities which were clearly prospering ventures. In 1887, for example, the family withdrew from the Viennese construction firm “Gebrüder Klein, A. Schmoll und E. Gaertner,” which had been established in 1869 as a joint venture combining the know-how of the Viennese structural engineers Adolph Schmoll and Ernst Gaertner with the capital provided by the Kleins. The company specialized in road and railway bridges, river and canal embankments, and quays and docks. The Kleins sold their stake in the firm at a time when it was still working on contracts to build railway bridges for the Hungarian Northern Railway.51

The inability of Gebrüder Klein to respond quickly to changing circumstances was also reflected in the company’s organizational structure. Especially in capital-intensive sectors, the recession led to a significant degree of economic concentration, which also brought changes in the legal forms preferred by businesses. Former family firms, which had often operated as general partnerships, began to restructure themselves into capital-based companies, usually joint-stock companies or limited partnerships, and later also limited liability companies. In some cases these companies continued to operate in the same way as the previous family firm, merely with a change of legal status. Nevertheless, Jürgen Kocka views this change of legal form as a significant step towards the loosening of the ties between business and the family.52 Gebrüder Klein remained a general partnership until the firm’s eventual liquidation, and the company’s iron production business changed its legal form only belatedly, at the turn of the twentieth century.

The Kleins’ traditional domain—iron production—was particularly severely affected by the economic crisis. The recession of the 1870s dealt the final blow to small or obsolescent ironworks which had failed to keep step with the ongoing development of modern production technologies. By the early 1870s, the Kleins’ stake in the highly viable Kladno ironworks (cofounded by the Kleins in the 1850s) had been bought out by the Credit Anstalt für Handel und Gewerbe. Not even the skilled manager Friedrich Klein was able to modernize the ironworks operated by the Zöptauer und Stefanauer Bergbau- und Eisenhütten Gewerkschaft. The rapid obsolescence of these ironworks, and their increasing failure to keep step with the competition, was exacerbated from the late 1870s by a combination of factors, chief among them the family members’ unwillingness to invest in modern technologies and a shortage of operating capital. In the 1880s, Friedrich Klein built coking ovens at both ironworks, despite the opposition of family members, who feared that the new coal-fired ovens would cause a slump in demand for the timber from their estates. However, this partial modernization merely postponed the rapid decline in the ironworks’ fortunes. The works were located at a considerable distance from coal deposits, and they suffered from high transport costs and poor-quality iron ore. This made the operation uncompetitive, though the company’s inevitable failure was staved off for several years by the introduction of a new product range. In 1901, the ironworks business was transformed into a joint-stock company (the Zöptauer und Stefanauer Bergbau- und Hütten- Aktiengesellschaft) with a basic capital of 3 million Krone (krona), but not even this step could save it. In 1910, pig iron production in Zöptau ceased, followed in 1913 by iron production at the Stefanau works. Both sites subsequently focused solely on processing iron produced elsewhere.53

By the turn of the twentieth century the Kleins’ once-famous firm was reduced to a mere shadow of its former self. It ceased to exist entirely at the end of 1908, when it was officially dissolved. In the run-up to World War I, the Kleins’ business activities focused solely on their hereditary estates and their holdings of shares in several joint-stock companies. By this point, the Kleins were no longer members of the Austro-Hungarian business elite.54

Conclusion

In the period following the Napoleonic Wars, the Bohemian Crown Lands witnessed the emergence of its first generation of modern entrepreneurs, who made a major contribution to the industrialization of the region. Some of these entrepreneurs came from prominent dynasties of merchants and bankers (e.g. the Rothschilds, Gutmanns, Herrings, Zdekauers and Lämmels), but others worked their way up from modest beginnings as small business owners (e.g. the Liebig, Lanna and Starck families). This case study, based on an analysis of the Klein family business, has demonstrated the exceptionally important role played by families in entrepreneurial activities during the era of the Industrial Revolution. These structures helped mitigate the initial risks associated with business ventures, and families also played a key role in the transfer of business know-how. In the road construction industry, in which the Kleins’ family firm first rose to prominence, close cooperation among family members enabled the family to win building contracts and successfully implement large projects which would have been beyond the capabilities of individuals acting alone.

Several business strategies were used by Gebrüder Klein during the course of its existence. The core business strategy during the Industrial Revolution involved the creation of social networks, which brought major benefits both socially and economically. These networks were not generally built up in a calculated way; far more frequently they simply emerged naturally in response to the company’s ongoing trajectory of development. One specific business strategy used by some entrepreneurs during the era of the “old regime” was the purchase of large estates. In the Kleins’ case, the family’s investment in such an estate was connected with their plans to become involved in the iron industry. However, even after the abolition of the patrimonial system, entrepreneurs continued to consider the purchase of large estates a good form of investment that represented a safe and tangible store of value and a symbol of social prestige.

Before the collapse of the “old regime” in Austria, the Kleins managed to implement effective business strategies, enabling them to respond to the changing economic circumstances in this late feudal state. Above all this involved a considerable degree of diversification in the family’s business activities. Even under the founding generation, the family portfolio included investments in all of the important sectors of the burgeoning Industrial Revolution. This business strategy was implemented with demonstrable success by a number of other leading bourgeois entrepreneurs in the Bohemian Crown Lands. The Kleins were also quick to invest in securities, initially in government bonds and later in company shares. Their share portfolio was highly diversified, including railway companies, textile factories, sugar refineries and insurers.55

A major adaptation strategy involved organizational changes. These changes can be traced on two levels: firstly in terms of the changing legal forms of the businesses and secondly in terms of the professionalization of management, as companies began to appoint managers from outside the family. The transition to professional management took place relatively quickly in the Kleins’ various family businesses during the 1840s and 1850s, though it was not until 1853 that the family firm itself (originally run as a loose consortium) was restructured as a general partnership, with the partners directly involved in company management. However, this change in legal form was somewhat inflexible, and it did not fully reflect the transition to a system of professional management. The family’s ironworks business first existed as a family firm; it was not restructured as a joint-stock company until the turn of the twentieth century, though this was not enough to save it.

The close connection between business and the family is demonstrated by the fate of the Kleins’ company during the crisis years of the 1870s. The construction company Gebrüder Klein was severely impacted by the recession, like other large family firms in the Industrial Revolution era, and although it began to implement a viable adaptation strategy, this process was interrupted by the death of key family members who had played a central role in guiding the company’s development during its rise to prosperity. Their heirs were unwilling to continue in business, and this led to a gradual decline in the firm’s activities, accompanied by a lack of interest in new developments and trends.

Archival Sources

Opava Provincial Archives (=OPA)

Olomouc branch, fonds “Rodinný archiv Kleinů” [Klein family archives], cart. 1, inv. no. 35.

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Paulsen, Andreas. “Das ‘Gesetz der dritten Generation.’” Der praktische Betriebswirt. Die aktive betriebswirtschaftliche Zeitschrift. May 21, 1941. 271–80.

Pierenkemper, Toni. Unternehmensgeschichte. Eine Einführung in ihre Methoden und Ergebnisse. Stuttgart: Franz Steiner Verlag, 2000.

Pierenkemper, Toni. “Entstehung und Wandel der deutschen Unternehmerschaft im 19. und 20. Jahrhundert.” Prager wirtschafts- und sozialhistorische Mitteilungen 8 (2007/2008): 79–94.

Pokluda, Zdeněk. “Pronikání buržoasie do sféry deskového velkostatkářského vlastnictví na Moravě v polovině 19. století” [The Penetration of the Bourgeoisie into the Ownership of Large Estates in Moravia during the Mid-nineteenth Century]. Vlastivědný věstník moravský 33 (1981): 165–78.

Popelka, Petr. “Podnikání a životní styl špičkových měšťanských podnikatelů éry průmyslové revoluce ve světle pozůstalostních spisů. Příklad moravské velkopodnikatelské rody Kleinů” [The Business Activities and Lifestyle of Leading Bourgeois Entrepreneurs during the Industrial Revolution Era in the Light of Probate Documentation. The Example of the Klein Family of Entrepreneurs from Moravia]. Časopis Matice moravské 129 (2010): 45–77.

Popelka, Petr. “Sociální začleňování špičkových měšťanských podnikatelů éry průmyslové revoluce na příkladu moravské podnikatelské rodiny Kleinů” [The social Integration of Leading Bourgeois Entrepreneurs in the Industrial Revolution Era: the Example of the Klein Family from Moravia]. Slezský sborník 108 (2010): 204–33.

Popelka, Petr. “Firma ‘Gebrüder Klein’ jako příklad rodinného velkopodnikání éry průmyslové revoluce” [The Gebrüder Klein Company as an Example of a Large-scale Family Business in the Industrial Revolution Era]. Hospodářské dějiny/Economic History 26, no. 1 (2011): 37–64.

Popelka, Petr. Zrod moderního podnikatelstva. Bratři Kleinové a podnikatelé v českých zemích a Rakouském císařství v éře kapitalistické industrializace [The Birth of the Modern Entrepreneurial Class. The Klein Brothers and Entrepreneurs in the Bohemian Crown Lands and the Austrian Empire during the Era of Capitalist Industrialization]. Ostrava: Ostravská univerzita, 2011.

Popelka, Petr. Zrod moderní dopravy. Modernizace dopravní infrastruktury v Rakouském Slezsku do vypuknutí první světové války [The Birth of Modern Transport. The Modernization of Transport Infrastructure in Austrian Silesia up to the Outbreak of World War I]. Ostrava: Ostravská univerzita, 2013.

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Translated by Christopher Hopkinson

Judit Klement

How to Adapt to a Changing Market?

The Budapest Flour Mill Companies at the Turn of the Nineteenth and Twentieth Centuries

 

The focus of this article is the steam mill enterprises in Budapest at the end of the nineteenth century, a time when these companies were no longer enjoying their most profitable years. While earlier their high-quality flour had been sold for good profits on the markets of Western Europe, they found themselves slowly pushed from the marketplace by increasingly intense price competition, which was in part a consequence of the crisis in agriculture and, quite simply, the globalization of agriculture. While they were still able to produce for the undeniably important markets within the Austro-Hungarian Monarchy and ever higher customs duties on agricultural products helped strengthen their production for these markets, the demand for expensive flour on the domestic market was significantly smaller than in Western Europe. Confronted with the changes that had occurred in the marketplace, the mills in Budapest tried to adapt in a variety of different ways. In this article, I examine these strategies, focusing in particular on the very distinctive expansion of one of the mill companies.

Keywords: steam mill, agricultural crises, Hungary, Budapest, turn of the nineteenth and twentieth centuries, lobby activity, cooperation

 

The milling industry was the first branch of the economy in Hungary to represent modern, mechanized, large-scale industrial production. On the basis of production and exports, the milling industry was the leading branch of industry in Hungary in the nineteenth century.1 The most modern, best equipped large enterprises within this industry, the ones that were able to produce the largest quantities of flour, were found in Budapest. All of these enterprises were engaged in business on a relatively large scale. They used steam engines, which were in virtually continuous operation and produced flour for sale.2 Growth in the Budapest steam milling industry began in the 1850s and burgeoned in the 1860s and 1870s.3 Neither the so-called small crisis of 1869 nor the crash of 1873 did much to upset the position of the mill enterprises. These crises did not result in any long-term loss of profits, nor did they compel the companies to reconsider or restructure their positions in the marketplace.4 However, beginning in the 1880s, market conditions began to change significantly, and this did force the steam mill companies of Budapest to adapt to shifting circumstances. The ways in which they attempted to do this are the focus of my inquiry.

In the Background: The Globalization of Agriculture

Beginning in the 1880s, there was a glut of grain on the European markets, and grains began to be imported in large quantities from the United States, Canada, Argentina, India, and Russia. As a result of this glut, the prices of agricultural products began to drop dramatically, and the governments of Europe began to adopt increasingly protectionist policies with regards to customs duties, which first and foremost meant the introduction of duties on agricultural imports, duties which gradually rose.

The falling prices affected all agricultural products, which is why the period that began in the 1880s and lasted until the mid-1890s is referred to as a time of agricultural crisis in the secondary literature.5 All in all, the duties made both the purchase of grains (the raw material) from abroad and the export of flour (the semi-finished product) more expensive, while at the same time, though the raw material could be obtained at a lower price, the prices of flour were also dropping.

While this agricultural crisis was underway, the United States began to emerge as an increasingly competitive rival to Hungarian production of flour on the world market. The entry of American flour on the European markets was another sign of the globalization of agriculture. Beginning in the 1880s, the mills in the area around Minneapolis dramatically increased their production capacities.6 Economic development in the post-Civil War years provided the foundation for growth in Minneapolis. In the wake of the war, tremendous territories in the western United States were being cultivated and grains were being harvested. Train lines were under construction, which made it possible to transport the grains produced in the west and the mid-west to the east coast. In addition, steamboat travel between the United States and Europe was becoming increasingly frequent, and this further favored exports. Thanks to the efficiency of the network of train and steamboat companies in the United States, grains and flour from Northern America was less expensive on the West European markets, even with the increasingly punitive customs duties, than the grains and flour produced by Hungarian competitors.7 The production of flour in the United States was almost completely automatized, which meant both continuous production and low production costs.8 Both of these factors made American flour more competitive from the perspective of price. In addition, because American grains were similar from the perspective of the hardiness of the individual seeds to Hungarian grain, the ground flour was also of a similar quality.9 It was no coincidence that American engineers were very interested in the various innovations that were being introduced in the milling industry in Budapest, and they rapidly adopted similar measures in the United States,10 which meant that Budapest began to lose its technological advantage.

As a consequence of these developments, in the 1880s Hungarian grains and, first and foremost, the various kinds of flour produced in Budapest began to find themselves crowded out of the foreign customs markets. The domestic customs market, i.e. the Austro-Hungarian Monarchy, increasingly became the most important market for grains and flour.11 While in 1882, 53 percent of Hungarian flour remained in the territories of the Monarchy, by 1912 this number had grown to 87 percent (see Figure 1).

 

Figure 1. Hungarian flour exports to Austria and in total, between 1882 and 1912, in quintals

Source: Annual reports of the Budapest Chamber of Commerce and Industry from 1882 to 1912.

 

This represented a tremendous loss of markets for the steam mill enterprises of Budapest, which had sold their finely ground flours first and foremost on the markets in Western Europe (Great Britain, Germany, Switzerland, France, Holland, and Belgium), but also on markets in comparatively distant lands, such as Brazil, the Dutch East Indies, and South Africa. The markets within the Austro-Hungarian Monarchy simply were not capable of purchasing such large quantities of high-quality flour, and thus, the growth in the amount of exported flour notwithstanding (see Figure 1), for the mill companies of the Hungarian capital the market for expensive high-quality ground flours significantly shrank.

The Positions of the Budapest Mill Enterprises at the End of the Nineteenth Century

If one focuses exclusively on production, there were no indications that the mill companies of Budapest faced any particular problems at the end of the nineteenth century. In 1875, they produced a total of only 3,148,117 quintals. By 1910, this number risen to 7,222,229. In three individual years (1886, 1906, and 1907), they produced more than 8 million quintals. Until the mid-1890s, growth was continuous. From then on, production stagnated, moving between 6 and 8 million quintals (see Figure 2).

 

Figure 2. The sum total output of the Budapest steam mills between 1875 and 1910
(wheat, in quintals)

Source: Annual reports of the Budapest Chamber of Commerce and Industry from 1878 to 1910; Milling industry statistics, 1894.

A note on the terminology: “sum total” refers to the sum of the production data for all of the enterprises.

“Sum total (- Első Bp.)” refers to the sum of the production data, not including the data for the Első Budapest Rt. [First Budapest Joint Stock Company], which produced the largest quantities in Budapest.

 

Thus, neither the agricultural crisis nor the shifts that were taking place in the agricultural marketplace caused a drop in production. This was due in part to a deliberate business policy which could be referred to as an attempt to “escape by getting ahead,”12 since the companies attempted to address the problems caused by dropping prices by increasing production. Growth in production was also furthered by the introduction of the processing trade by the state.13

The processing trade made it possible for the mills to import grain without having to pay customs duties if they could export a given amount of milling product before a given deadline. The processing trade was not a new institution or phenomenon. As a practice, it had existed before, and it was familiar and part of established practice abroad as well.14 In Hungary, the second point of the tenth paragraph of law XVI of 1882 on the general customs and excise tariff for the customs area of the Austro-Hungarian Monarchy made it possible for this practice to be introduced again.15 The implementation of the law as it applied to the milling industry was regulated by a decree issued in the same year by the Ministry of Finance.16

According to the decree, the grains that were imported were free of customs duties, or rather the duties were refunded, if, within a year of having imported 100 kilograms of wheat, a given company exported 70 kilograms of wheat flour. In the case of rye, 65 kilograms of rye meal had to be exported for every 100 kilograms imported. (It is worth noting that these proportions correspond approximately to the quantity of wheat and rye meal that can be obtained from the grinding process. Bran was thus free of customs duties according to the decree.) The companies had to register the imported grains and the exported flour at the appropriate customs house. The decree specified only that the grain products that were exported had to correspond with the kinds of grain that were imported “according to their kind.” In other words, wheat that had been imported was free of customs duties if the company that imported it exported wheat flour. The decree makes no more specific mention of the raw materials or finished products, thus the companies did not actually have to demonstrate that the milling product that was exported was actually made using the grains that had been imported. By refunding customs duties, the government sought to ensure that the customs duties that were introduced in 1882 in the Monarchy did not have a negative influence on the volume of flour exported. Yet at the same time, the government also wanted to prevent duty-free grains from leading to price wars on the domestic market.

The leaders of the Budapest mill companies were unambiguous in their praise of the processing trade, and indeed they characterized it as life-saving. In their view, it helped compensate for the increased costs that had come with the introduction of customs duties on grains and flours.17 The processing trade was unquestionably one of the factors behind the growth in production. This is demonstrated quite clearly by the fact that the growth in production coincided with the introduction of the processing trade. In 1896, limits were placed for the first time on the discounts that were offered by the processing trade (for 100 kilograms of wheat, a company had to export 100 kilograms of wheat flour), and in 1900 the institution was eliminated altogether. In the case of the Budapest mills, production stopped growing in the 1890s.

