The Formation of Global Tourism from an East-Central European Perspective

Sarah Lemmen
Christian-Albrechts-University of Kiel
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This article traces the formation of tourism to non-European regions from the late nineteenth century to the end of the interwar period with a focus on its East-Central European and specifically its Czech perspective. Tourism to Africa and Asia—considered here to be the culmination of “global tourism” in the nineteenth and first half of the twentieth century—has been generally regarded as part and parcel of the imperial endeavor: empire shaped both the infrastructure and the practice of overseas tourism. By focusing on Czechs as “non-imperial” tourists to non-European regions, this article traces their travel experience as defined by different coordinates: no imperial identity would determine their behavior abroad, and no reasoning of economic nationalism would favor the visit to certain world regions over others.

Following an overview of the globalization of tourism and its interconnectedness with the imperial project, this article focuses on the specifics of Czech tourism to non-European regions. Some specifics have very practical implications, such as the language skills that generally catered rather to a Central European than a global environment, or the average travel budget that was lower than that of travelers from Germany, Great Britain or the United States. Others suggest a Czech identity that was drafted in contrast to the imperial “other” and outside the colonial dichotomy of “rulers” and “ruled.” While Czech travelers profited from a strongly imperial tourist infrastructure, they often professed a general skepticism toward imperial rule.

Keywords: travel; tourism; globalization; East-Central Europe; Czechoslovakia; empire; Africa; Asia

The “Golden Age of Travel” in East-Central Europe

In 1932, Vladimír Hýl, a young teacher and cultural critic from the Czechoslovak city of Ostrava, displayed an unwavering belief in modernization when he formulated a history of advancing means of transportation that would enhance tourism around the globe:

In modern times, the world is shrinking and [thus] enables everyone to get to know her. Distances are soon to be meaningless. While sailing ships still required up to three months to reach America, [and] the first steamship needed fourteen days, [today] the fastest steamship manages the distance in five days and the airplane in eighty hours!1

From today’s perspective, even the stated flight time seems incredibly high and thus lets us continue this narrative of increasing speed and global density up to the present. Yet, this quote highlights the rapid change of overseas travels starting with the first passenger ocean liner launched in 1838, continuing with the faster and more regular ocean liners from the 1870s onward, and passing on to the first transatlantic passenger flight from southern Germany to New Jersey in 1928—only a short couple of years before Vladimír Hýl described the shrinking of the world in such enthusiastic terms.2

The rapid development of the means of transportation, both in travel time and mode as well as in the regions covered, led to a globalization of tourism that by the late nineteenth century had reached all continents and was soon to be criticized for producing a global “mass tourism” to destinations such as Cairo or Aswan.3 Although in his statement Vladimír Hýl was overly optimistic in his assessment that just about “everyone” could go and see the world, he did catch the zeitgeist of the interwar period as a time when even long-distance travels were slowly opening for a growing middle class. Trips to see the pyramids of Egypt, the exotic bazaars of Tunis and Algiers, the famous Buddha of Kamakura or the Taj Mahal in Agra had come into reach for growing social strata not only in London and Paris, but also in Vienna, Budapest and Prague.

This article traces the formation of tourism to non-European regions from the late nineteenth century to the end of the interwar period with a focus on its East-Central European and specifically its Czech perspectives. There are good reasons for the concentration on this region. The globalization of tourism, as the inherent claim suggests, affected virtually all world regions. But it did not affect all of them in the same way. And while around 1900 it was more likely for a European to embark on a leisure trip to India than for an Indian to explore Europe, it was also more likely for a member of British society to travel overseas than it was for a citizen of the Austro-Hungarian Monarchy or, during the interwar period, of one of its successor states. Local customs, economic capital and political power played a role in choosing travel destinations, in finding travel accommodations and not least in interpreting and understanding travel experiences. This article will focus on the local appropriation of global processes—or “glocalization”4—when examining Czech tourism to non-European regions in this “golden age of travel” from the late nineteenth century and throughout the interwar period.5 By doing so, it will challenge some general assumptions on the relation between tourism and imperialism.