The processing trade was the most vigorously opposed by the alliance of Hungarian landowners (Országos Magyar Gazdasági Egyesület, OMGE), since they regarded it as the primary cause of the drops in the prices of grain on the domestic market, and they also considered it a kind of cheating that there was no way of verifying that the milling products that were exported were actually made using the grains that had been imported. The OMGE had the support of Austrian farmers and Austrian and Czech industrial interests as well. Towards the end of the 1890s, in the course of negotiations intended to lead to the next economic compromise, the Austrians were adamant about the elimination of the processing trade, and in the course of similar negotiations in 1907 they were strongly opposed to its reintroduction. This demonstrates clearly that the question of the processing trade was not only a Hungarian issue.18

While the leaders of the milling enterprises in Budapest protested vociferously against the limitations placed on processing trade and later its elimination and, indeed, in the wake of World War I expected that it would be reintroduced, it is not immediately apparently that this would have had any significant effect on their profits. A contemporary market analyst made this contention in 1910, and my analyses support his conclusion.19 However, the debate concerning the processing trade played a considerable role in the ever more active presence of lobbyists working in support not only of the interests of the Budapest milling industry, but also in the interests of Hungarian industry in general. It is hardly coincidental that the National Alliance of Industrialists, an organization devoted to the defense of industry interests, was founded in 1900, in Hungary.

Since most of the Budapest milling enterprises were joint stock companies, their balance sheets, which were public information, allow for study of the successes and failures of their business ventures. In order to provide an overview of their circumstances at the end of the nineteenth century, I offer a summary of the results of my examination, forgoing diagrams and detailed analysis in the interests of brevity and space.20

The effects of the agricultural crisis were most immediately apparent in their profitability. (Profitability is measured here by earnings as a percentage of own capital, the latter of which is the sum of invested capital, reserves and write-offs, and earnings.) As of the early 1880s, drops in profits among the joint stock mill companies of Budapest were a general trend. Earnings as a percentage of own capital remained around 5 percent from the mid-1880s up to the outbreak of World War I. This constituted a drastic decline, since earlier this proportion had been consistently above 10 percent. The companies never managed to bring in profits comparable to earnings in the mid-1870s.

Drops in profit were followed by drops in dividends. Up until the late 1870s, the Budapest mill companies had reliably paid out annual dividends of more than 10 percent. In the early 1880s, dividends were roughly 15 percent of the nominal value of the stock. This dropped to 5 percent by 1886, and while there were two years in the first half of the 1890s in which dividends again rose to roughly 10 percent,21 5 percent was much more characteristic of the decade. (At the time, in general banks paid 6 percent on deposits.) After 1906, there was one more moment of economic upswing before the outbreak of war. This can be seen in increases in production. Profits also increased marginally, and dividends crept above 5 percent, but they remained below 10 percent on average. At the same time, one should add, with regards to dividends that according to the management reports most of the mill companies strove to pay at least 5 percent, even in the worst years, even if they had to dip into reserves in order to do this. In general, the companies set aside dividend reserves for this purpose.

The prices of shares of stock in the Budapest milling enterprises suggest similar economic trends. Until the mid-1880s, the shares remained roughly around 150 percent of their nominal value on the stock market. After 1885, their value dropped a bit, but remained above the nominal value. Share prices also reflect the brief period of growth in the first half of the 1890s, when on average they exceeded 150 percent of their nominal value, only then to plummet back down to 100 percent, where they remained for another decade. Beginning in 1906, share prices again reflect the period of upswing before World War I. Shares rose to and even went above 150 percent of their nominal value. Nonetheless, from the mid-1890s on, shares in milling enterprises fell out of the club of best investments, and they never became a part of this group again.22

While share prices only began to reveal the precariousness of the positions of the milling enterprises in the mid-1890s, the credit indicators at the Pest branch of the Austro-Hungarian Bank indicated potential concerns as early as the mid-1880s. This institution played the role of central bank at the time, and the decisions regarding which enterprises were given loans and how much they would be given reflected the market position of the given company or branch of industry. In the mid-1880s, the Austro-Hungarian Bank began to reduce the amounts of the loans that were made to the Budapest mill companies, though earlier they had regarded the credit of these businesses as particularly favorable. In 1890–91, the amounts of the loans that were given to some individual companies began to increase, though given the absence of sources, we know little about how this development progressed.23 At the same time, on the basis of the balance sheets, we do have an overview of the indebtedness of the Budapest milling enterprises. In other words, we can consider this question from the perspective of the borrowers. According to the balance sheets, the proportion of foreign capital to company capital followed the trend suggested by the Austro-Hungarian Bank’s credit indicators. In the 1880s and particularly in the latter half of the decade, the amount of foreign capital dropped slightly on the balance sheets. However, beginning in the 1890s, it began to grow again, and it continued to grow symptomatically until World War I.24 Furthermore, in the periods in which foreign capital was lower, the enterprises demonstrated that they wanted to hold proportionally larger funds in reserve and also that they were capable of a larger degree of internal financing. From the 1870s until the early 1890s, the amounts set aside in reserves grew continuously at the Budapest milling enterprises, but even when they ceased to grow, they still remained at the levels at which they had been at the end of the 1880s. The same was true of the companies’ ability to use internal sources to finance operations.

To summarize, the data that I have presented on the Budapest milling enterprises at the end of the nineteenth century illustrate clearly that the economic circumstances of these enterprises began to change dramatically beginning in the 1880s. Profits, which earlier had poured in, began to run dry, dividends and share prices dropped, and external sources of credit temporarily declined. While it is quite apparent that they were compelled to make significant strategic shifts in order to adapt to shifting market conditions, this period was not nearly as dire from the perspective of the fates of these companies and the challenges that they had to face as the post-war period, which bore witness to a fatal decline in market position.25 Rather, in the period before the outbreak of World War I, on the basis of the data the milling enterprises simply seem to have been part of a branch of industry that was no longer growing.26 However, the shift in their positions on the market also led to changes in the business policies and strategies of these companies.

Adaptation to the Market

The continuous growth in production, which lasted until the mid-1890s, and the strengthening of the tendency to set aside funds in reserves that could even be used to pay dividends both indicate attempts on the part of the companies to adapt to shifting circumstances. But the genuinely striking shift came with efforts among the various enterprises to promote cooperation and hold onto or acquire new markets.

As the Budapest mills, far from cutting production, actually increased it, the abovementioned narrowing of their markets led to a glut. The companies attempted to address this problem by agreeing on shared production limits. Company leaders met almost every year to attempt to arrive at some consensus, and these meetings were always recorded in the annual reports of the boards of directors. However, even if an agreement were reached regarding mutual cuts in production that would last a few months, it was not at all certain that either party would actually stick to the terms of the agreement. The annual reports contain recurring complaints concerning the necessity of cutting back production, which was justified because of the accumulating stockpiles, and the failures of the negotiations to reach an agreement concerning mutual reductions of operations. Earlier, there had been hardly any examples of the milling enterprises of Budapest attempting to work together in their own shared interests.27

The failure of the companies to negotiate a meaningful form of cooperation was one of the factors that galvanized their efforts to acquire new markets. Beginning in the 1890s, the milling enterprises of the Hungarian capital strove to purchase mills in settlements in the countryside and, thereby, to obtain their markets. While the Budapest mill companies had vibrant and effective ties with enterprises and markets beyond the borders of the Austro-Hungarian Monarchy (the strength of which, however, decreased with the loss of markets in the wake of the agricultural crisis), the milling enterprises outside of Budapest enjoyed advantageous positions on the markets within the Monarchy and in Hungary. Thus, by acquiring the mills outside of Budapest, the mill companies in the capital had more opportunities to sell on the domestic market, which also meant avoiding having to pay customs duties.28

Towards the end of the nineteenth century, some of the Budapest milling enterprises began to merge, and this represented another manner of acquiring new markets. Pannónia and the Erzsébet Gőzmalom Rt. (Erzsébet Steam Mill Joint Stock Company) merged in 1896. Over the course of a decade of aggressive business moves, one of the enterprises, Első Budapesti Gőzmalom Rt. (First Budapest Steam Mill Joint Stock Company), managed to acquire four of its competitors. This “hostile maneuvering” began at the turn of the century and continued to lead to mergers in the late 1920s and the mid-1930s.

The Expansion of the First Budapest Steam Mill Joint Stock Company

I have addressed the circumstances of and challenges faced by the milling enterprises of Budapest in general thus far, making no mention of the at times quite considerable differences among them. However, at the beginning of the twentieth century, two of the companies in the Hungarian capital began to get well ahead of their competitors from the perspective of business and production results, the Victoria Steam Mill Joint Stock Company and the First Budapest Steam Mill Joint Stock Company. Victoria Steam Mill had significant financial backing from abroad, primarily from England, and grew in part because of expansion into the Balkans. The First Budapest Steam Mill Company had support from domestic banks and developed a network of enterprises that for a long time was not overly conspicuous. In the rest of my study, I focus on the details of this story.29

The relationships between the companies first became noticeable because of the presence of certain individuals. Leaders of the First Budapest Steam Mill Company all of a sudden would acquire roles on the boards of directors and the supervisory committees of other mill companies in Budapest,30 specifically as of 1904 at the Pesti Molnárok és Sütők Gőzmalma Rt. (Pest Millers and Bakers’ Steam Mill Joint Stock Company) and the Lujza Gőzmalom Rt. (Lujza Steam Mill Joint Stock Company) and as of 1912 at the Erzsébet Gőzmalom Rt. (Elisabeth Steam Mill Join Stock Company). From 1904 to 1907, three of the at least five people on the board of directors of the Pest Millers and Bakers’ Company came from First Budapest, and in 1907 this number rose to four. In 1905, the relationship became mutual, when the general manager of the Millers and Bakers became one of the eight people serving on the board of directors at First Budapest. In the case of the Lujza Steam Mill Company, as of 1904 First Budapest continuously had three people on the board of directors and one person on the supervisory committee, as of 1911, in the latter two.31 Additionally, in 1914, a new general manager was appointed who also had a position at First Budapest. In return, the interests of Lujza Steam Mill Company were represented on the board of directors of First Budapest by two people, and from 1912 on by one member. First Budapest’s relationship with Erzsébet Steam Mill remained one-sided, meaning people from First Budapest acquired positions at Erzsébet. In 1912, three of the at most ten people on the board of directors were from First Budapest, as were two of the five people on the supervisory committee.32

Earlier, these kinds of personal interconnections had been prohibited by articles of associations. Indeed for this very reason, general meetings had to be held in order to modify the articles of associations. This took place in roughly the same manner everywhere. For instance, in April of 1904, Pest Millers and Bakers made an alteration to the company’s constitution in order to loosen this restriction. The relevant clause of paragraph 35 contained the following stipulation: “[t]he members of the board of directors cannot play roles in the leadership or management of other milling enterprises unless the board of directors gives its unanimous agreement.”33 However, beyond this, nothing took place at the general meetings of these companies that would indicate that some agreement or accord had been reached or some form of cooperation or collaboration was underway with another company.

The reports of the First Budapest board of directors that survived among the writings of the company make some mention of these new relationships, though admittedly only sparing mention. The report on financial year 1903 contained the following passage regarding the relationship of the company to Pest Millers and Bakers and the Lujza Steam Mill:

 

The intense competition with the mills of the capital described in the first section of our report and also the difficulties that arise every time it would be important to arrive at agreements regarding the most significant questions of our industry prompted us, on the subject of drawing other milling companies into our sphere of interest, to give serious consideration to those among the overtures that have again been made to us that we are convinced will not only loyally defend the interests of the shareholders of these companies, but whose collaborative participation will also be advantageous from many perspectives for us and will also correspond to our business goals. And in the end we accept the offers that have been made by the Lujza Steam Mill and the Pest Millers and Bakers’ Steam Mill Companies. [The manner of implementation will be voluntary exchange of shares] in such a manner that we promise the shareholders in the Lujza Steam Mill Company one share in our company in exchange for five shares in the Lujza company and the shareholders in the Pest Millers and Bakers’ Company one share in our enterprise for every three shares in the Millers and Bakers’ Company, and all this without dividend warrants for the 1903 financial year. […]

While it is our intention to maintain the independent organization of the two shareholder companies to be drawn into our sphere of interest, nonetheless, cooperation among three such prominent enterprises, each of which has a production capacity exceeding three-million [quintals] per year, creates numerous advantages and will definitely help us place the business of strong foundations. Furthermore, it will increase the competitiveness of Hungarian flour on the foreign market and thus will perform a useful service for Hungarian exports and, indirectly, the Hungarian economy.34

The reference to “intense competition” and the “difficulties” that arose with regards to reaching agreements on the most important questions indicate that the expansion became the new strategy of First Budapest. Since the company had been unable to arrive at lasting agreements with its competitors, it had chosen another path: “drawing” the other companies into its “sphere of interest.” The board of directors needed a detailed explanation because the proposal to “draw” other enterprises into First Budapest’s “sphere of interest,” i.e. in concrete terms the implementation of “voluntary exchange of shares,” meant that First Budapest would have to issue new shares. So the general meeting of First Budapest had to increase the capital of the company. At the assembly that was held on February 15, 1904, the general meeting voted in favor of raising the capital from 3 million crowns to 4.5 million crowns by issuing 3,000 shares with a nominal value of 500 crowns. Thus, the overlaps between the companies, which were already visible in the presence of First Budapest’s people on the board of directors and supervisory committee of other companies, also became overlaps in ownership.

While the exchange of shares of stock was voluntary, the report of the board of directors of First Budapest indicates the scale of the planned acquisition. According to the report, they offered one share of First Budapest stock in exchange for five shares of stock in Lujza Steam Mill and three shares of stock in Pest Millers and Bakers.35 At the time, Lujza Steam Mill had a capital of 2,800,000 crowns and 8,750 shares of stock with a nominal value of 320 crowns. The Pest Millers and Bakers’ Steam Mill Company had a capital of 1,800,000 crowns with 4,500 shares of stock with a nominal value of 400 crowns. If the shareholders had wished to acquire all of the Lujza stock, they would have needed 1,750 shares of First Budapest stock in order to do so. Similarly, it would have needed 1,500 shares of First Budapest stock in order to acquire all of the Pest Millers and Bakers shares. All in all, this exchange, in both companies, would have required a total of 3,250 shares of First Budapest stock. Since the general meeting of First Budapest had decided to issue 3,000 new shares of stock, they cannot have assumed that the shareholders in Lujza and Pest Milllers and Bakers intended to exchange all of their stock in these companies. However, they were clearly interested in securing a majority share.

If we consider the offer from the perspective of the Lujza and Pest Millers and Bakers shareholders, the exchange of stock does in fact seem to have been a reasonable proposition. Since 1900, stock in the Lujza Steam Mill Company had been weaker with each passing year, and the value of the stock on the market had remained between 210 and 230 crowns, in other words only 65 to 70 percent of the nominal value. The nominal value of five shares of this stock was 1,600 crows, but even at a bad market price they were worth at least 1,000 crowns, in exchange for which First Budapest was offering one share of its stock, nominally worth 500 crowns but in general fetching at least twice as much on the market. (On December 31, 1903 the market price of First Budapest stock was 1,285 crowns, and on June 30, 1904 it was 1,1000 crowns.) The Pest Millers and Bakers’ Company stock had a better standing on the market than the Lujza stock. They generally closed at a price above their nominal value, and even when the price dipped, it remained around 94 percent, or 375 crowns. The nominal value of three shares of Pest Millers and Bakers stock was 1,200 crowns or, when the price dropped, 1,125 crowns. Thus, the market price of First Budapest stock was roughly equal to that of three shares of Pest Millers and Bakers stock (see Figure 3).36

Figure 3: Market prices of shares of stock in the Budapest milling enterprises
as a percentage of their nominal value.

A note on the terminology: “average” refers to all of the enterprises; “average - Első Bp.” refers to average market value of stocks, not including the data for the Első Budapest Rt. [First Budapest Joint Stock Company]; “average - Első Bp. - Viktória” refers to average market value of stocks, not including the data for the Első Budapest Rt. [First Budapest Joint Stock Company] and for Viktória Steam Mill Joint Stock Company.

Source: Tőzsdelap, 1900–1914.

The documents of the companies contain no details concerning the actual implementation of the exchange of stocks, nor is it actually clear that either the Lujza Steam Mill Company or Pest Millers and Bakers actually sought to establish a relationship with First Budapest. However, the shares that were represented in the course of general meetings offer some insights into the rearrangement of the shareholdings. Since the voting power of an individual shareholder at an assembly was always proportionate to the number of shares he possessed (in compliance with the proportion of shares to votes specified in the articles of association of the company), in order to determine the number of votes for a given assembly the shareholders had to present their shares which they intended to have in votes at the general meeting. This presentation always took place before the general meeting, mainly in a bank or at the pay desk of the company. The lists of shareholders that were compiled became part of the minutes of the general meeting and thus constituted documents that had to be submitted to the registry court. If they survived among the documents of the company or the registry court, they enable us to reconstruct the circle of proprietors of a joint stock company. However, the fact that only a small fraction of shareholders actually showed up for the assemblies does significantly limit the usefulness of these lists.37 Fortunately, in the case of the Lujza Steam Mill Company and the Pest Millers and Bakers’ Steam Mill Company the lists for 1904–1914 are available, with the exception of the Millers and Bakers list for 1912, thus I was able to draw on these sources.38

The First Budapest Steam Mill Company does not figure a single time on any of the lists of shareholders. In other words, the company used individuals to further its interests at the assemblies. Thus, with regards to the presence of the company as a shareholder and owner, one must consider the shares of stock held by the people that represented First Budapest.

The people who had positions at the Pest Millers and Bakers’ Steam Mill as of 1904 and at the same time represented the interests of First Budapest were all present at the general meetings as shareholders. Their combined share in the company was small at first, reaching barely 1 percent, but by 1905 and 1906 it had risen to 5 percent, and as of 1907 it remained around 10 percent (see Table 1).