Tourism to Africa and Asia—as will be considered here the culmination of “global tourism” for the nineteenth and the first half of the twentieth century—has been generally regarded as part and parcel of the imperial endeavor. Research on the entanglement of tourism and empire has strongly argued the case that overseas tourism evolved in the wake of imperial outreach, while at the same time reinforcing imperial power.6 The building of infrastructure—railroads, shipping lines—in regions of imperial influence helped create efficient and safe tourism in locations that had been difficult to reach, while tourist infrastructure and its main protagonists —Thomas Cook & Son and others—became central financial and political players overseas, reinforcing imperial interests.7

At the same time, the entanglement of tourism and empire was also reflected in the practice of tourism. Focusing on tourists mainly from Great Britain—not only as the country with the largest overseas empire at the time, but also as the “inventor of tourism”—and from other empires, numerous studies show that these “imperial tourists” were coined by the imperial experience while at the same time they were given a vital role in (direct and indirect) empire building.8 For one, “empire tourism”—e.g. visiting destinations inside the empire—was the common way of traveling, both because imperial tourists may have had stronger ties to these places, but also because imperial tourism was strongly promoted for both economic reasons and in support of imperial identity. Touring the Empire therefore was denoted for British travelers as “buy British, see British, travel British, parade British,” and was part of enforcing imperial power and maintaining the existing world order.9 Travel destinations, choices of travel mode, and behavior on location were affected by an imperial identity and controlled by an imperial network. Looking at it from a reverse angle, travel experience was also tainted by the imperial: while imperial tourism offered a glimpse of the exotic, it was also embedded in a familiar context, as British currency and foods, customs and social routines were “available to British tourists across the Empire, especially in port cities and colonial capitals.”10

To be sure, “imperial tourism” was not the only option for British travelers, although certainly the most frequent one.11 Research has suggested, however, that imperial identity was generally not shed outside the empires, and that the choices and actions of the travelers were indeed imperially informed: independent of their travel destination or motive, it has been suggested, British travelers shared a British imperial mindset, which with “its triumphant rhetoric, [. . .] and colonialist vision [. . .] contributed to ways of seeing the world.”12 Imperial identity, then, coined travel experience and world views both inside and outside the empire.

This concept of “empire tourism” and imperial identity, as historian Gordon Pirie points out, was surely not a purely British phenomenon, but (however in lesser scope and degree) also valid in Belgium, France, Germany, Italy, the Netherlands, Portugal and Spain.13 In contrast, Czech tourists—as well as those from Hungary, Poland and Austria among others—could not rely on imperial networks and infrastructure overseas or seek the familiar in the exotic.14 This is not to say that Czech—and other non-imperial—travelers were neutral bystanders: they took advantage of the imperial infrastructure and thus, inadvertently, also took part in the European imperial project. They, as much as any other tourist, were part of this form of “un-invited visiting,” of “creating inequality between ‘hosts’ and ‘guests.’”15 For the local populations, therefore, there might not have been a great difference between a Czech and a British traveler, as European travelers generally and inadvertently supported the existing imperial order.16

At the same time, however, the experience of non-imperial tourists was embedded in and defined by different coordinates: no imperial identity would coin their behavior abroad and no reasoning of economic nationalism would favor the visit of certain world regions over others. This would influence both decisions on where and how to travel and the experiences made on location. As the literary scholar Wendy Bracewell has argued, in contrast to British and French imperialist travel writing, “accounts of travel from Europe’s eastern peripheries suggest different relations of knowledge, representation and power, rather less monolithic or polarized.”17 Eastern European travelers, as Bracewell further argues, did not travel in a contextual void, but neither did they adopt all perceptions of the places they visited from Western discourse, as they “may find themselves working with a pre-existing vocabulary of images and stereotypes, but they are far from voiceless.”18 Although certainly not immune to notions of European superiority, East European tourism to non-European destinations certainly did not encounter a familiar environment: The “non-imperial tourist” was dealing with a different set of issues than imperial tourists, some of which were highly practical.