 

	1904	1905	1906	1907	1908	1909	1910	1911	1913	1914
Sándor halmi Deutsch	10			100	100	100
Károly Haggenmacher	10	100	100	100	100	100		100	150	150
Jakab Lang	10
Ede Langferder	10	100	100	100	100	100	100	100	150	150
Ottó Mayer				100	100	100	100	100	100	150
Henrik rátonyi Reusz	10		50			50	100	100	100	150
Jakab Schuk	10	30	60	30	30	30	30	30
Number of shares of stock owned by them	60	230	310	430	430	480	330	430	500	600
Shares of stock owned by them as a percentage of the total number of shares in the company (%)	1.3	5.1	6.9	9.6	9.6	10.7	7.3	9.6	11.1	13.3
Total number of shares of stock presented at the assemblies	1853	1190	1180	1280	1030	1350	1150	1290	1470	1460
Total shares of stock presented at the assemblies as a percentage of the total number of shares in the company (%)	41.2	26.4	26.2	28.4	22.9	30.0	25.6	28.7	32.7	32.4

 

Table 1: Shareholdings of the people who represented the First Budapest Steam Mill Company at the general meetings of the Pest Millers and Bakers’ Steam Mill Company, 1904–1914

 

Not all of the people who represented First Budapest and had come to play important roles at Lujza from 1904 were listed as shareholders at the general meetings, but the tendency was similar. Their presence could not be detected in 1904, but by 1905–1906, they represented almost 5 percent of the shares, and as of 1907 their share ownership hovered around 10 percent (see Table 2).

	1904	1905	1906	1907	1908	1909	1910	1911	1912	1913	1914
Lajos Gerisch							200	200	200	200	200
Károly Haggenmacher		125	125	125	125	200	200				200
Ede Langfelder		125	125	375	125	200	200	200	200	200	200
Miksa Löwy		125	125	125	125	200	200	200	200	200	200
Ottó Mayer				125	125	200	200	200	200		200
Number of shares of stock owned by them	0	375	375	750	500	800	1000	800	800	600	1000
Shares of stock owned by them as a percentage of the total number of shares in the company (%)	0.0	4.3	4.3	8.6	5.7	9.1	11.4	9.1	9.1	6.9	11.4
Total number of shares of stock presented at the assemblies	1146	2000	1875	2375	1875	3200	2800	2800	3000	2400	3000
Total shares of stock presented at the assemblies as a percentage of the total number of shares in the company (%)	13.1	22.9	21.4	27.1	21.4	36.6	32.0	32.0	34.3	27.4	34.3

 

Table 2: Shareholdings of the people who represented the First Budapest Steam Mill Company at the general meetings of the Lujza Steam Mill Company, 1904–1914

 

One can therefore conclude, on the basis of this data, that after 1904, the First Budapest Steam Mill Company managed to acquire 10 percent of both the Lujza and the Pest Millers and Bakers’ Steam Mill companies. However, on the lists of shareholders one finds not only “representatives” delegated by First Budapest, but also other people who had positions at First Budapest, as well as representatives of other enterprises that had been drawn into the sphere of interest of First Budapest. For instance, the general manager of the Lujza Steam Mill was present as a shareholder in the Pest Millers and Bakers’ Steam Mill Company, and vice versa. If one considers all of the people among the Pest Millers and Bakers’ Steam Mill and the Lujza Steam Mill Company shareholders who were in positions at First Budapest or at other companies in the sphere of interest of First Budapest at the same time (for the sake of simplicity I will refer to them as “network people”), their presence is even more striking. They owned almost 20 percent of the shares at these companies. And at this time a stake between 15 and 20 percent in an enterprise meant a majority share (see Tables 3 and 4).39

	1904	1905	1906	1907	1908	1909	1910	1911	1913	1914
Sándor halmi Deutsch	10			100	100	100
Izidor Déry	10	50	50	50	50	50	100	100
Henrik Fellner	5
Lajos Gerisch	10	30				30	30	30	50	50
Károly Haggenmacher	10	100	100	100	100	100		100	150	150
Kálmán Kovácshegyi	1
Jakab Lang	10
Ede Langfelder	10	100	100	100	100	100	100	100	150	150
Leó Lánczy	10
Vilmos Leipziger	10	100	100	100		100
Miksa Löwy	10	50	50	50		50	50	50	50	50
Ottó Mayer				100	100	100	100	100	100	150
Rezső Renschler	10	30	30			30
Henrik rátonyi Reusz	10		50			50	100	100	100	150
Jakab Schuk	10	30	60	30	30	30	30	30
Ferenc Waigand	10	100	100	100	100	100	100	100	100	150
Number of shares of stock owned by them	136	590	640	730	580	840	610	710	700	850
Shares of stock owned by them as a percentage of the total number of shares in the company (%)	3.0	13.1	14.2	16.2	12.9	18.7	13.6	15.8	15.6	18.9
Total number of shares of stock presented at the assemblies	1853	1190	1180	1280	1030	1350	1150	1290	1470	1460
Total shares of stock presented at the assemblies as a percentage of the total number of shares in the company (%)	41.2	26.4	26.2	28.4	22.9	30.0	25.6	28.7	32.7	32.4

 

Table 3: Shareholdings of the “network people” on the basis of general meetings
of the Pest Millers and Bakers’ Steam Mill Company between 1904 and 1914

	1904	1905	1906	1907	1908	1909	1910	1911	1912	1913	1914
Sándor halmi Deutsch		125	125	125	125	200
Izidor Déry	377	250	125	Represented	125	200	200	200
Henrik Fellner				250	125	200	200		200
Lajos Gerisch							200	200	200	200	200
Károly Haggenmacher		125	125	125	125	200	200				200
Ede Langfelder		125	125	375	125	200	200	200	200	200	200
Leó Lánczy				Represented
Vilmos Leipziger		125		Represented	125
Miksa Löwy		125	125	125	125	200	200	200	200	200	200
Ottó Mayer				125	125	200	200	200	200		200
Henrik rátonyi Reusz		125	125	125		200	200	200	200	200	200
Ferenc Waigand				125	125	200	200	200	200		200
Number of shares of stock owned	377	1000	750	1375	1125	1800	1800	1400	1400	800	1400
Shares of stock owned as a percentage of the total number of shares in the company (%)	4.3	11.4	8.6	15.7	12.9	20.6	20.6	16.0	16.0	9.1	16.0
Total number of shares of stock owned by people present at the assemblies	1146	2000	1875	2375	1875	3200	2800	2800	3000	2400	3000
Total shares of stock owned by people present at the assemblies as a percentage of the total number of shares in the company (%)	13.1	22.9	21.4	27.1	21.4	36.6	32.0	32.0	34.3	27.4	34.3

 

Table 4: Shareholdings of the “network people” on the basis of general meetings
of the Lujza Steam Mill Company between 1904 and 1914

A note on the terminology: “Represented” means that the given person was represented at the general meeting by another shareholder, and there isn’t any information about the number of his shares.

At the same time, one cannot merely assume that these individuals were members of an organized “network,” rather, one must demonstrate this, so it is worth taking a closer look at the names. The first distinct group that emerges consisted of the highly trained steam mill specialists who were employed at First Budapest, including the head clerk, the company director, the chief accountant, the technical and trade director, and the general manager.40 One also discerns another group among the people who had ties to First Budapest, namely people who were members of the board of directors or the supervisory committee.41 The third group consisted of the general managers of the two mills that had been drawn into the sphere of interest of First Budapest, Ferenc Waigand from Pest Millers and Bakers and Izidor Déry from Lujza. The fourth group was made up of bankers, and they seem to have been the “key” to this network. Leó Lánczy, who had been a member of the board of directors of First Budapest since 1895, had served as the president of the Pesti Magyar Kereskedelmi Bank Rt. (Hungarian Commerce Bank of Pest) since 1881. He was also president of the Budapest Chamber of Commerce and Industry and a member of parliament.42 Henrik Fellner, who became a member of the board of directors at Lujza in 1904 and then at First Budapest in 1907, served as managing director of the Hungarian Commerce Bank of Pest between 1882 and 1911 and then became the head of Leipziger’s spirits and sugar factory.43 (Vilmos Leipziger himself had a close connection to them, and it was hardly coincidental that after Lánczy’s first appearance in 1895 on the board of directors of First Budapest, Leipziger also became a member of the board, nor is it surprising that Fellner became the head of the Leipziger factory after 1911, though it is true that Leipziger himself was not a banker.)

Thus, if one considers the positions played by these individuals in the companies and the influence they exerted as shareholders, the essence of the statement made in the 1903 report issued by the First Budapest board of directors becomes clear and vivid: “cooperation among three such prominent enterprises, each of which has a production capacity exceeding three-million [quintals] per year.” Positions of influence and ownership of significant quantities of stock helped ensure that Pest Millers and Bakers and Lujza would come and remain under the supervision and sway of First Budapest, and in the background the Hungarian Commerce Bank of Pest could wield its influence to further its interests.

Presumably, First Budapest adopted a similar strategy when it drew the Erzsébet [Elisabeth] Steam Mill Company into its sphere of interest in 1912. The overlaps in individuals who served in positions of influence at both companies were also accompanied by the acquisition of stock, in all likelihood through the voluntary exchange of shares. The report of the First Budapest board of directors on financial year 1912 certainly suggests this.44 However, none of the lists of shareholders in the Elisabeth Steam Mill Company after 1880 survives, and we do not even know what kinds of exchanges were offered to Elisabeth shareholders. The Hungarian Commerce Bank of Pest, however, definitely had a presence among the leaders of this company. In 1908, Fülöp Weisz, who had begun his career at the Commerce Bank in 1891, became a member of the board of directors of Elisabeth. By that time, he was already on the board of directors at the bank. In 1911, he became the executive director in his bank, and after the death of Lánczy in 1921 he became the president.45

The Expansion of the First Budapest Steam Mill Seen from Below

Expansion of the First Budapest Steam Mill Joint Stock Company, however, went beyond drawing the Pest Millers and Bakers, Lujza, and later Erzsébet into their “spheres of interest.” In 1916, they exerted their influence on the Pesti Hengermalom Rt. (Pest Rolling Mill Joint Stock Company), which remained independent until 1928, at which point it merged with First Budapest. The case of Pest Rolling Mill differs from that of the other three corporations simply because primary sources have survived that offer insights into the moment when the corporation joined the “sphere of interest” of the First Budapest Steam Mill. In addition, the extraordinary primary sources may also further an understanding of the actual meaning of the expression “belonging to the sphere of interest,” as well as the role that was played by the Hungarian Commerce Bank of Pest.

The minutes of a meeting survive which provide written documentation of how the corporations entered into contact with each other. It is quite telling that the documents were found not in the archives of the companies themselves or the Hungarian Commerce Bank of Pest, nor were they among the office records of the registry court. Rather, they were in a family bequest.46 The minutes of the meeting were taken on February 9, 1916, and six people took part in the meeting.

[R]ecorded […] during the meeting of the representatives of the Hungarian Commerce Bank of Pest, specifically his excellency privy councillor Leó Lánczy and Henrik Fellner, members of the board of directors of the Hungarian Commerce Bank of Pest, and also the board of directors of the First Budapest Steam Mill Company, represented by members of the board of directors his excellency privy councillor Leó Lánczy, Henrik Fellner, and general manager Ede Langfelder, as well as member of the Upper House Sir Konrád Burchard-Bélaváry, Dr. Rezső Burchard-Bélaváry and Dr. Andor Burchard-Bélaváry, the three of whom are representatives of the majority of the shareholders of the Pest Rolling Mill Joint Stock Company.

Thus, Lánczy and Fellner represented both First Budapest and the Commerce Bank. The meeting was held at the home of Konrád Burchard-Bélaváry,47 which means that, in addition to constituting an official record of the discussion, the minutes were also the product of an unofficial and private talk. The parties to the negotiations pledged in writing (and affirmed with their signatures) that until February 17, “the regulations… would remain in word only.” They planned to hold the annual general assembly of First Budapest by February 17, since they needed the authorization of the general meeting in order to execute several points of their agreement. With the proper authorizations, the minutes would become a “legally binding [...] agreement.” (And this did in fact come to pass, as they had expected it would.) Lánczy was the president of the six-person “sitting.” Langfelder kept the minutes.

 

Leó Lánczy […], having opened the meeting, states that he turned to the representatives of the abovementioned majority of shareholders in the First Budapest Steam Mill Company and the Pest Rolling Mill Joint Stock Company with the idea that the Pest Rolling Mill Company join with the First Budapest Steam Mill Joint Stock Company.

According to the minutes, First Budapest sought to establish ties with Pest Rolling Mill, and Ede Langfelder, acting on behalf of First Budapest, had already discussed the preconditions of a closer relationship between the two enterprises before the meeting was held with Rezső Burchard-Bélaváry, representing Pest Rolling Mill. The proposal made by First Budapest should seem familiar: a voluntary exchange of Rolling Mill stock for stock in First Budapest, “in a manner, however, that ensures that the Pest Rolling Mill Company will remain an independent shareholder company.” According to the concrete offer, First Budapest offered one share of its stock in exchange for four shares of stock in Pest Rolling Mill. Anyone who did not wish to take advantage of the exchange could keep their shares of Pest Rolling Mill stock or could sell it to First Budapest for 400 crowns per share in cash. This offer also seemed reasonable, since shares of stock in First Budapest, which had a nominal value of 500 crowns, were fetching 1,860 crowns on the market, while shares of stock in Pest Rolling Mill, which had a nominal value of 300 crowns, were selling for between 300 and 400 crowns on the market in the years leading up to World War I.48

The real value of the minutes, which contained fourteen points, lies in the fact that they shed light on the regulation of details of an affair that was already familiar. For instance, the minutes make clear that the preliminary negotiations touched on the question of the operational and strategic leaders of the company that was being absorbed. The minutes also make note of the stipulation that the members of the board of directors and the supervisory board of Pest Rolling Mill would be allowed to keep their positions in the future, as would the managing directors and white-collar workers. Furthermore, First Budapest offered separate five-year contracts to Károly Stumpf and Andor Burchard-Bélaváry, who had served as managing directors at Rolling Mill, as well as Boldizsár Luby, a wheat buyer, alongside their salaries at the time. These three men were responsible for the everyday operational management of the company.

The fifth point of the minutes stipulates that the next Rolling Mill general meeting had to elect four board of directors’ members and two supervisory committee’ members from First Budapest. According to the text, “the board of directors of First Budapest will disclose the names of the men that it will choose for the board of directors and the supervisory committee of Rolling Mill at a fit and proper time.” As the First Budapest leaders ensured in advance their new members of the governing body, they put it in writing, and they appended the new articles of association of Rolling Mill to the minutes as well, on which the following general assembly, to be held in March, had to vote. The eleventh point of the minutes indicates that, as the parties had agreed, Rolling Mill would also send a representative, specifically Konrád Burchard-Bélaváry, to serve on the board of directors of First Budapest:49 “[The] Hungarian Commerce Bank of Pest, as the owner of the majority share of First Budapest, […] guarantees implementation of this choice.” In other words, the real significance of the Commerce Bank, which consistently referred to itself as a “mediator” in the case, lay in its influence as the majority shareholder of First Budapest Steam Mill Company. The agreement also specifies that Konrád Burchard-Bélaváry would remain president of Rolling Mill and Rezső Burchard-Bélaváry would remain vice president, and, furthermore, that Rezső would succeed Konrád as president and would be paid an honorarium of 10,000 crowns per year.50

The details concerning the exchange of shares are covered in several points. The “task” of the Burchards was “to support and facilitate to the best of their ability the implementation of the intended transaction” and to “pledge to trade 4,040 shares of Rolling Mill stock for shares in First Budapest in the abovementioned way.” Rolling Mill had 8,000 shares of stock in circulation on the market, thus the three Burchards (Konrád, Rezső, and Andor) themselves provided the majority of the shares for the undertaking. According to the agreement, the Hungarian Commerce Bank of Pest would inform shareholders in Rolling Mill of the chance to exchange their stock, and the text of this notice was also appended to the minutes. It is worth citing the beginning of this text:

 

We have the pleasure to inform you that an agreement has been reached, with our intercession, among the representatives of the majority of shareholders in the Budapest firm, First Budapest Steam Mill Company, and the Pest Rolling Mill Company. This agreement has as its goal the nurturing of a closer relationship between the Pest Rolling Mill Company and the First Budapest Steam Mill Joint Stock Company. This agreement can only have a positive impact on the production and trade relations of both enterprises, not to mention the profitability of the stock.

 

The “intercession” of the Commerce Bank also meant that the bank would take possession of the Rolling Mill shares in exchange for a temporary voucher and then would deliver these shares in exchange for First Budapest shares when these First Budapest shares were issued, which would take place after the following general assembly of First Budapest had authorized an increase in the capital. The Rolling Mill shareholders would not have to pay any of the costs of this exchange of shares, as First Budapest and the Commerce Bank had agreed to cover them.51

The contract contained specific provisions concerning the fate of the First Budapest shares that were to be given in exchange for the Rolling Mill shares. The owners-to-be of the 1,010 shares of First Budapest stock that were received in exchange for the 4,040 shares of Rolling Mill stock owned by the Burchards were bound by the terms of the contract not to sell the stock without the express permission of the First Budapest board of directors “for the moment for a period of nine years, i.e. until the expiration of next mandate of the First Budapest board of directors,” i.e. until 1925. Indeed, the contract also stipulated that, “these shares should be disposable at the request of the First Budapest board of directors on the occasions of the First Budapest general meetings with the goal of having its motions passed. In the interests of this goal, these share owners should present their shares before each individual general meeting of First Budapest at a time and place specified in the articles of association.” These conditions applied, according to the minutes, to every new share of First Budapest stock that the three Buchards or “a majority group represented by them” received as part of the exchange. If they wished to sell shares, they had to give First Budapest or a company named by First Budapest the first right to buy. First Budapest wished to keep a close watch on the ownership of its shares of stock in the hands of the Burchards:

 

In December 1924 and every five years thereafter (1929, 1934, etc.), Misters Burchard-Bélaváry must declare in writing to the First Budapest board of directors whether they intend to maintain the block specified in these minutes on the sale of the shares of First Budapest stock in their possession for the duration of the next five-year mandate of the First Budapest board of directors.

The second-to-last point of the minutes clarifies what is meant by the phrase “belonging to the sphere of interest”: in questions pertaining to management, in the future Rolling Mill would have to cooperate continuously with First Budapest:

 

The drafting and finalizing of the Rolling Mill balance sheets for December 31, 1915 and the presentation of a motion to be made to the Rolling Mill general assembly on the question of how to use net profits will take place with the cooperation of the First Budapest board of directors and with their consent.

Undeniably, the market position of the First Budapest Steam Mill Company was continuously growing stronger in the first decade of the twentieth century. In other words, one cannot venture any conclusions concerning the contracts that were concluded between First Budapest and Pest Millers and Bakers and First Budapest and Lujza in 1904 or between First Budapest and the Elisabeth Steam Mill Company in 1912 (these contracts have not survived) simply on the basis of the strategies that were adopted by First Budapest in the acquisition of Pest Rolling Mill in 1916. Those contracts may well have been significantly different, but one can be quite sure that they devoted similar attention to detail when addressing questions of the various levels of strategy and operations, the precise implementation of the exchange of stock, the ways in which the shares of First Budapest stock that were obtained by the leaders of the companies that were brought, as a consequence of the exchange, into the sphere of interest of First Budapest would be handled, and the future forms of cooperation between the enterprises.

The distribution of the shares of stock in Pest Millers and Bakers and Lujza and the agreement discussed above that was reached with Pest Rolling Mill clearly indicate that, as a result of the transactions, First Budapest obtained a majority share in all four enterprises. Undoubtedly, First Budapest needed the support of a bank in order to finance and arrange these acquisitions, which were provided by the Hungarian Commerce Bank of Pest. The representatives of First Budapest then occupied operational and strategic positions at the other companies. Thus, all four enterprises found themselves in a close relationship with First Budapest. However, this was not a one-directional relationship that was entirely dictated by First Budapest. Rather, as a consequence of the agreements that were reached with the companies that were drawn into its sphere of interest, the earlier leaders of these companies for the most part occupied positions on the First Budapest board of directors. They supported its operations by giving their consent, and were also present at the general assemblies of the other companies as shareholders. First Budapest was in the center of the network, and the Hungarian Commerce Bank of Pest was right behind it, but there were also ties between the companies that worked together with them.

It is a bit difficult to find a precise term with which to describe what came into being as a result of the whole process. It was not quite a merger, since the companies continued to operate individually, legally. They had their own independent stocks, which were sold on the market, and they had separate balance sheets and issued annual reports. At the same time, the form of cooperation that emerged was more than a cartel. Certainly, the joint stock mill companies that were in the network harmonized their production efforts, their market presence, and no doubt their prices, but they were bound by more than a mere cartel agreement, since they were also linked by majority ownership. This was almost a kind of national cartel52 or quasi-merger.53 It was, in any case, an unambiguous example of interlocking directorates.

Individuals who played roles both in banking and industry were in the foreground of research on interlocking relationships. In the secondary literature, which used to cast personal ties between banks and industrial undertakings as unambiguous examples of the power and sway of banks, a consensus has gradually emerged according to which the relationships, which were motivated by and based on shared interests, were far more complex and subtle, and took a variety of forms.54 In the case of First Budapest and the Hungarian Commerce Bank of Pest, one cannot speak of a relationship of domination by the bank. In other words, the bank did not control the industrial enterprise. The bank did not directly control the mills. The Pest Millers and Bakers’ Company did not have even a single banker on its board of directors, and the other mill companies had only one, mostly. The bank was a majority shareholder of First Budapest,55 and First Budapest and/or the Hungarian Commerce Bank of Pest became majority shareholders of the Pest Millers and Bakers’ Steam Mill Company, the Lujza Steam Mill Company, the Erzsébet [Elisabeth] Steam Mill Company, and the Pest Rolling Mill Company. Business management was unquestionably handled by First Budapest. Bankers rarely “wound up” in decision-making positions. I can only suggest that the mills and the bank were in continuous agreement throughout the process of absorbing the other companies into First Budapest. The Pest Millers and Bakers’ Steam Mill Company, the Erzsébet Steam Mill Company, and the Pest Rolling Mill Company continued to function as independent enterprises until 1928, and Lujza Steam Mill Company stayed in business until 1936.

Archival Sources

Budapest Főváros Levéltára [Budapest Municipal Archive] (=BFL)

VII.2.e. Cégbírósági iratok [Registry Court Documents] (Cg.)

1193/715. Erzsébet Gőzmalom Rt. [Erzsébet Steam Mill Joint Stock Company]

1211/1. 712, 762, 763. Pesti Molnárok és Sütők Gőzmalma Rt. [Pest Millers

and Bakers’ Steam Mill Joint Stock Company]

1224/675, 676, 667, 668. Lujza Gőzmalom Rt. [Lujza Steam Mill Joint Stock

Company]

XI.1005. Első Budapesti Gőzmalom Rt. [First Budapest Steam Mill Joint Stock Company]

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Bosányi, Endre. A malomipar szerepe és jelentősége közgazdaságunkban [The Role and Significance of the Milling Industry in Our Economy]. Budapest: Pesti Könyvnyomda Rt., 1892.

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Klement, Judit. Hazai vállalkozók a hőskorban. A budapesti gőzmalomipar vállalkozói a 19. század második felében [Cottage Industries in the Heroic Age. Enterprises in the Budapest Milling Industry in the Second Half of the Nineteenth Century]. Budapest, Eötvös Kiadó, 2012.

Klement, Judit. “Vállalatok hálózatban. Vállalati kooperáció a 20. század elején a budapesti gőzmalomiparban” [Enterprises in Network. Business Cooperation in the Budapest Steam Mill Industry in the Early Twentieth Century]. Korall 50 (2012): 82−106.

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Klement, Judit. “Die Agrarkrise am Ende des 19. Jahrhunderts und die Budapester Mühlenindustrie.“ In Krisen/Geschichten im Mitteleuropäischem Kontext. Sozial- und Wirtschaftsgeschichtliche Studien zum 19./20. Jahrhundert, edited by Márkus Keller, György Kövér, and Csaba Sasfi, 167–97. Vienna: Institut für Ungarische Geschichtsforschung in Wien, 2015.

Kövér, György. “A részvényesek névjegyzéke mint társadalomtörténeti forrás” [The Registry of Shareholders as a Social History Source]. In Kutatás – módszertan [Research – Methodology], edited by Gyula Erdmann, 118–24. (Rendi társadalom – polgári társadalom 2.) Gyula: Hajnal István Kör, 1989.

Kövér, György A felhalmozás íve. Társadalom- és gazdaságtörténeti tanulmányok [The Arc of Stockpiling. Essays on Social and Economic History]. Budapest: Új Mandátum Kiadó, 2002.

Kuhlmann, Charles. The Development of the Flour-Milling Industry in the United States with Special Reference to the Industry in Minneapolis. Clifton: Augustus M. Kelley, 1973.

Löherer, Andor. Gazdasági válság és a búza árhanyatlása Magyarországon. Okai, eredményei és orvosszerei [Economic Crisis and the Decline in the Price of Wheat in Hungary. Causes, Consequences, and Treatments]. Budapest: Pátria, 1896.

Mérő, Katalin. “Részvényárfolyamok alakulása a budapesti értéktőzsdén, 1864–1943” [Trends in Stock Market Prices at the Budapest Stock Exchange]. Statisztikai Szemle 65, no. 12 (1987): 1239–59.

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Pogány, Ágnes. “Crisis Management Strategies after World War I. The Case of the Budapest Flour Mills.” Hungarian Historical Review 4, no. 4 (2015): 868–99.

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Translated by Thomas Cooper

Ágnes Pogány

Crisis Management Strategies after World War I

The Case of the Budapest Flour Mills*

 

The history of the big Budapest flour mills reached its finale in the second half of the 1920s. By then, it had been clear to all players that the Hungarian flour mill industry could not return to the prosperity of the nineteenth century and indeed had become one of the many crisis branches of the Trianon economy. The grave problems of the branch were not without antecedents. The big mills in Hungary had begun to lose ground in the global market in the last decades of the nineteenth century. Their declining competitiveness manifested itself in reduced exports, drops in price, and increasing domestic rivalry. The big Hungarian commercial mills sought solutions to overcome their problems that were similar to the solutions adopted by other foreign companies at the time. They strove to cut production costs and increase profits by establishing economies of scale and scope with horizontal and vertical integrations. Companies used basically two means to limit competition between firms: they organized cartels or they merged with their rivals to control their economic environment. In this article, I analyze how these crisis management practices were applied to meet corporate needs in the interwar period. I investigate these questions mainly as a case study of the biggest Hungarian flour milling company, the Első Budapesti Gőzmalom Rt. (First Budapest Steam Mill Co. later: FBSM), based on its archival documents and articles that were printed in the contemporary economic press.

Keywords: crisis, flour mills, Budapest, Hungary, interwar years

“Only the concentration of forces can alleviate
the unfavorable conjuncture of the firms nowadays”1

The Budapest Steam Mills before World War I

The first phases of the history of the big metropolitan mills are quite well known. Many publications analyze the factors that explained the unparalleled successes thanks to which Budapest became the world’s biggest flour milling center in the 1860s and 1870s. The companies, however, proved unable to preserve their technological advantages and their positions as leaders in the market permanently. From the 1880s on, Hungarian flour exports were gradually forced out of the international markets. Innovative Hungarian grinding methods gained ground in other countries, and this also made it difficult for the Hungarian companies to maintain a competitive edge. Cheap flour arrived from overseas producers and former importers began to make flour using North American, Russian and Argentinean wheat, which from the perspective of quality was in no way inferior to the Hungarian products. The competitiveness of the Budapest firms gradually diminished. They were unable to compete with lower priced milling products of the overseas big firms.2 This was due in part to the fact that the Hungarian companies were much less productive than their American counterparts. In the US roller milling was associated with lower labor requirements. According to Perren, in 1890 in Minneapolis one worker produced 562.5 tons of flour, whereas in Budapest production was only 136.1 tons per worker.3 Hungarian statistics show similar data. Thus, thanks to highly mechanized plants and better organization, the efficiency of production in the US was roughly four times higher than in factories in Hungary. Labor productivity did not improve in the later decades either, lagging far behind the values typical in America (Table 1).

 

	Volume of manufactured flour (1000 tons)	Total employees (persons)	Total workers (persons)	T1	T2
1890	459.3	3420	3048	134.3	150.69
1900	578	3694	3248	156.47	177.96
1910	609.4	4144	–	147.06	–

 

Table 1: The Productivity of the Budapest Milling Industry (1890−1910)

T1: Production per person, tons

T2: Production per worker, tons

Source:

Magyar Statisztikai Évkönyv, Új Folyam I. (Budapest: Magyar. Királyi Statisztikai Hivatal, 1893), 149. Accessed September 1, 2015, http://konyvtar.ksh.hu/inc/kb_statisztika/statevkonyvek/1893/htm/149.htm.

Magyar Statisztikai Évkönyv, Új Folyam VIII. (Budapest: Magyar. Királyi Statisztikai Hivatal, 1900), 178.

Accessed September 1, 2015, http://konyvtar.ksh.hu/inc/kb_statisztika/statevkonyvek/1900/htm/178.htm.

Magyar Statisztikai Évkönyv, Új Folyam XVIII. (Budapest: Magyar. Királyi Statisztikai Hivatal, 1910), 186. Accessed September 1, 2015, http://konyvtar.ksh.hu/inc/kb_statisztika/statevkonyvek/1910/htm/186.htm.

“A magyar korona országainak 1900. évi népszámlálása. Második rész, A népesség foglalkozása községenként,” Magyar Statisztikai Közlemények, Új sorozat, part 2 (Budapest: Magyar. Királyi Statisztikai Hivatal, 1904), 82–83, 580–81.

“A magyar szent korona országainak 1910. évi népszámlálása. Harmadik rész, A népesség foglalkozása részletesen és a vállalati statisztika,” Magyar Statisztikai Közlemények, Új sorozat, vol. 52 (Budapest: Magyar Királyi Központi Statisztikai Hivatal, 1914), 396–97. Accessed September 1, 2015, http://konyvtar.ksh.hu/inc/kb_statisztika/Manda/MSK/MSK_048.pdf.

 

We know from the research done by Judit Klement and György Kövér that the domestic flour industry gradually lost its former leading role in Hungarian industry and its profitability declined as of the middle of the 1880s. Business conditions did not improve in the early twentieth century either. In the years leading up to World War I, price competition grew increasingly intense, as did the struggle for markets. 4

From Crisis to Crisis – the Interwar Years

The devastations of war, a controlled war economy, and the Romanian occupation of much of Hungary in 1919 caused serious damage to the domestic mills.5 However, the provisions of the Trianon Treaty and the dismemberment of the Austro-Hungarian Monarchy constituted an almost irreparable blow. The liquidation of a stable common internal market encompassing 51 million consumers placed Hungarian flour exporters, who had sold the majority of their products in the western parts of the Monarchy before 1914, in a very difficult situation. After the war, production capacities proved oversized compared to the volume of domestic cereal production and lower internal demand, which increased production costs significantly. Austria and Czechoslovakia built their own milling industries, defended by customs walls, and they increasingly bought wheat instead of flour in Hungary. Therefore, Hungarian flour gradually lost its traditional markets in the interwar period (Diagram 1).6

 

Diagram 1: Wheat flour and grits export of Hungary, 1925−1937 (1000 quintal)

Source: Hungarian Statistical Yearbooks, relevant years

 

The greatest stock market crisis of the stabilization period was caused by the failure of the Victoria Mill, which had been one of the most successful and largest metropolitan flour mills. In two months, shares in the company lost nearly 90 percent of their value. In December 1925, they were listed at 400 pengő, while in the end of January 1926 they were worth only 57 pengő. In the last week of January, the depreciation of the stock caused 16.8 million pengő in losses to the owners. In February 1926, Victoria was followed by the Concordia Mill, which belonged to the industrial holding of the prosperous Hatvany-Deutsch family. Both general managers, Emil Bacher and Henrik Hönich, committed suicide after the critical situation of their companies had been unveiled. The collapse of the large steam mills was caused by foreign indebtedness, failed large-scale futures transactions on the Chicago produce exchange, and the lack of export opportunities. While in Vienna the banks fell prey to the termination of the inflationary boom following financial stabilization, in Pest it was the flour mills that crumbled. The crisis proved enduring. Share prices in the milling industry did not recover even in the following years, and they showed the worst performance among all securities in the interwar period, according to Katalin Mérő’s calculations.7

These grave problems have generally been explained in the secondary literature as consequences, in large part, of changes in the foreign markets, the agricultural crisis of the late nineteenth century, the territorial provisions of the Trianon Peace Treaty, and the growing commercial protectionism of the interwar period. However, the question of how these companies reacted to the changes in their economic environment has not been given similar attention. The Hungarian flour mills were not simple sufferers of these shifts in the global markets. They had chances to develop various strategies in order to overcome the difficulties and improve their competitive positions. I analyze the alternatives that were at the disposal of the Hungarian flour milling industry and the ways in which various alternatives were applied.

The Emergence of Big Business in the Late Nineteenth Century

The second half of the nineteenth century witnessed a business revolution, in which an ever-widening range of manufacturing, mining and service companies adopted modern forms of large-scale business. Global big enterprise emerged first in the United States and then spread to other continents. A growing proportion of economic transactions took place within the framework of these organizations. Technological factors prompted vertical integration and the growth of the firms on ways that improved processes allowing for increasing economies of scale. The applied new high-volume technologies resulted in unprecedented cost advantages when economies of scale and scope were sufficiently exploited. Cost advantages, however, were not automatic. The changes demanded not only huge investments in machinery, management and marketing, but also a careful rearrangement of successive processing stages, thorough planning to achieve smooth material flows and speedier throughput. Only obsessive cost control and monitoring of the complex production processes resulted in economies of scale and scope and reduced transaction costs. Only in this case could entrepreneurs exploit the potentials of large-scale business to drive out smaller competitors. Otherwise, production costs radically increased, and huge losses appeared due to high fixed capital costs compared to labor costs. Corporations typically increased their scales by vertical or horizontal integration, mergers and acquisitions. According to Chandler, investments in domestic and international marketing and distribution were perhaps the most important elements in establishing these big industrial firms, because they ensured that the volume of sales keep pace with the new volume of production.8

In some branches, such as oil refining, metallurgy, or food processing, continuous flow techniques and economies of speed were more easily obtained. Modern flour milling technology was especially well-suited for reorganization in this new corporate framework. It was no coincidence that large-scale industrial enterprises emerged relatively early in this branch of industry. Hungarian investors recognized these huge potentials when they established new, high-volume grinding capacities to produce homogenous, standardized output in the 1870s. However, Hungarian entrepreneurs did not imitate wholly the American or German big corporations. The Budapest flour mills had many unique features. They were smaller in size and horizontal and vertical integration and product diversification were not typical at the time.