By telling a story of the emergence, development and experience of Czech tourism mainly to African and Asian destinations from the late nineteenth century to the end of the interwar period, I am asking how a world that had been built around imperial interests was appropriated by tourists without any stakes in the empire at hand. While looking specifically at Czech tourists, the underlying question is if (and how) a non-imperial tourism was different from an imperial tourism. In that sense, the arguments and the underlying concept may be valid for other “non-imperial tourists” from Poland, Hungary or interwar Austria.

This article is based to a large part on Czech travelogues published from 1890 to 1938 as well as on articles that were published in contemporary journals and magazines as part of a public discourse on tourism and its importance for the Bohemian lands as part of the Austro-Hungarian Empire, as well as later for Czechoslovakia. Without access to quantifiable data on Czech tourism abroad, the steady increase in the publication of travelogues as well as the heightened public debates on tourism and the growing number of commercialized package tours to popular tourist destinations give not only an estimate of trends—of tourist destinations, of travel incentives, etc.—but also an evaluation of how tourism was experienced.

The Globalization of Tourism

Travel connections between continents have always existed, in the form of trade relations, expeditions or diplomatic missions. The specific form of long-distance tourism spanning several continents, however, in its understanding as a leisure activity and relying on the predictability of financial and temporal investment as well as a certain comfort, evolved from the European core of tourism during the nineteenth century.19

The eventual globalization of tourism—its outreach beyond the European continent—was strongly connected to the imperial project.20 Tourism—in contrast to the more adventurous and individualistic (as well as more expensive) earlier forms of long-distance travel—relied on favorable political stability and heavy infrastructure: tourism expanded in the wake of what came to be called “railway imperialism.”21 The speed with which the growing railway network soon connected all continents is remarkable, and it changed international and intercontinental relations as well as the means and speed of transportation and forms of control. In terms of tourism, railways not only considerably enhanced the number of travelers, but they also redefined travel destinations, as travelers would follow the train tracks and therefore were less inclined to venture “off the beaten track.”22 In short, railways enabled tourism to non-European regions on a large scale, while at the same time streamlining tourism to certain destinations and certain forms of travel.

Tourism as an Imperial Project

Only some regions outside of Europe or North America had been established as regularly frequented tourist destinations by the middle of the nineteenth century. One of the earliest and most important certainly was Egypt. The vital train connection between the Egyptian port of Alexandria and further inland to Cairo opened for instance already in 1854, reducing the travel time between these two cities from four days to a mere four hours, thereby connecting the Egyptian metropole to a global transport network and enhancing its history as one of the most popular tourist destinations outside Europe.23 This early date also serves as a reminder that British imperialist outreach did not necessarily predate the financial involvement in infrastructure and the advent of tourism, but rode along with its expansion. Muhammad Ali Pasha, governor of Egypt, was quite a driving force himself in the modernization of Cairo and the accommodation of European tourists.24

Other regions central to European interests and eventually to European tourism obtained railroads during the second half of the nineteenth century, intensifying in the last three decades. The railroad system in Africa was concentrated at first mainly in the north, expanding rapidly from Egypt to Algeria and Tunisia. By the turn of the century, the African continent had 20,000 kilometers of railroads, connecting vast regions by regular schedule.25 A similar timeframe can be established for India, which in 1860 only had 1,350 kilometers of railway tracks, while in 1900, this number had increased 25-fold, with the central train connection between Bombay and Calcutta opening in 1870.26 In South America, similar to Australia, railroads were first introduced in the 1850s, although railway construction accelerated only in the 1880s.27 Only few world regions, such as the vast Chinese empire, remained with virtually no railroad network until the turn of the century, a fact that both hints at the limited influence of European imperial powers in China and accounts for the relatively small number of European tourists during the nineteenth century.28

While the advancement of tourism largely followed European imperial outreach, it went eventually from imperial byproduct to establishing its own driving force. Two of the most famous passenger train services exemplify this trend of an increase in catering to a luxurious form of tourism and to well-paying customers: the famous Orient Express connected Paris—and Vienna—with Constantinople beginning in 1883. The Trans-Siberian Railway, built in the years 1891–1914, finally connected Moscow and eventually all of Europe overland with Vladivostok at the Pacific Ocean.29

The railroad network was complemented by the simultaneous establishment of regular travel routes by seaway. The opening of the Suez Canal in 1869 facilitated the direct connection by sea from Europe to Asia. Direct and regular ferry connections on steamships were introduced from Trieste to Port Said in 1869, Bombay in 1870, Singapore in 1880, Hong Kong in 1880, Shanghai in 1881 and Yokohama in 1892, enhancing the global transportation network considerably.

By geographical convenience, it was quite common to hail from East Central Europe. Not only did the trains to Constantinople or to Russia and then on to East Asia stop in Vienna, in Budapest or in Warsaw; but after the opening of the Suez Canal, the Austro-Hungarian port city of Trieste had become a central hub for transportation to the Southern Hemisphere. In its wake, Austrian Lloyd became the leading shipping company on this route for passenger travel.30

In the span of a couple of decades, European tourism to places such as Cairo, Algiers and Bombay had become both considerably faster and safer, more projectable in terms of time and finances, and last but not least, significantly more comfortable if not outright luxurious. By the late nineteenth century, the “golden age of travel” had been heralded for the European tourist.31

An Empire Equipped for Tourists

This apparent accessibility of the world was celebrated and promoted by the tourist industry. In 1890 a brochure by the travel agency Thomas Cook & Son dubbed Cairo “no more than a winter suburb of London.”32 Less possessive, but implying a similar direction, the Czech travel journal Do světa commented retrospectively in 1932 on the immense pace with which tourism had taken over the world and Czech society in particular:

 

While less than a quarter century ago, a trip to Venice was considered a large expedition that only those could accomplish who were not only blessed with wealth but also with great courage, today even the members of less affluent social strata are returning from Aswan in Upper Egypt or from [the Algerian] Biskra as if from a short excursion.33

This perception, of course, was not only due to the easy accessibility of foreign shores and to the calculability both of time and financial means, but to the emergence of a wide range of tourist infrastructure of European provenance and—again—in close relation to the imperial project. In colonial and tourist centers, an array of luxury hotels was built, such as the well-known Shepheard’s Hotel in Cairo or the Mena-House right at the foot of the Egyptian pyramids.34 Restaurants and cafés with European fare provided for the culinary well-being of the travelers.35 The first office of the British travel agency Thomas Cook & Son in Cairo (opened in 1872) signaled another feat in the history of global tourism, offering package deals to its clients with measured exotic exposure and a heightened degree of security.36 Soon even trips around the world could be booked as a package tour.37 By the turn of the century, as the historian Robert F. Hunter argues, “there were two empires on the Nile—Britain’s military occupation, and Cook’s Egyptian travel,”38 and both profited from one another: tourism had conquered the world.

Another layer of tourist infrastructure soon followed suit: the exploration of long-distance and global tourism to Africa and Asia was soon taken up by prominent travel guides such as the German Baedeker Guides or the British “red books” by John Murray when they took non-European travel destinations into their repertory, with John Murray offering a first decisive list of “must-sees” of Egypt already in 1847, of Syria and Palestine in 1858 and of India in 1859. Karl Baedeker concentrated on non-European regions somewhat later, focusing on Syria and Palestine in 1875 and on Egypt in 1877, but omitted India altogether until as late as 1914—a hint at the different status of India in the British and the German context as well as the role imperial interests played in the choice of travel destinations.39 Another popular series of travel handbooks, the German Meyers Reisebücher, adhered in 1907 to the globalization of tourism with the publication of a “travel-around-the-world guide.”40 Czech tourists, however, had to make due with foreign-language guides for quite a long time: the first Czech-language travel guide to the Near East and North Africa was published only in 1936.41

The impact of this rapid globalization of tourism was immense—on the regions affected by it, on the travelers and on the local population, as well as on the power dynamics between them. A tourist in a fancy hotel or a European café in Algeria or Morocco during the interwar period could only marvel at the fact that less than a lifetime before, until the 1880s, certain North African regions could only be visited “disguised as a Muslim or a Jew,” as a tourist duly noted in 1928.42 In fact, some of the famous expeditions to explore and conquer the “Dark Continent” had taken place only a couple of years before the advent of the tourist: the 1880s still saw the second Africa expedition by Moravian explorer Emil Holub or the Emin Pasha Expedition by Henry Morton Stanley. Shortly thereafter, the adventurous and troublesome expeditions were exchanged for hotels and railroads, the constant uncertainty of exploration replaced by an exact itinerary and precise timetable. The era of the explorer was mostly over—now focusing mainly on the polar regions—and the tourist came to stay.