The American model involved the mass marketing of mass produced articles in part through the establishment of sales and marketing departments within a company and frequently the development of a retail sales network. Huge advertising campaigns ensured the massive growth of sales volume. In Hungary, on the other hand, the typical practice was to use wholesaler grain-merchant firms and commercial agents for the purchase of raw materials and the sale of the produce, because firms could rely on well-established commercial services that had functioned well already before the creation of big industrial corporations. Therefore, Hungarian mills did not invest in the creation of their own marketing facilities, and they were possibly less ready to seek out new markets for their flours or promote the retail−trade of their products than their North American rivals. According to Judit Klement, Hungarian roller mills had extended networks of flour agents, and they employed brokers and consignees. They might have had some marketing campaigns abroad as well, based on surviving foreign-language posters and advertising leaflets.9 Big American flour mills, on the other hand, increased sales by diversification and the development of many new products, such as breakfast cereals and other products in the 1920s and 1930s, which were intended for consumers with higher incomes who were more open to ready-to-eat foods than Hungarian consumers. In the US flour mills developed their own brands in the late nineteenth century. Product diversification in Hungary remained modest. Some enterprises built biscuit or horse fodder plants. Others started to bake bread during World War I in order to increase their profits. The FBSM started to make crackers, and other flour mills began to clean rice and barley, or established malt-kilns in the grave crisis at the end of the 1920s.10

Big American flour milling companies followed the path that Chandler had described. General Mills was established in 1928, following the merger of five flour mills in order to take advantage of economies of scale and scope in both production and distribution. After the merger, General Mills became one of the largest milling companies in the world. In the 1930s, the firm acquired several grocery companies using similar marketing facilities, and it expanded its animal-feed lines, all of which used similar production facilities. In the early 1900s, the Washburn Crosby Company, which later initiated the merger, spent the astronomical amount of $650,000 on advertising its branded flour product. In the early 1920s, the company already had its own advertising department and radio station, which broadcasted radio serials like the Betty Crocker Cooking School of the Air, which debuted in 1924 as a means of advertising their various products. By World War II, General Mills had begun to produce toasters and other appliances, which it sold through the outlets that handled its groceries.11

This kind of business policy was also followed by many roller mills in Canada. The W. W. Ogilvie Milling Company increased its size by vertical integration and built modern mills with big production capacities. It constructed its own line of elevators through districts that produced the best milling grades of grain. In 1890, the capacity of the Winnipeg mill was 1,800 barrels (bbls) per day,12 and in 1900 it was 2,500 bbls, but in 1909 the Ogilvies’ largest (“Royal”) mill in Montreal produced 6,000 barrels (533.4 tons) per day. In the same year, Ogilvie Milling built the “biggest mill in the British Empire” and “probably the biggest in the world” at its Point Douglas (Winnipeg) site, increasing production from 4,000 to 8,000 barrels (711.2 tons) per day. For the sake of comparison, in 1909 all plants of the FBSM, which had the biggest production capacity of the Hungarian mills, produced only 220.3 tons of flour together. In the 1920s, the Ogilvies, along with the other large milling companies in Canada, expanded into baking and other flour-related businesses, as a way of guaranteeing a market for some of its flour.13

The Great Wave of Mergers in the US

Capital-intensive industries, due to the big fixed capital investments, were especially vulnerable to price warfare and competition for markets, because they caused declining sales, deteriorating throughput, overcapacity, decreasing prices and severe losses. Therefore, these industries usually attempted to stabilize their external business environment and strove to control markets, prices and competitors. Basically “three strategies were evident: predatory trade practices, cartelization, and monopolization.”14 In the 1880s, a great merger wave began in the US. A sense of tremendous opportunities associated with exploiting economies of scale and scope in the American market was probably the most important driving force in promoting the merger movement. By the 1890s, the pace of industrial concentration quickened, culminating in a pronounced peak between 1895 and 1903, when an average of 300 firms were absorbed each year.15 Chandler was of the opinion that this merger movement was the single most important episode in the evolution of modern industrial enterprise in the US from the 1880s to the 1940s. Not only did it set in place the structure of the new, capital-intensive industries and define their major players for much of the rest of the twentieth century, it also permitted the rationalization of American industries in a way that did not begin in Britain or in Germany until the 1920s.16 The formation in 1882 of the Standard Oil Trust, the first consolidation of forty smaller and bigger petroleum companies into a single giant firm, stimulated many imitations in other industries with the incentives to gain effective control of output, price and market.17 Among turn-of-the-century mergers, the predominant process was horizontal consolidation, the simultaneous merger of many or all competitors in an industry into a single, giant enterprise.

The simultaneous rapid expansion of many capital-intensive industries in the early 1890s, followed by the deep depression of 1893, gave rise to abnormally serious price wars. Lamoreaux explains the 1895–1904 merger wave in the United States primarily as an attempt to escape the severe price competition that developed during the depression of the 1890s by firms in capital-intensive, mass-production industries, which had expanded rapidly and therefore increased their debt burden on the eve of the 1893 panic. The merger movement came partly because of continuing antirust legislation and activities by the states and partly because of the increasing difficulties of enforcing contractual agreements by trade associations during the depression of the mid-1890s.18

Similar processes took place in Great Britain and Germany. From the 1890s until the late 1920s, large oligopolies came into existence by means of horizontal and vertical integrations to exploit economies of scale and scope. In Germany, cartelization did, however, inhibit horizontal merger activity as a means of concentrating production, largely because the security afforded by cartels provided little incentive to acquire competitors. On the other hand, mergers associated with vertical integration and diversifications were common. By 1907, only 5 of the 100 leading German industrial corporations remained undiversified, while 88 had indulged in some form of vertical integration (forward into sales and distribution, or backward into securing supplies of raw materials). Merger activity had contributed significantly to fashioning this integrated structure.19

Crisis Management Strategies of the Hungarian Flour Milling Industry

What follows from all this for the big Budapest steam mills? My argument is that they faced difficulties similar to those faced by large corporations abroad at the turn of the century. The pioneering entrepreneurs made investments in facilities and personnel that were large enough to drive out the smaller, higher-cost firms, but with increasing overseas competition Hungarian flour mills became plagued by overcapacity, declining throughput, and rising costs as a consequence. Increasing output and capacity only intensified competition and drove down prices even more. On both continents the standard response by manufacturers to intensified competition and the resulting price decline was first to reach informal agreements as to price and output and then to make more formal agreements (enforced by cartels or trade associations) to reduce output, set prices and allocate regional markets. When all of these strategies proved unsuccessful, then they often resorted to mergers.20 Similarly, in Hungary, flour mills developed various concepts to solve the crisis and restore market dominance in the middle of the 1920s. In the following, I analyze these crisis-management attempts in the case of the First Budapest Steam Mill Company (FBSM).

Cartel or Merger?

Before World War I, several forms of looser cooperation had emerged among the metropolitan commercial flour mills. According to Vilmos Sándor, the first agreement on the use of sacks came into being in November 1869. In the 1870s, manufacturers came to an understanding on the conditions of flour shipment, credit granting and the borrowing of sacks. These agreements proved very short-lived, however.21 The big Budapest mills concluded an agreement on the purchase of wheat before 1873, and by 1882 they formed a cartel to reduce the volume of output when needed. The cartel was renewed from time to time according to Kirsch. In 1887, another agreement was reached on the terms of flour sale, number and quality of flour types, forms of packing, and the repurchase of sacks.22 Although in 1912, the contemporary economist and social democrat Jenő Varga wrote explicitly about a flour milling cartel that had reduced output to prevent the fall of flour prices from time to time,23 Judit Klement denies the existence of a broader milling cartel before 1914. According to her, one can find precedents only for occasional cooperation, but not all metropolitan flour mills joined these associations. They were not able to reach a permanent agreement even on a temporary reduction of output for a couple of months in the year.24

World War I had brought about significant changes. The organization of a centralized war economy represented a kind of forced cartelization which reduced the autonomy of the flour milling companies considerably.25 After the war, many elements of the war economy, such as public provision of flour for the public employees or state control of exports, had remained in effect until financial stabilization and the shortage of wheat and coal made stronger cooperation also reasonable. Following the fall of the Soviet Republic in 1919, the metropolitan flour mills concluded an agreement with the government. It was decided that, of the 13 Budapest flour mills, 7 were to be closed down. The government was ready to cover the costs not only of those mills that were kept in operation, but also of those which were shut down, and this was particularly favorable for the firms.

 

This period was the time of daily lengthy talks with the existing government, and it was next to impossible to imagine that it would have been possible to protect the common interests without common administration.26

In these early post-war years, a so called milling concentration had been formed, which was renewed yearly until the summer of 1925. The functioning mills operated on a common profit or loss basis, on common account. The millers’ fee and the working conditions were set by a contract made between the mills and the Futura Trade Corporation of Hungarian Cooperative Centers (Futura, Magyar Szövetkezeti Központok Áruforgalmi Rt.), which was the successor of the war-time economic organization War Produce Co. (Hadi Termény Rt.). The flour mills established a common office for the control and settlement of common receipts and expenses, which functioned successfully according to the director of the FBSM.27 The many difficulties after the war brought the firms closer to one another; the business federations the Hungarian Metropolitan Milling Association (Magyar Fővárosi Malomegyesület) and the National Association of the Provincial Milling Industrialists (Vidéki Malomiparosok Országos Egyesülete) therefore formed a common steering committee to help foster closer cooperation.28 In the early 1920s, the managers of the Budapest mills still looked optimistically to the future, and they believed in the return of the better export opportunities of the prewar years. This optimism did not last long, however. It evaporated soon after the end of the inflationary boom.

Raising the Milling Concentration from the Dead

During the process of financial stabilization following hyperinflation, the government liquidated the last elements of the war economy; discontinued the public provision of flour, and liberated flour exports. These measures terminated the principal reasons to sustain the milling concentration, so it was closed on July 15, 1925.29 A ruthless life-or-death war for markets began among the corporations as a consequence.30 In spite of the competitive struggle, many milling companies wanted to return to forms of cooperation. The leadership of the FBSM was also assured that “the concentration was absolutely necessary, considering the low utilization of the grinding capacities.”31

A draft to revitalize the terminated milling concentration was made by the general manager of the FBSM Sándor Stux who wanted to invite even the representatives of the Austrian and provincial mills to the talks on the new cartel. The negotiations had been carried on for several months in early 1925, but they ended with a fiasco.32 The always well-informed economic weekly Pesti Tőzsde33 had reason to believe that the milling concentration was prevented by Emil Bacher, since he did not want to join the cartel with the provincial flour mills of the Victoria Mill.34 The only matter the Budapest mills were able to agree on was the reestablishment of the milling agreement which had been in force before the war. It concerned albeit only questions of minor importance, such as the uniform payment and shipment terms of flour sales and had started from August 1925 on. The provincial firms joined later as well.35

In the springtime of 1926, before the ensuing grinding season, plans for the creation of a milling cartel came up again. This time, the provincial mills initiated the negotiations, sending out a special commission to solve the problems. Originally, they planned a cartel for the provincial flour mills which was to grow to nationwide proportions later on. The government strongly supported the agreement; they attributed the collapse of the Concordia and Victoria and the crash of many smaller flour mills to the absence of the milling cartel in the first place.36 The press reported in May that an agreement among the provincial mills had been reached. About twenty to twenty-five country mills joined the arrangement, which was developed on the basis of a proposal made by Lipót Schrecker, general manager of the Borsod-Miskolci Steam Mill, which belonged to the Hatvany-Deutsch milling group. The participants agreed on the basic principles, but the final compromise was not yet reached. The cartel was to assume joint control of procurement and sales through a central administration.

 

The concentration should begin in early July and work on common profit. The brand names of the provincial mills are to remain in use, but purchases and sales will be carried out according to the instructions of the central administration.

Unfortunately, not everyone agreed on these terms. Géza Aczél, general manager of the Back Mill which had plants in Győr and Szeged, opposed the Schrecker-plan. Instead, he proposed an output reduction in the country mills by fixing and dividing weekly or monthly quotas. Nevertheless, the majority accepted the first proposal during the negotiations. The organizers of the cartel did not want to omit the major Budapest mills from the agreement, inasmuch as most owned significant provincial plants. Pesti Tőzsde was informed that Emil Bacher was not hostile to the cartel this time. On the contrary, he wished to join it with his flour mills.37 Baron Károly Hatvany and Lipót Schrecker had to convince Sándor Stux, the head of FBSM, the biggest flour mill in Hungary. His words were of especially great importance, since in the summer of 1926 he was elected to the position of cochairman of the Hungarian Metropolitan Milling Association and he had become a councilor on the Stock Exchange a few weeks earlier.38

The Big Mill Merger

Nevertheless, it became clear by the end of May that FBSM did not support the Schrecker-plan and had other ideas concerning inter-firm cooperation instead; they planned a much more radical organizational transformation. According to the journalist writing in Pesti Tőzsde, the idea of the big merger appeared as early as the last months of 1925. Not only Sándor Stux supported the plan, so did the head of the Concordia Mill, Henrik Hönich.

 

[The essence of the project was] to merge all Budapest and four or five leading provincial mills into a single corporation and in doing so to create a new joint stock company with huge capital, the shares of which would be listed on the stock exchange, and the securities of all participating firms would be exchanged for shares in the new trust company.39

The talks concerning the big merger fell through again because of the resistance of the provincial mills, and the concept was struck from the agenda after the outbreak of the milling crisis at the turn of 1925−1926.40

Although several plans were drawn up to relieve the grave crisis, it soon became obvious that the companies were unable to agree and accept any of them, albeit the government pressed vehemently for the bargain, principally with regards to exports. The minister of commerce, Lajos Walko, who had to face an increasingly deteriorating balance of payments after the financial stabilization, summoned the heads of the big Budapest mills to a consultation in the summer of 1926.41 At the meeting, Stux also explained that he regarded the cartel plans as useless and did not support them because it would have been impossible to convince 3,000 flour mills to comply with the rules of the cartel, but even the 350 commercial mills would have been too many for a cartel. Administration would also have been too expensive.42 His reasoning was hardly a surprise; the most recent research had also proved that the majority of the cartels were especially vulnerable and short-lived. It was extremely difficult and costly to frame such controlling mechanisms that could force the cartel members to keep the agreement, since the temptation to cheat was too great. It seemed profitable to offer products below the prices fixed by the cartel or to fail to meet other terms of the agreement.43 Consequently, the FBSM sought a solution in horizontal integration, which promised much higher cost savings than a simple cartel. Stux was convinced that “only a merger is expedient from the point of view of the rationalization of technology and personnel.”44 According to the correspondent writing for the Pesti Tőzsde, FBSM wanted to merge with four big flour mills in the summer of 1926. The Gizella, the Schmidt and Császár, the Hungária Mills and the Borsod−Miskolci concern were considered acceptable partners. Stux wanted to exchange the securities of the merging mills for the shares of the FBSM. Nevertheless, neither his plan nor the cartel plan of 120 provincial mills was realized in the end.45

Contemporary newspapers are not the only sources on the Stux project. He himself put his ideas concerning the big merger down on paper for the FBSM and its principal shareholder, the Hungarian Commercial Bank of Pest (Pesti Magyar Kereskedelmi Bank) twice in 1926.46 In these memoranda Stux, stressed that he did not consider cartel a good solution, and he deemed mergers necessary because of the high production costs. He urged radical cuts in costs and the rationalization of the plants and the staff. His merger plans met with strong resistance however; the owners of the plants sentenced to be shut down insisted vehemently on keeping their mills working, although their mills would have continued to operate with high production costs and losses. The negotiations again failed to produce meaningful results.

News on the merger appeared again in the press by the end of 1927. Pesti Tőzsde wrote about a merger of FBSM, Borsod−Miskolci Mill, and Első Békéscsaba Steam Mill, which belonged to the sphere of influence of the latter. Stux confirmed that there had been some consultations between himself and general manager Schrecker.47 However, again they failed to resolve their differences. Borsod−Miskolci did not want to merge its profitable foreign mills. FBSM, on the other hand, was not inclined to the merger if this condition was not met.48 Rumors about the establishment of a “new huge milling trust” gained ground in May 1928 once more. This time FBSM, Borsod−Miskolci, Gizella and all of Victoria’s mills in Budapest and the rest of Hungary were to be amalgamated. According to the news, there were intense daily negotiations in Stux’s office that had the support of the government.

 

The new company is to take over all plants of the big Budapest mills in return for shares, and it will grind only in those mills where it is the most rational in order to guarantee the best utilization of capacities and lower flour prices. The absorbed companies would share in the profit in form of dividends. The new corporation would merge the provincial plants of the merged mills as well and thus control a significant part of the domestic milling industry.49

However, it became soon obvious that there were serious conflicts among the negotiating partners. One of them was that they were unable to agree on questions of leadership. FBSM reserved the leading role for itself, given that it owned more than 50 percent of the production capacities to be amalgamated. The others did not accept this and wanted to participate in the controlling positions, claiming that on the basis of assets their positions were not so ill-proportioned.50 Personal issues proved to be the final impediment to the merger. Of the four heads of the milling firms, only one could have become general manager of the new company. In order to further thrift and rationalization, the number of high-ranking employees and other staff would have had to have been decreased by 75 percent at least as well. Another problem arose because the Hungária Mill was not inclined to join the talks, although the government insisted on this and made its support and the granting of various privileges conditional on the participation of all big flour mills in the merger.51

Accordingly, the huge milling trust was not created in 1928 either. The horizontal integration of the biggest companies of the branch failed to come about. The press reported on the complete cessation of negotiations as early as November. The big merger lost its actuality and expedience. Agricultural producers suffering from the grave consequences of grain overproduction on world markets also vehemently opposed the formation of a huge milling oligopoly, as they were afraid of a further decline in prices.52 All this meant that none of the projects elaborated in order to reestablish inter firm cooperation was realized in the second half of the 1920s. The beginning of the Great Depression put an end to autonomous crisis management strategies from the 1930s on.

Individual Strategies − Building a Concern

Managers of the flour mill companies were presumably not astonished when they faced the difficulties of making a cartel since they had not managed to set up a permanent agreement before World War I either. The repeated failure of cooperative strategies therefore made it necessary for individual corporations to develop their own crisis management strategies as well in order to improve their positions. Consequently, as early as the turn of the century, the FBSM aimed to form its own flour milling group by acquiring several plants. This policy was justified in the management’s report of the year 1903 by the cutthroat war of the flour mills and the failure to establish mechanisms for controlling inter-firm competition. There were no hostile take-overs, however, since the milling enterprises wanted themselves to join the FBSM, which accepted only the offers that were considered the most favorable. First, FBSM made a bargain with the shareholders of two well-reputed and long-standing companies, the Lujza Steam Mill (Lujza Gőzmalom) and the Pest Mill of Millers and Bakers (Pesti Molnárok és Sütők Malma) in 1903.53 There was an uncompelled mutual exchange of shares by raising the share capitals of the participating companies. The management expected the deal to lead to an improvement in the company’s competitiveness.54 FBSM acquired share ownership in the Erzsébet Steam Mill in 1911.55

The building of the holding had accelerated during the years of World War I. FBSM obtained shares of many Budapest and provincial flour mills. It bought plants in Karcag, Mezőtúr and Gyoma in 1915 and formed the joint stock company Tisza-County Roller Mill and Warehouse Co. (Tiszavidéki Hengermalom és Tárház Rt.) out of them. It also got hold of other firms in Vác, Zombor, Galac and Pancsova.56 In 1916, FBSM concluded an agreement with the owners of the Pest Roller Mill Company (Pesti Hengermalom Társaság) to exchange their securities for shares of the FBSM, four Roller Mill shares being equal to one share in First Budapest. Those who did not like the bargain could sell or even keep their Roller Mill shares. FBSM financed the extension of its sphere of interest by raising the share capital by one million crown, to 7.5 million crown. Thus, the daily grinding capacities of the whole group had increased to 2,670 tons.57 In 1916, they acquired the majority ownership of the Zenta Roller Mill (Zentai Hengermalom Heszler és Társai Rt.) and bought a plant in Versec with a daily grinding capacity of 40 tons, to be enlarged later on. Out of the two latter mills the Southern Milling Industry Co. (Délvidéki Malomipar Rt.) was established. It was a new joint stock company with a 500,000-crown share capital. The business report of 1916 explained that the new acquisitions made possible the control of the firms that had been bought up.58 In 1917, a new flour mill, the First Székesfehérvár Steam Mill Co. (Első Székesfehérvári Gőzmalmi Rt.), was built.59 The Károly Mill in Nagykikinda, which was bought up that autumn, was transformed into a joint stock company with one million-crown share capital, and its daily capacities were enlarged to 60 tons. The Tisza-County Roller Mill and Warehouse was completed with a mill in Szarvas and a storehouse in Dévaványa.60 During the war years there were many new investments. Capacities were increased in the hopes of a better business atmosphere in the peacetime to come. A completely new plant was built on the site of the Erzsébet Mill, which was burnt down in 1914. According to the report of the management, it was furnished with the most up-to-date equipment and became one of the biggest mills on the continent.61 The holding grew much more slowly in the inflationary period. The shares of the József Lowland Steam Mill and Sawmill Co. (József Alföldi Gőzmalom és Fűrészmalom Rt.) in Hódmezővásárhely and the Körös-County Industrial and Trade Company (Körösvidéki Ipari és Áruforgalmi Rt.) were obtained in 1922.62 In the following year, Júlia Mill in Nyíregyháza got involved in the business group in order to get a satisfactory position in a significant rye-producing province.63

Although FBSM acquired several Budapest and provincial flour mills during the first decades of the twentieth century, these new acquisitions continued to operate separately, under their own former names and with their own accounts and profits. This meant that no effective merger was undertaken. Only grinding capacities were enlarged, but new, more effective organizational solutions to help further rationalization and economies of scale and scope were not implemented. An effort to get the biggest output quota in a future milling cartel might explain this policy of acquisitions by the FBSM. It would also add to the picture that many mills that joined the concern had belonged to the sphere of interest of the Pest Hungarian Commercial Bank (PMKB) before. The Bank had a majority share ownership in several of these flour mills. The Commercial Bank owned nearly 100 percent of the Zombor, Vác, Pancsova and Zenta steam mills already in 1913. The Bank owned a significant share of the First Budapest Steam Mill as well. According to the data presented by Béla Tomka, it had nearly 30 percent of the shares in the end of 1913.64 The bank might have obtained an even larger parcel of shares later on based on the number of securities that were deposited at the general assemblies held in the late 1920s and early 1930s (Table 2).

 

	1928	1929	1931
Number of shares deposited by the Hungarian Commercial Bank of Pest	75,000	95,000	65,568
Number of all deposited shares at the general assembly	85,205	10,4675	116,507
Shares deposited by the Hungarian Commercial Bank, in percent of all deposited shares	88.02%	90.76%	56.28%
Total number of FBSM shares	165,000	165,000	165,000
Shares deposited by the Hungarian Commercial Bank, as a percent of total number of FBSM shares	45.45%	57.58%	39.74%

 

Table 2: Shares deposited at the general assembly of the FBSM, 1928−1931

Source: BFL XI.1005. box 2. General assembly of 1927, February 24, 1928. General assembly of 1928, February 14, 1929; Minutes taken at the 63rd ordinary general assembly of the First Budapest Seam Mill Co. on February 21, 1931.

 

The Commercial Bank showed great interest in the flour mills. In 1913 the biggest part (27.2 percent) of the bank’s industrial shareholdings belonged to the milling industry. Tomka has shown that this was not a result of a deliberate business policy, since the profitability of the flour milling industry was low by that time. Current share prices frequently remained below face value. The purpose of industrial shareholdings was often to obtain discount and deposit business, but illiquid companies could pay off their debts with their own shares as well, which might have remained in the portfolio of the creditor for years considering the low market value of these securities. The profitability of the smaller provincial flour mills was particularly low. They were frequently highly indebted with the bank; their debts were significantly higher than their share capital (Table 3).65

 

Flour Mills	Share holding of the bank (percent)	Share capital	Credits granted by the bank	Syndicate quota	Members on board of directors and supervisory board representing the bank (person)
		(1000 crowns)
First Budapest Steam Mill	29.65	6500	-	-	2
Erzsébet Steam Mill	0.7	2700	1870.0	91.3	2
King Mill Hedrich and Strausz	33.9	4000	6530.5	-	1
Zombori Roller Mill	97	1000	2897.3	-	2
Vác Roller Mill	95.1	750	1287.2	-	2
Pancsova Steam Mill	100.0	400	1515.2	-	2
Zenta Roller Mill	-	600	903.2	-	2
Lujza Steam Mill	-	2800	-	-	1
István Steam Mill of Debrecen	-	5200	-	490.7	-
Gizella Steam Mill	-	3200	-	-	1
First Békéscsaba Steam Mill	-	2000	200.0	-	-

 

Table 3: The flour milling holding of the Hungarian Commercial Bank of Pest, 1913.

Source: Tomka, Érdek és érdektelenség, 179.

 

The Commercial Bank took an active part in building the milling group around the First Budapest Steam Mill, mediated the exchange of shares between the Lujza Mill and the FBSM, transformed the King Mill (Királymalom) into a joint stock company, and bought up several smaller provincial mills before World War I. The aim was probably to increase the efficiency of the companies. At least, calculations made in 1914 suggest this. The bank had estimated the economic efficiency of the big commercial mills in Budapest, taking into account their grinding capacities and financial positions, and guessed the effects of a possible merger on their productivity.66 According to the calculation, the profit of the bank’s milling group had only slightly exceeded the discount rate of the central bank (Table 4). According to Tomka, the profitability of other industries was significantly higher. In 1913, profitability in banking was 14.3, and in the iron and steel industry it was 18.4 percent (profit as a percentage of share capital).67

 

Flour Mill	Average investment (1000 crowns)		Profitability (percent)
	1912	1913	1912	1913
Pancsova Steam Mill	1378	1457	6.72	7.65
Vác Roller Mill	1291	1250	6.65	7.54
Zombor Roller Mill	2183	2536	6.76	7.74
Zenta Roller Mill	753	765	8.18	8.75
Discount rate of the Austro-Hungarian Bank	-	-	5.15	5.9

 

Table 4: Profitability of the flour milling holding
of the Hungarian Commercial Bank of Pest, 1912−1913

The data contain the incomes from interests and commissions.

Source: MNL OL Z40 Projektumok, 52. item 984 Malmainknál való kihelyezéseink 1912. és 1913. évi jövedelmezősége [Profitability of our Investments in our Flour Mills in the Years 1912 and 1913]. Budapest, January 28, 1914.

Thus, the new members of the milling concern of the FBSM were not very lucrative and their financial positions were also not favorable. In spite of this, no direct measures were taken to reduce costs by concentrating grinding in the most effective plants or rationalizing production and administration until 1926. Managers viewing future business potentials as bright renewed the mills and enlarged grinding capacities during the period of post-war inflation. 68

Chandler has pointed out that acquisitions alone did not ensure market dominance and cost reduction. Mergers increased organizational capabilities and productivity only if a single, centralized administrative control was quickly established over the merged or acquired companies and the facilities and personnel were then rationalized to exploit more fully the economies of scale and scope. But if the companies acquired or those coming into the merger were not administratively centralized and rationalized but instead continued to operate autonomously, much as they had before the change, the enlarged enterprise remained little more than a federation of firms. The resulting cost advantages were minimal.69 These conclusions were drawn relatively late in Budapest. Only the grave milling crisis in 1925−1926 and the repeated failure of collective collusive policies forced the management of the FBSM to develop a new corporate strategy and fundamentally reorganize the company structure. By the springtime of 1926, it had been settled that the merger of the plants acquired earlier would be completed.

Merger and Rationalization

At the extraordinary general assembly of the FBSM held on April 22, 1926, the merger of three Budapest (Pest Roller Mill Company, Pest Steam Mill of Millers and Bakers, Erzsébet Steam Mill) and five mills outside the city (Vác Roller Mill, First Székesfehérvári Steam Mill, Tisza-County Roller Mill and Warehouse, Karcag, József Lowland Steam Mill and Sawmill, Hódmezővásárhely, Júlia Steam Mill, Nyíregyháza) was decided. From then on, the merged mills operated as plants of the First Budapest Steam Mill. The merger took place on the same day in the same board room of the FBSM in the case of all participating firms. New FBSM shares were emitted and exchanged against the securities of the fused companies and then these exchanged shares were destroyed. The majority of the newly issued shares ended up in the portfolio of the FBSM because it had owned the shares of the merged companies even before the merger (Table 5). The other shares to be exchanged were bought from their owners. Two plants were left out of the merger. Lujza Mill continued to function as a separate warehouse and the Körös-County Industrial and Trade Co. was maintained as an independent entity for various commercial transactions.70

 

	External shareholding	Shareholding of the FBSM	Total shares	FBSM ownership (%)
	pieces
Luiza Steam Mill	49.000	61,201.000	61,250.000	99.920
Pest Mill of Millers and Bakers	238.040	31,261.960	31,500.000	99.240
Erzsébet Mill	129.330	47,120.670	47,250.000	99.730
Pest Roller Mill	509.864	55,490.136	56,000.000	99.089
Tisza-County Roller Mill and Warehouse Co.	0.000	393,750.000	393,750.000	100.000
Körös-County Industrial and Trade Co.	0.000	210,000.000	210,000.000	100.000
Vác Roller Mill	22,319.000	677,681.000	700,000.000	96.811
József Lowland Steam Mill and Sawmill Co.	252,100.000	797,900.000	1,050,000.000	75.990
First Székesfehérvár Steam Mill	0.000	1,050,000.000	1,050,000.000	100.000
Júlia Mill	112.000	1319.000	1431.000	92.173

 

Table 5: The flour milling group of the First Budapest Steam Mill before the merger of 1926

Source: BFL XI. 1005. Első Budapesti Gőzmalom Részvénytársaság, Okmánytár, Fúziókra vonatkozó iratok [FBSM, Record Office, Documents concerning fusions] box 73. 36.

In order to maximize savings, smaller plants which were deemed superfluous were closed down following the merger.

 

We concentrated our plants in such a way that from among our Budapest mills only the most economical one on Pozsonyi Street was kept continuously in operation. We put in operation our best equipped roller mill only in the autumn months when it was most needed.

 

There were dismissals as well, both of workers and administrative staff.71 The equipment and building sites of the factories that had been closed down were sold. The revenues increased available working capital, so the company did not have to borrow as much in these years. In spite of this, the index of external financing deteriorated in the second half of the 1920s (Diagram 2). The layoffs had not brought savings for years either, because severances and pension payments represented a large financial burden in the first years.72

Diagram 2: Financial position of the First Budapest Steam Mill (1914−1942)

Indebtedness coefficient 1: Proportion of creditors to capital assets

Indebtedness coefficient 2: Proportion of external capital to own capital

External capital: Liabilities less own capital

Own capital: Share capital plus reserves

Creditors: Acceptances in circulation plus not redeemed dividend-warrants

Source: Balance sheets of the FBSM, 1914−1942. On the index numbers: Béla Tomka, “A magyar malomipar finanszírozása,” 79–97.

Consequently, the merger did not bring about the expected results. The company’s financial situation and competitiveness did not improve. Flour exports had diminished further, and revenues and profits kept declining. During the Great Depression, the market interventions of the government, such as the boletta system, the subsidies to domestic grain producers, the introduction of the foreign exchange control and the overvalued exchange rate of the pengő currency also damaged the competitiveness of the Hungarian flour mills abroad. The profitability of the company declined dramatically in the years following the merger. Except for the years 1927–1928, profits declined year by year. After 1932, there was hardly a year which did not bring losses (Diagram 3).

 

Diagram 3: Profitability of the First Budapest Steam Mill, 1914−1942 (percent)

Proportion of profits to share capital

Source: Balance sheets of the FBSM, 1914−1942

 

Reserves kept shrinking as well. As of late 1927, the shares prices quoted on the Budapest Stock Exchange declined steadily and never exceeded face value, by the end of 1930 they were worth only a third of their nominal value (Diagram 4). Therefore it was decided at the general assembly held on February 21, 1931 to reduce the share capital of the company by one third, from 8.4 million to 5.6 million pengős.73

 

 

Diagram 4: Share prices of the First Budapest Steam Mill Co., 1926–1931 (pengő)

Source: Quotations, Pesti Tőzsde, 1926−1931.

 

The public balance for 1933 showed a loss of 1.5 million pengős and for 1935 4 million pengős, which was caused partly by the deficits of the current business year and partly by the writing-down of the value of the closed and demolished mills from the balance sheet. The serious losses and business recession forced the management to dismantle many flour mills and sell demolished materials and machinery. The real properties were sold as building plots after having been parceled out. The flour mill in Vác was also closed down, and dismissals and pensioning continued. Demolition of the Pest Steam Mill of Millers and Bakers on the Soroksári Street began in 1933.74 The Lujza Steam Mill had also shown losses for many years. Incomes did not cover the expenditures, so Lujza was merged into the FBSM by January 1, 1936. FBSM took over the Lujza’s warehouse business and the issue of the warehouse warrants, which was continued on the Óbuda site of the Erzsébet Mill. The buildings in Újlak, which had not been in operation for many years, was also demolished and the building parcels on Kolosy Square and Lajos Street were sold.75 This was followed in 1939 by the dismantling of the industrial and residential buildings of the Erzsébet Mill.76

Conclusions

On the basis of contemporary sources we can conclude that the big Budapest commercial mills had a fairly accurate assessment of their situation. They were well aware of the main causes of the serious crisis. They also knew the alternatives that could have alleviated their problems. In my paper, I showed that Hungarian flour mills developed various strategies to improve their competitiveness in the middle of the 1920s. First they attempted to create a looser form of cooperation; a plan of establishing a milling cartel involving a large number of flour mills was made. Then the concept of horizontal integration was tried by merging the biggest flour milling firms. Personal conflicts, inability to accept the compromises necessary for cooperation, and distrust hindered horizontal integration of the biggest players. Crisis management strategies also failed, possibly because there were too many firms in Hungary. It was nearly impossible to conclude an agreement due to conflicting interests of the many flour mills.

Although the FBSM, as the biggest company of the branch of industry, tried to play a leading role in transforming the Hungarian milling industry, it proved unable to assert leadership over others. As a consequence, neither project was implemented in the 1920s, which might explain why the domestic flour milling industry proved unable to overcome its problems and remained permanently a crisis-ridden branch, which gradually liquidated itself in the 1930s. In parallel with these attempts, some bigger companies formed concerns by drawing smaller flour mills into their spheres of influence in order to reduce price wars and competition and also to gain new markets. These mergers, however, did not lead to higher profits or better utilization of capacities, even when business administration got centralized and production processes rationalized. Acquisitions did not prove effective and did not lead to the restoration of former market positions. Insufficient product diversification and shrinking internal and exports markets might have contributed to the failure as well.

Finally, in the changing atmosphere of the 1930s, direct state intervention was applied in order to mitigate the crisis. Neither the failed cartels nor the mergers, nor even government assistance was enough to stabilize the financial positions of the branch, however, which led to the self-liquidation of the Hungarian flour milling industry. By the 1930s, flour mills which had once been the great pride of Hungarian industry were being shut down and dismantled.

 

Archival Sources

Budapest Főváros Levéltára [Budapest Municipal Archive] (=BFL)

XI.1005 First Budapest Steam Mill Co.

Magyar Nemzeti Levéltár Országos Levéltára [National Archive of the Hungarian National Archive] (=MNL OL)

Z 36 Pesti Magyar Kereskedelmi Bank, Ipari Titkárság

Z40 Pesti Magyar Kereskedelmi Bank, Projektumok

 

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Magyar Statisztikai Évkönyv [Hungarian Statistical Yearbook]. 1925−1938.

 

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András Schlett

The Socialist-Type Process of Innovation Lessons of Hungarian Agrarian Modernization between 1960 and 1990*

 

This article analyses the role and the possibilities of innovations in agriculture during the socialist era in Hungary between 1960 and 1990. The introduction of the established industrial-type production systems ushered in significant changes in Hungarian agriculture in the 1960s. The most spectacular changes were increasing outputs and improvements in the food supply. The spreading of high-yield stocks and the adoption of intensive technological procedures helped improve production.
The first part of the paper uses J. A. Schumpeter’s basic definitions of innovation as a guideline to examine the particularities and limitations of socialist innovations as illustrated by the example of the introduction of industrial-type production systems. It highlights and analyzes the factors that exerted a particularly decisive influence on the launch and progress of a new and distinctive form of organizing production. Since the innovation had been institutionalized because of political resolve through central control based on the planned economy, I analyze the features of the relationships between politics and the economy, which were shaped by the politicians and the innovators.
Finally, I examine how political resolve and the inability to revise policies created a kind of path dependence in the 1970s in the socialist countries, while economic and technological development showed much more flexibility within the capitalist countries during the economic crisis.