The Specificity of Czech Tourism

It is self-evident—if under-researched—that long-distance tourism to destinations in Africa or Asia even in its early phase was not limited to British, French or other “imperial tourists,” but was also enjoyed by a growing number of citizens of the Habsburg Empire and its successor states.

Czech tourists were part of global tourism from the very beginning—quite literally, as various travelers confirmed who took trips along railroad lines that had been built only shortly before.43 This experience, however, was limited in access to certain social classes. While extensive data on the quantity and social class of travelers from the Czech lands is not available, a look at the authors of travelogues suggests that until World War I, long-distance travelers from the Bohemian lands generally had an upper middle-class background. The well-known educator and writer Josef Kořenský, also acclaimed to be the first Czech to travel around the world (in 1893–1894), or the lawyer and journalist Jan Josef Svátek are representative travelers of this time both in social and professional background.44 Researchers and pilgrims were among the travelers, but—specific to the Czech case—there were neither members of the nobility nor public servants. The interwar years offered a democratization in tourism. The opening of travel destinations for ever more tourists, the lowering of the prices through competition and the increased catering not only to the higher society, but also to an ever more mobile middle and even lower middle-class enabled larger segments of society to travel abroad and even beyond the borders of Europe.

The expansion of tourism also led to an infrastructure around travel needs in the Bohemian lands and especially in interwar Czechoslovakia. Travel agencies opened in urban centers, such as the travel agency Čedok (founded in 1920), offering package tours abroad,45 while the Brno-based travel agency Do světa advertised three organized trips to Northern Africa and the Near East in 1927 alone.46 Other institutions followed suit to meet the growing demand.47 At the same time, journals and magazines sprang up that catered to the growing interest in travel to foreign countries.48 The tourist infrastructure met growing demand: the travel magazine Do světa discussed in its first edition in 1926 the “significance of [Czech] travel abroad“ and stated confidently: “Our travel activities are increasing.”49

Thus, Czech tourism developed in line with a general European trend to “get to know [the world],” as Vladimír Hýl is quoted at the beginning of this article. For a number of reasons, however, traveling turned out to be different for, say, a Czech teacher than for a British colonial officer, and these differences, I argue, were reflected both in the travel experience abroad and in the discourse surrounding long-distance tourism. The choice of travel destinations and travel mode, the language skills and financial abilities coined the travel experiences. A different mode of traveling than that of “imperial travelers” was noted by the tourists themselves and interpreted from a Czech perspective.

Travel Destinations and Financial Means

British tourists, as has been stated, were encouraged to travel the British Empire. Similarly, for French citizens, “[c]olonial tourism was represented as a duty.”50 While this was not an exclusive model of traveling, it certainly was a recurrent one.51 For Czech tourists, however, there was no “self-evident” travel destination in non-European regions. If we take the corpus of published travelogues as an indicator of popular travel destinations, we can determine, out of a sample of almost 100 Czech travelogues on non-European regions published between 1890 and 1938, the preferred destinations for global tourism.

In many ways, Czech tourists followed the travel routes set by imperial infrastructure, and not least by the recommendations of the widely consulted travel guides by Baedeker or Murray. However, they did not follow any imperial pattern. Egypt was and remained the most often and most regularly visited country throughout the entire “golden age of travel,” relying on the extended tourist infrastructure and fairly easy accessibility as much as on the fame of its ancient tourist sites. A trip to Egypt—which included a longer stay in Cairo and a ride to the pyramids, and often entailed an excursion down the Nile to the sites of Upper Egypt—was sometimes combined with a trip to either Algeria and Tunisia, or to Palestine. In the interwar period, various Asian countries such as Japan, India, China and Ceylon had become popular travel destinations at least for more affluent tourists.