Keywords: Hungarian agriculture, innovation, industrial-like agriculture, path dependence, New Economic Mechanism

 

There is a comprehensive consensus in the secondary economics literature according to which capitalism has a strong tendency toward innovation, whereas socialism makes innovations impossible and this is a specific feature of the system. The main value of capitalism is the eager encouragement for entrepreneurial inventiveness and innovative processes, and the best prerequisites are competition, decentralized initiatives and huge rewards for success. In contrast, the socialist economic system did not inspire innovations because of a lack of competition, low rewards and centralized policies dictated by political factors. This limited the number of innovations and rendered the socialist countries incapable of adopting and adapting innovations without significant delays in a wide range of areas.1

Handbooks describing the socialist system lay emphasis on the fact that it was an unviable because it made innovation impossible. The system did not inspire innovation during an era of crucial technological advancements. Since there were risks involved and they had unpredictable outcomes, the production units persuaded themselves not to embark on such enterprises, or they were advised by higher levels of administration against any kind of risky business. Given the absence of innovation, the only source of growth remained savings, which were forced by budgetary considerations, and the investment of these savings into production. Later the system was sustained with foreign loans, but eventually planned economies collapsed under the weight of debts. Another option was to reach a positive balance of trade by adopting the “Ceauşescu way,” which essentially meant exporting anything of value on the foreign markets, but this went hand in hand with pauperization, which ultimately undermines the legitimacy of the system.

Thus, the failure of the system is directly linked to its paternalism and the soft budget constraint syndrome. The meaning of paternalism is the following according to János Kornai: “If certain areas of the economy have financial difficulties, then the state will assist them and the government budget will take over the liabilities.”2 Thus, it creates a soft budget constraint, and this budget constraint helps the public companies survive despite sustained losses, because the state comes to their rescue again and again. Moreover, the system primarily benefited underachieving companies and sectors, because they got the most support from the state through the redistribution between various companies. Therefore, a built-in tendency towards counter-selection prevailed, in which efforts were primarily aimed at state allotments and not maximizing profits.3

While it is worth taking risks and accepting research costs to develop innovations in a market economy (which, if successful, significantly increase the market value of the company), the budget in a socialist system immediately swallows any excess profit. Eventually, the executives and employees of a socialist company are better off without innovation, because they achieve the same results (the same wages and development opportunities) with less investment. At the same time, not only are the low level of socialist innovation and the lack of expeditious introduction of new technologies explained by an array of factors, but these factors are interconnected in a complicated, hierarchical way.4

By examining the history and processes of socialist agrarian modernization, I seek to study the efforts that were made within the sector to address the system’s dysfunctional features and the extent to which these efforts contributed to the success of an endeavor or the creation of the necessary prerequisites for success. In the early 1960s, a technological shift based on West German standards and the creation of the material and technical foundations for industrial-like agriculture raised Hungarian agriculture to the highest level in the world.5 The most spectacular changes were illustrated by growth in outputs and improvements in the food supply. The spread of high-yield stocks and the adoption of intensive technological procedures helped increase production. The potential of Hungarian agricultural production was significant even in international comparison. The average yield of wheat and corn matched the French, Danish, American or Canadian results, and meat production was also among the best in the world.6

In the early 1920s Ludwig von Mises pointed out that instead, while Marx had predicted the emergence of global socialism and the creation of a socialist commonwealth, in fact socialist countries found themselves compelled to copy the production methods, products and technologies of capitalist countries.7 Hungarian innovation meant first and foremost copying or adopting technologies during this period, and of course the socialist agrarian innovation could not have been implemented without capitalism, more precisely without the revolution in agrarian technology that was taking place in Western countries.

In my examination of the particularities and limitations of socialist agrarian modernization, J. A. Schumpeter’s following basic cases of innovation serve as a guideline:

a) The introduction of a new and in that particular sector practically unknown production procedure, by no means based on new scientific findings, which can be a new commercial process in connection with some kind of goods.

b) The production of new—that is, for consumers as yet unknown—goods or production of certain goods in new qualities.

c) New settlement opportunities or the opening up of a market, in which that particular branch of industry of this country had not been present earlier, regardless of the incidental previous existence of the market.

d) New sources of supply of raw materials or semi-finished goods: it is irrelevant, again, whether the source of supply already existed but was ignored, was not considered appropriate, or had to be created.8

Innovation was institutionalized because of political resolve through central control based on the planned economy. The innovative ability unfolded in economic sectors, which from some point of view had been chosen by economic planning. The socialist system had some very distinguished features, different from other systems, and these features showed an interior unity. The elements of the system were interlocked, but at the same time they were preconditions for one another. Some traits were considered more fundamental than others, and they were unquestionable elements, such as state ownership or the autocracy of the communist party, and this determined other, less fundamental, so-called “derivative” features, for example paternalism and pathways chosen by the political elite. These factors had a destructive effect on the mesospheres and microspheres of the economy and society such as empty generalities, superficial terms, obscured responsibilities, scapegoating and equivocation, buck-passing and obfuscation. On a theoretical level, the logic of socialist innovation raises a few questions based on the above:

– Did the new or redesigned product have any strategically important feature that made it a military product rather than a civil one?

– Could the product play any special role in the procurement of oil, which was essential?

– How to make an innovator interested in undertaking a costly and risky innovation in an egalitarian socialist system, in which any extra profit of the companies would be drained by the state itself?

– What kind of political power did an innovator need in order to pursue plans for innovation?

The study illustrates the system-specific features of socialist agrarian modernization and the obstacles to the introduction of innovative production. It also presents the efforts made to eliminate these hindrances. It is also important to see what the roles of the system’s basic and “derivative” features were, as well as the importance of the introduction of market elements (which were alien to the system) in the success of the so-called “role-model companies,”9 which were prominent in the field of production innovation.

Basic Cases of Innovation in Hungarian Agriculture between 1960 and 1990

Agrarian Technical Revolution

In the 1950s, significant changes took place in the agriculture production techniques of the Western world. The transformation, referred to as the “green revolution,” increased productivity in many fields. Industrial-type production systems made agriculture dependent on external material input and resources. At the same time, artificial systems were created in order to make processes independent of environmental factors.10 With the industrial, energy-intensive agrarian system, which utilized a significant amount of artificial material and energy of industrial origin, the logic of industry (closed spaces under human control, processes based on functional connections etc.) emerged in agriculture as an ideal. This resulted in independence, artificial control, and the gradual replacement of natural resources by artificial resources as the basic aspirations of the new vision of agriculture.

Agricultural technical development is a perpetual, complex, consequential and purposeful form of innovation, which has an effect on the elements of agricultural production (arable land, manpower, capital goods) because it causes qualitative and quantitative changes and it results in more efficient agricultural production of higher quality.

The general basic features of industrial agriculture are the following:

– It focuses exclusively on production tasks in accordance with the principles of achieving independence and at the expense of other roles of space (biosphere and social habitat); solutions and technological procedures are selected on the basis of their productivity, effectiveness and economic efficiency.

– To this end, it aspires to concentration and centralization, increases the (factory, field and machine) scale, strives to create as large and “homogeneous” areas as possible, and seeks with these methods to make “central control and manipulatedness” and “process control” more effective.

– Its basic method is to transform the environment according to the demands of the specified tasks and activities; that is, it shapes the space to the task, without attempting to adjust activities to the environmental attributes.

All the above result in a greater extent of intensive artificial resource expenditure.11

In Hungarian agriculture a true technical, technological revolution took place beginning in the early 1960s. The primary goal was to reconcile political adequacy and economic rationale. During this period, attempts were made to introduce Western systems of production organization without deviating from socialist ideological approaches.

The successful adaptation of new technologies was a pressing necessity, because agricultural output had been considerably decreased as a result of collectivization, which led to a disinterest among the participants involved in cultivating land and a lack of machines and experienced managers. Frequently, soldiers and students were sent to harvest the crops during the busiest periods, but even so Hungary had to import a significant amount of wheat and corn between 1960 and 1962, which had a significantly adverse effect on the balance of trade. Asset requirements of agriculture were increased markedly by the reorganization. Nearly nine-tenths of the agricultural investments had to cover the replacement of lost small-scale agricultural production power between 1958 and 1968. At the same time, the higher operational costs of the newly created large-scale works had to be covered as well.

Reform efforts in agriculture began earlier than the adoption of the New Economic Mechanism, which was introduced in 1968.12 The farm machinery pools of the state began to close their gates in 1964, and all of the machines had made part of the cooperatives by the end of the decade. The conditions in the cooperatives and the state farms steadily improved, and the individual plants started to become independent due to the decentralization of the central planning. The total volume of investments in the agricultural sector was increased and producer prices were raised (by 10 percent in 1966 and again by 10 percent in 1968).13 Skilled workers had been trained in large numbers, and high-level engineering schools were organized. Institutions of higher education that had been closed were reopened (e.g. in Debrecen, Keszthely, Óvár). 1967 bore witness to important institutional reforms. Four countrywide high authorities were merged into a single coordinating body, which was called the Department of Agriculture and Food, and a representative body for agriculture was created, the National Council of Cooperatives.

From this time on, the new organization replaced the fragmented control system and was able to represent the interests of agriculture more effectively. 14

The results of these changes included improvements in the food supply and the radical transformation of the work conditions and living conditions of agricultural workers.

The spread of high-yield stocks and the adoption of intensive technological procedures resulted in a spectacular improvement in the yield of certain products.15

Product Restructuring and Economies of Scale

Two Successful Branches: Poultry and Corn

The socialist ideology forced a change in production proportions, encouraging segments with higher efficiency and rapidly raising agricultural output. Hungarian agriculture made outstanding achievements in two areas between 1960 and 1990: poultry and egg output and corn production.

Poultry provided a good basis for qualitative production in livestock-breeding. The poultry branch had experienced a significant technological revolution during the 1950s. This sector was the first to consequentially apply industrial solutions, and these solutions raised poultry stock-farming to a high production-value level. State allotments established the conditions for economical production. From the perspectives of forage valorization, manpower and investment payoff, making poultry products is a very economical process. As a consequence of the great prolificacy of poultry and generational rotation, the production cycle is also quick, making it possible to produce large amounts of meat every year. The remarkable ability of poultry to adapt makes it stable on every level of industrial production. This sector provided meat production in the largest amounts in stable qualities at the lowest prices during the shortest time. With large-scale organization of poultry meat and egg production, the economic and political profiles became compatible with each other. Creating and expanding the complex breeding and farming technology required a comprehensive international and domestic division of labor, ample room for maneuver and a free rein in many respects. Even the opening of Hungarian agriculture towards foreign countries was in fact connected to this sector.

The theoretical and practical foundations of industrial poultry farming were built on Western and in particular German models, resulting in the establishment of the first systematically organized agricultural sector in Hungary. Egg production started with Lohmann-type poultries imported from West Germany. This was followed by the organization of the construction of new poultry stables appropriate for the emerging closed-production system. By cutting off or artificially rationing the elements of the natural environment, it became possible to measure continuously and regulate every production factor.

Until the end of the period under examination, poultry breeding played the largest role in Hungarian large-scale livestock farming, coming closest to matching levels of quality in leading countries. Thanks to poultry farming, Hungary became an important player in agricultural innovation. This sector was the most successful in catching up with the accelerated pace of production. As a consequence of the significant domestic supply and relatively low prices, domestic poultry meat and egg consumption skyrocketed.16

Significant changes were made in crop production as well. While a group of arable crops, namely the more mechanized and high yielding varieties, expanded their acreage, the size of regions assigned to other species shows a significant reduction beginning in the 1960s. The total area devoted to the production of wheat, corn, lucerne and sunflower was two and half times larger than the other species’ area of production between 1961 and 1970. This rate was increased to 4.3 times by 1972, causing a substantial simplification in the sowing structure.17

Although the closed system of professional commodity production was first developed in poultry product turnout, hybridization as one of the main incentives was taken over by poultry farmers from corn production. As early as the 1960s, corn attracted the attention of experts examining the potentials of intensive industrial production, since the success of large-scale livestock breeding was significantly influenced by forage maize. Among the cereals, this plant has the greatest productivity and contains the most energy in a functional unit. Because of these two attributes, it was the most appropriate for the realization of the aims of the corn and meat program announced by the political leadership. Successful examples of effective production within large-scale frameworks were found in the USA and Yugoslavia, so focus was placed on the adoption of procedures that had been used in these countries. The Garst Farm in Iowa participated directly in the creation of the Hungarian system and transported hybrid seed-corns, but later Yugoslavian and Hungarian intensive varieties of seed-corns were cultivated in large areas as well.18

In Hungary corn became the primary plant for the imported production systems in the cultivation of arable crops. The main attribute that made it appropriate for this was its high tolerance for monoculture. The average yield increased by 25 percent per hectare from 1970 to 1980.19 Experience, however, showed that within a relatively short time monoculture resulted in various problems, the neutralization of which required considerable financial sacrifices. They included the unfavorable physical-chemical and biological alterations of the soil. The rapid spread of certain resistant weeds connected with monocultures (e.g. Canary grass) and the accumulation of chemical residue caused several problems. The shortening of optimal time meant further disadvantages in production during the cultivation and harvest time.

As was true in the case of livestock breeding, the emerging production systems’ main feature was the full scale organization of production. This involved the whole process, from habitat selection, soil testing, and growing trials to production technologies based on the latest scientific knowledge and corn for the markets. This purpose was served by mechanization, which called into being the notion of production units, making them widespread in production systems. Creating such blocks within mechanization made processes more transparent and therefore made the organization of work easier.

It is important to mention that there were attempts to introduce industrial production in other areas, too, but most of them failed. For example, the principal mistake in the introduction of industrial pork production was the mechanical imitation of the poultry farming program. Thus, the initial phase—farrowing, early selection (28 days)—took place at the system center, which is the most crucial part in pig farming. It turned out that not every aspect of poultry farming was suitable to pork production, since although the most difficult part of the process, the incubation period, could be managed extremely well in the case of poultry, this period generated numerous further problems in the case of swine.

The industrialization of sheep farming ended in spectacular failure, as it was less compatible with the biological capacities of the animals. The industrialization of production meant that the animals were kept on closed stepping grids that caused foot problems and lameness within a short time, so sheep were later fattened under traditional circumstances but with intensive fodder supplement. Both failures were illustrated by the experiments of the leading agricultural enterprise, the role-model Bábolna farm, in the early 1970s.20

External Relations

The Kádár regime decided to make a significant change in its economic policy in the early 1960s after the 21st Congress of the Communist Party of the Soviet Union (January 27, 1959–February 5, 1959). They thought it was necessary to loosen the one-sided economic dependency and set the economy right.21 For this purpose, the relevant public authorities sent experts to various West European countries, commencing preparations for the adoption of advanced West European technology. The process was sped up by the political détente at the time, which especially facilitated the East–West economic relationship within Europe.

The business policy of agriculture in socialist Hungary was built on three main markets. External trade relations with the other socialist countries, especially the Soviet Union, Czechoslovakia, the German Democratic Republic (GDR) and Poland, had gradually extended over the years. Cooperative endeavors were undertaken with companies from European capitalist countries to improve exports to Western countries and create independent livestock breeding. The dynamically developing Middle Eastern countries became more significant export markets in terms of currency volume. For example, almost 30 percent of the Hungarian poultry export headed to the Middle East.22

Technological innovation was connected primarily to purchases of Western licenses and know-how, which were then further “developed.” Relations with western companies had an important role. The procurement and utilization of advanced Western technology also helped further changes in production structure and quality improvement.

Along with machine purchases, the selected companies (the so-called model farms) also strived to foster cooperation with the more advanced Western firms (e.g. in the area of joint developments). Company managements became more ambitious as they got acquainted with the level of Western technology. Their relationships facilitated the adoption of modern organizational and management principles. The joint ventures helped create close relationships with Western firms.

The accumulated knowledge, methods, breeding and growing procedures generated by various external market relations contributed greatly to the development of industrial-like production systems. The know-how was achieved primarily through the everyday practice of commercial cooperation with foreign partners during the various stages of livestock breeding and the production of goods. Several cooperative endeavors were established with advanced Western companies and joint ventures were also founded. They served as bases of information in exploring the fields of breeding, technological development, and changes in the market. Similarly, they had an invaluable role in the acquisition and testing of the latest tools, procedures, and breeds and in the training of experts from Bábolna. Joint ventures made integration into Western market conditions easier, and these ventures thus supported self-maintenance during the early critical phase. It is important to note the critical pressure of international commercial competition, which gradually brought a qualitative agricultural perspective into prominence. Target areas, volumes and time sequences of export were varied by types of goods.

The distinctive feature of the poultry product group in the 1970s was that roughly 80 percent of its export went to non-ruble-based markets. This significant rate of export to non-ruble-based markets was also strengthened by the Soviet Union itself, which as the largest consumer in the 1970s often purchased for dollars. By and large, in the second half of the 1970s, about 40 percent of slaughtered poultry was exported to the Soviet Union, 21 percent to the Middle East and 17 percent to the countries of the Common Market. In 1983, these rates changed to 57.2 percent, 4.3 percent and 13.5 percent, respectively.23

In terms of export volume, the following countries had significant roles: socialist countries (the Soviet Union, Czechoslovakia, the GDR and Poland) and the developing Northern African and sub-Saharan African countries, as well as the Middle East (Iraq, Algeria, Libya, Egypt, Angola, Lebanon and Iran). In the case of European advanced capitalist countries (e.g. Austria, West Germany, France, Switzerland and Italy), the main goals were market presence, understanding of the value judgement of markets with the highest standards, and remaining up-to date and well-informed. Western import was aimed at the permanent maintenance of a part of domestic propagation and variety selection, commercial and professional contact, and in some cases cooperation with the best breeder companies in the world.24

The process outlined above strengthened the openness of Hungary’s foreign trade structure, although at the time it balanced the proportions of COMECON relations (Council for Mutual Economic Assistance, 1949–1991) with the so-called hard currency relations in foreign trade traffic. Hungary became a transit country for advanced technology towards COMECON countries. The Western part of Europe extended its outlets towards the East. Hungary, on the other hand, was able to import advanced technology and modern consumer goods in exchange for export based on the use of (at the time) cheap energy imported from COMECON countries.

Organizational Changes and New Organizations

After the 1956 Revolution, there were two goals in the agrarian sphere: on the one hand policies were designed with the intention of improving living standards and making production more effective. On the other, the same policies were also intended to prove the legitimacy and advanced state of large scale production, and the two goals were intricately intertwined.25 However, in the early 1960s, forced collectivization reduced agricultural production by 10 percent. It became obvious that full scale technological reconstruction was needed for any significant advancement that might help ensure proper supplies of foodstuffs and raise living standards under the new conditions.

The fundamental changes in the structure of estates, which essentially meant concentration and centralization, resulted in a drastic decline of diversification and variegation. While in the developed capitalist states the average farm size in agriculture decreased due to the technical revolution, Hungary was characterized by an increase in farm size that at times was abnormal. In the 1970s, huge company unifications took place in agriculture. Between 1970 and 1979, the number of state farms dropped from 184 to 131. The average area of a state farm, however, increased from 5,548 hectares to 7,598 hectares.26 In Hungary, great agricultural entities evolved that had never been seen before. Their production value matched industrial corporations. Within the state farms vast sectors evolved and industrial and accessory activities also strengthened agricultural production. Almost one-third of the activities of every big farm were not closely linked to agricultural production. The agricultural entities and the first combinations evolved in the early 1970s in Bábolna, Agárd, Bóly and Mezőhegyes. “The bigger the better” principle also had the support of technocrats, but they only optimized the operating hours of the machines and the volume of the cultivated areas, not the production costs.

 

Figure 1. Changes in the number of cooperatives (striped) and state farms (black)

Source: László Csete, A termelőszövetkezetek és az állami gazdaságok fejlődése
(Budapest: AKI, 1985), 9–10.

 

In cases of combinations, the main profile activities were not confined to single sections of agricultural production. They comprised the formerly separated sections of output, such as production of capital goods, production of agricultural raw materials, and processing and sale of stock, and they validated them in the same enterprise domain. The company organization that was established had to undertake complex development in its field of activity as well. This could be attained with development work using wider-range research and academic achievements, intense concentration of production and partner relationships. 27

In agriculture, in addition to the centralization process, the integrating activity of big farms became a characteristic developmental trend. The increase in company size was replaced gradually by horizontal and vertical relations. Higher level types of organizations (systems, integrated associations) were formed. New types of cooperative forms were created and the process of production concentration and specialization was given new content. In agriculture, enterprise systems came into being with many functions and rich profiles.

The existence of production innovation assumed changes in factory organization, and it was accompanied by a spread of different association forms in agriculture. These had significant tasks in the development of technical and technological innovation. The role of the system center as a center of innovation was based on the complex genetic, technical-technological and farming system, in which research development played an increasingly important role. The most characteristic feature of the cooperative process was that certain previous company functions were often separated from the framework of companies and found another niche on another organizational level of integration. The production systems represented technological and organizational innovation, and most of them operated as an organization spreading innovation.

The combinations and state farms integrated more and more lands, giving rise to enormous production volumes, while they further developed agriculture and food industry and different industrial activities. They played significant roles in the evolution of productive systems. They helped further the spread on a wide scale of up-to-date techniques and technologies through the emerging production systems.

In the 1960s, the production systems became one of the pillars of the Hungarian agrarian model. The selected state farms cooperated with research institutes and companies that produced and sold agricultural means of production, as well as processing plants, and they developed a complex production technology for a specific branch (for example maize) within the framework of this distinctive form of production organization. The farms could join the production systems, and they got the necessary technologies, machines, chemicals, seeds, consultancy and training based on the up-to-date research achievements in exchange for a fee and surplus yields. The main task of the members of the system was securing production, and they were guided by an administrator. The members did not do research and did not make experiments, but they helped further the research of the system center by sharing their production experiences. The system center worked like a supply organization, and the supply activities generated income. The industrial-like poultry meat and egg production system of Bábolna demonstrates the size of the system. It contained 195 member farms in 1987, and they produced 162,000 tons of poultry meat and 1,650 million eggs. The Industrial-Like Maize Producing System’s 264 member farms produced maize on 220,000 hectares and wheat and other cultivated plants on 349,000 hectares.28

Loyalty and Competence: the Managerial Revolution and Pressures of Innovation

The overdetermined role of the political regime dominated the planned economic system in terms of the social subsystems. The political power determined all movement and evolution within the social spheres and thus hindered any attempt to develop specific laws or arrive at rational approaches to internal questions. Socialist redistribution replaced market-based decisions with central, official and administrative decisions, thus creating a monolithic, society-wide and predominantly bureaucratic organization as a network of the abovementioned decisions. The bureaucratic political elite decided on the relevant economic and power-related issues. The division of power, which was almost a constitutional principle in the market economics, ceased to be exist, as did any division of the economic, political and cultural power.

The steady increasing in levels of consumption became the main political priority in the Kádár regime after the 1956 Revolution in general, but especially following the forced collectivization efforts. It became important to raise production in an ever-increasing way in the interest of improving the domestic food supply, improving the ratio of exports over imports for foodstuffs and increasing the balance of foreign exchange, especially when it came to convertible currency. The value of the products that were necessary in order to ensure the “satisfaction” of the population had been improved, as had the value of the so-called “hard” products in external trade, which were considered competitive goods in the non-ruble-based markets.29 The executives of companies could negotiate for more resources and more favorable figures in the plans when they supplied the political goods, or “political products,” as they were called in agriculture.30

The post-Stalinist regime abolished its political monopoly and made some concessions, especially for the benefit of technocratic intellectuals. Gradually the key decisions came to be made by the managers instead of the redistributors, because the managers controlled the most favorable combinations of economic, cultural and social capital during the post-Stalinist era of socialism. They possessed more favorable combinations than the politocracy, which perhaps had more cultural and social capital, but significantly less economic potential. And the technocratic intellectuals possessed more favorable conditions than the intellectuals and far more favorable conditions than possessed by the class of the internally differentiated and weak small entrepreneurs.

Managers and technocrats of the companies selected as the vanguard of modernization became citizens with a kind of dual nationality.31 If the political atmosphere became more tense and the ideology exerted an influence on professional circles, then these managers would put more emphasis on their political role, but if there was any detente or the managers were related to professional circles or visited foreign countries, they would stress their professional skills.32

The economy and society of the Kádár regime was characterized by comprehensive and secret negotiations. The elites developed in the settings of these secret negotiations and thereby seized power. They had to rely on a system of bureaucratic secret deals, whether they liked it or not, if they wanted to advance. Informal negotiating became a kind of ability, but it lost power when considerations of market orientation came into play. Informal connections and negotiations remained important tools in the attainment of goals throughout the period. The subsidies and benefits of state in their various forms were obtained most frequently by companies with representatives who were at the same time members of higher governing bodies.

However the support of the highest levels of government did not mean a permanent advantage. The opportunities enjoyed by companies underwent significant changes when the political climate changed. In the early 1970s, the agrarian sector found itself in a crossfire after its assessment was transformed within the circle of economic reform.33 The orthodox among the elites launched a counter-offensive against the reform. The economic mechanism stopped in its tracks and the increasingly fierce debates between the highest-ranking leaders of the party resulted in great tension. János Kádár visited Moscow between February 11 and 14, 1972. Brezhnev expressed his disappointment about Hungarian growth rates, which lagged behind the COMECON rates, and he made it clear that he was not a supporter of the economic governance system initiated under Kádár in 1968. In addition, he wanted to foster closer connections between the Hungarian and the Soviet economies.34 The Magyar Szocialista Munkáspárt (MSZMP) Központi Bizottsága [Central Committee of the Hungarian Socialist Worker’s Party] decided against reforms on November 14 and 15, 1972. The recentralization process had been begun and the National Planning Committee was created to strengthen the central leadership.35

In the aftermath of the changes, the main representatives of the agrarian reformers, including Lajos Fehér,36 and their most important economic political ally, the reformer Rezső Nyers,37 were removed from the leadership.38 In addition, the prominent companies became the main targets of the anti-reform forces, because these enterprises had been the pioneers in the implementation of the economic mechanism.39 The reform politicians of the Central Committee had committed a lot of acts that were regarded as “irregularities” by the anti-reform faction, and the opponents of the reform tried to annihilate them as the “seeds of capitalism.” Numerous inquiries were initiated against the new model farms, and they focused with particularly rigorous scrutiny on their relationships with institutions in the West. Economic development played a vital role for Kádár against the conservative forces, which launched a persistent campaign to imperil his position in the eyes of Brezhnev. So in Kádár’s “game of compromise,” the companies that had played prominent roles in production innovation became more valuable assets, as did their economic “creative forces” and the important role of their production. The abovementioned events provided an example for the dependency of the farms on political power. The advantages they enjoyed did not last forever, and when the upper layer of the political leadership was transformed and emphasis shifted, everything within the supported or “tolerated” category suddenly was pilloried as seeds of capitalism as the conservative forces gained strength. As the prominent enterprise of the era, Bábolna was always in the limelight, sometimes as a socialist model farm, sometimes as a forward bastion of capitalism.40

The sociological content of these attacks meant that the retrograde forces wanted to weaken the alliance of reform communists and technocracy by series of attacks against technocracy. The adoption of technocratic methods of systems of economic governance bestowed the political power with the ability to avoid the most obvious errors of economic policy. Thus, the political power could ward off the economic crisis for a while. It could provide gradually rising living standards, it could create a relative balance between the commodities and demand, and it could avoid the political earthquakes that are caused by economic disappointment. The system centers became necessities within Hungarian agriculture in the 1970s, and their leaders exerted a significant influence on political life. The prominent companies enjoyed monopolies in several areas, and their managers had the necessary technical and cultural capital to maintain control over the key factors of production, which was a powerful lobbying tool.

Crisis and Path Dependence

Significant transformations were taking place in the global economy in the 1970s, and the conditions of global economy changed adversely in terms of agriculture. The development of Hungarian agriculture in the second half of the twentieth century faced a rapid rise of direct (fuel) and indirect (chemical fertilizer, pesticide, machine etc.) energy input.41 The proportion of the materials with industrial origins in the total material resources of agriculture was very small in the early 1960s, but by the middle of the 1980s it had risen to almost 60 percent.42

While the conditions of development in the 1960s were characterized by abundance and an accumulation of factors of production at a relatively low price, the broadening international relations and their aftermath, the expanding markets, and the changes in the global economy in the 1970s and 1980s revealed the vulnerabilities of the agricultural production systems.43 The boom in energy and fuel prices radically changed the price conditions of Hungarian foreign trade. Changes in prices on the world market appeared, if with some delay, in trade that was done in rubles because of a switch to a five-year crawling price basis.44 So in 1975 the price level of import in this relation increased more than 25 percent, while that of energy sources doubled.45 This significantly affected the cost claims of energy-intensive agricultural systems.

After 1973, global economic processes and the significant decline in Hungarian foreign trade made clear with tremendous force the extent to which the Hungarian economy depended on its involvement in the international division of labor and the benefits of this involvement.

The conditions of sales became more adverse, since the global market faced a crisis of overproduction in agriculture. The prices of food significantly dropped in the terms of export toward capitalist countries, and foodstuffs were relatively devalued. Agricultural and food products, which had attracted considerable sums in convertible currencies, had lost a great deal of their strength, and their strategic role was questioned. Foreign trade with market economies gradually became an Achilles’ heel of the Hungarian economy. Development was required to import goods, but in turn development called for export. However, trade with the West had nurtured an acceptance of Western measures (with regards to the market). The deficit of foreign trade reflected a continuous drop in effectiveness, which caused a dramatic increase in government debt.

While Hungary’s import in the field of raw materials and energy sources was inflexible, the demand for Hungarian agricultural products had plummeted in terms of prices of export.46

In the 1970s, economic and technological development showed signs of discontinuity in the capitalist countries. Hungarian agriculture had to adapt and change its formations or transform them comprehensively and qualitatively as a reaction to the crisis, but these responses were not implemented. The system of economic planning, which was introduced in 1968, had a basic fault from the outset: it did not create a real market. It did not develop a market that could have had an impact on the economy and thus economic effectiveness had never possessed the necessary selective power for development and then for the assignation and implementation of these developments. Although the reform promised a new price system that would offer some guidance regarding how to change the composition of production and define the limits of return in terms of the products’ costs (in short, it would transfer the impulses of the market to the companies), none of these promises was kept. The guiding power of prices was not implemented, because the prices were adapted to levels and increase of costs according to the “needs of autarchic development.”

Moreover, the economic governance tried to eliminate the effects of inflation and did not introduce the changing price ratios of the global economy into the domestic price system. It predominantly tried to prevent the spillover effects of inflation by using budgetary instruments. Thus, the importing companies could not feel the real price ratios and price levels, and this prompted them to use imports in a less rational way. The companies did not have much interest in introducing modern technologies: their production plans were adapted to the existing machines and any changes in the production system meant that they would not produce the required amount of products.

The extreme energy dependent structure of the agriculture remained unchanged. The existing production objects and technological procedures, which made a solid base for industrial methods, could only operate at a high cost. Agricultural companies were created and consolidated for great developments and production goals, but they did not have to deal with cost sensitivity, so they did not develop the necessary skills, nor were they able to identify potential opportunities to reduce costs.

This all illustrates the fact that the market orientation of agricultural estates never became a living and responsive force. Since prices did not impose limits on cost recovery, they also did not impose any requirements in the terms of efficiency. In addition, the same was true of competiveness. The producer prices of agricultural products were fully isolated from the selling prices of foreign markets. The Kádár regime paid close attention to ensure that the modest living standards that had been achieved were not affected by external shocks.

In the wake of changing prices on the global market, the role of agriculture was fatefully linked to the status of a country trapped in a debt crisis. Agricultural export was necessary in order to keep the relative capitalist balance of payments in spite of the radically reduced prices on the global market, because this export could not be replaced by other products and branches. The need for subsidies in the area of export was increased, but this meant only qualitative support at the same time and it preserved the existing structure, because it brought the economic assessment of the lowest quality and the best products closer together.47 In the middle of the 1980s, more than half of the support provided for the food economy consisted of export subsidies.

By this time about 20 percent of the products of the food economy were exported, which was a higher proportion in relation to national production, and one third of the export went to the markets with convertible currencies. So the food economy produced an export surplus of 50–60 billion HUF, including its 30 billion export surplus in the area of convertible currencies, and contributed to maintaining the delicate stability of the Hungarian national economy.

Although a series of government and state party decisions emphasized that the agricultural development was based on a proven agrarian policy, the efficiency of investments became more and more unbeneficial with respect to increased agricultural production. Economic policy measures still did not contain any requirements for greater efficiency. The growing debt crisis prevented the implementation of the necessary steps for the transformation of structure, and only a few regulations, which it was assumed were compatible with the market, started the more favorable processes toward the future transformation of the structure. However, restrained imports overshadowed these measures, as did the constraint that forced the production of goods that could have been sold for convertible currencies, independently of the economical nature of production and its effects on structure. This was also true of agricultural products.48 Because of the changing external conditions and the inadequate responses, agricultural growth and its roles in economic growth increasingly became a subject of debates.

Conclusions

Returning to the questions I raised in the beginning of this paper, the islands of innovation produced familiar agriculture products of a higher quality than the usual domestic ones. In addition, they managed to create domestic varieties and breeds in certain areas due to the achievements of Western agricultural revolution. For example, the closed system of industrial-like poultry production (and then maize growing) was a new kind of production procedure in Hungary at that time. The meat was considered a partly civil, partly security (strategic and military) product in the domain of foodstuffs. It could be traded for oil within the COMECON. The sale of agrarian products to the Soviet market for dollars was a relatively new phenomenon, and the imported Western breeding animals provided good quality livestock. The organizational system purposefully adapted capitalist pragmatism to the socialist setting. The selected companies had a significant role in the introduction of the innovations, and the origins of this prominent role lay in the unique possibilities and exemptions, such as the limited profile exemption and the independent right to export. The political leadership created opportunities for these farms, and they could generate significant income as foundations for innovation and system organizers.49

As I have shown, these features created very special conditions: not every product can be a strategic product; not every manager can be a member of the Central Committee; not every company can oppose the bureaucratic governance, but only a few of them can get specific status. Thus, it is clear that innovation under socialism cannot be a rule, just an exception.

As I have shown, the key to the secret was precisely this island-like feature and the fact that the success stories did not become general models because they had to maintain their island-like nature in order to be successful. The ever growing islands had to integrate the cooperating and the non-cooperating units under their control, because the setting was unsuitable for cooperation.

A dual struggle was fought between integrating and non-integrating forces of the system between 1960 and 1990 in the areas of economy, structure, politics and society. Although the struggles of selected companies and model farms could be described as an almost heroic battle against dysfunction at micro and meso-levels, only the leading technocrats who had become part of the political power system were allowed to participate in this fighting and apply some elements of market policy. However, they had to accept the limits set by the dominant power for the benefits (monopolies, subsidies). Actually, these companies behaved like supporting pillars of the regime. Their real interests did not bring them closer to competition and the market, despite the introduction of some elements of market compatibles. Their interests actually led to less efficient over-allocation by keeping the (dysfunctional) monopoly rights and remaining caught between politics and companies.

While the energy crisis imposed a lot of changes and innovation on every area of production in the West, socialist modernization controlled by higher levels resulted in a specific path dependence. The system prevented the changes from being realized on company levels and it also made the “selected companies” oppose any kind of disadvantageous changes, even in the short term. Thus the system could only get rid of the minor dysfunctional features, while preserving its basic traits.

 

Archival Sources

Magyar Nemzeti Levéltár Országos Levéltára (=MNL OL) [Hungarian National Archives]

M-KS-288. f. 5/575. Magyar Szocialista Munkáspárt, Politikai Bizottság iratai [Hungarian Socialist Worker’s Party, Political Committee meetings], 1956–1989.

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* My research enjoyed the support of the Bolyai János Research Scholarship, Hungarian Academy of Sciences.