Czech tourists, therefore, traveled to the same destinations as “imperial tourists,” if without the focus on one empire or another. However, they generally had distinct access to them. On average, Czech tourists had markedly less financial means than their British or German counterparts, a fact that clearly influenced their travel experience. The—admittedly fragmentary—data suggests that especially in the interwar period, Czech tourists were strongly recruited from professions such as teachers, university professors, journalists, as well as university students or artists. Not only did these professions come with a rather moderate income—although, almost equally important to long-distance traveling, with above-average vacation time—but, in international comparison, Czech spending capacity was limited. Although the national income of Czechoslovakia was higher than that of neighboring Eastern European countries or of Italy, it was somewhat below that of Austria and Germany and clearly below that of Western European countries or the USA.52 A comparison of incomes of some of the relevant professions in Prague, Berlin and New York for the second half of the 1920s show a distinct difference: while teachers in Prague earned about 1,500 Kčs, those in Berlin earned about twice as much and in New York triple that amount. This ratio applies to the income of university professors as well.53 These numbers suggest that in internationally frequented tourist centers that catered to the needs and means of the “imperial tourists,” the average spending power of Czech travelers was considerably lower than that of tourists from Western Europe or the United States.

Accordingly, a trip to Cairo, and even more so to India or Japan, was still an expensive undertaking for the average Czech tourist. The Brno-based travel agency of Jaroslav Karásek advertised a four-week roundtrip tour to Alexandria, Cairo, Aswan, Luxor and Jerusalem for 17,900 Kčs,54 while a four-week trip to Tunisia and Algeria was offered for 6,750 Kčs.55 Even the less expensive tour was four and a half times the amount of the monthly salary of a teacher in Prague. Especially during the interwar period, Czech tourists often opted for a more cost-effective solution by choosing to travel second class. This travel mode was a common topic in the travelogues. The luxurious grand hotels were generally traded for small boarding houses, the comfort of a first-class passage was rejected for the somewhat simpler second-class transit. The distinction of travelers according to social class and financial means was discussed by Czech tourists, who realized that the luxurious hotels were “adapted to the needs of the upper ten thousand,”56 and catered, as was made explicit, to the budgets of tourists from Great Britain or the United States.57 The Czechs, however, were “the only tourists traveling second class,” as the pioneer in Czechoslovak-Moroccan relations, Jan Kořínek, claimed in 1928.58 The travelogues offer a view of a European two-class society following an East-West divide, with the imperial tourists living the high life in the colonial metropolises, while Czech tourists shared the simple boarding houses with other Central and East European travelers, or as one of the travelers noted in 1935, with “Russians, Jews, [and] Poles.”59

Language Skills and Language Problems

Central to travel preparations was the gathering of information. While travelers from imperial nations could generally rely on published information in their mother tongue and thereby partake in a national discourse on those travel destinations, Czech travelers—and with them many others from “small nations”—had to make due mainly with literature in a foreign language, a situation that changed only slowly in the interwar period.

The main Czech encyclopedia of the time, Ottův slovník naučný (1888–1909), comparable in scope, depth and relevance to the Encyclopædia Britannica,60 gives ample evidence of the language distribution of the available literature at the time. The dictionary entries for “Africa,” “Asia,” and “America,” published in the first two volumes in the years 1888–89, refer to only seven literature references in Czech out of 116 mentioned altogether, adding up to six percent of the cited literature.61 The supplement edition of the encyclopedia from the interwar period consulted literature in Czech to a greater extent. The same dictionary entries now referred in 12 percent of all citations to Czech language publications. The majority of references, however, was still made to literature in German, followed by English and French.62 All in all, the increase of Czech-language literature was embedded in a general increase of specialist publications. While the article on “Asia” in the first edition of 1889 still noted that there were “only very little publications on all of A[sia],” the second edition, published roughly 40 years later, came to the conclusion that “[t]he literature on A[sia] has been increasing lately to such an extent that one can only mention the most important works that either reflect on the entire continent or on large regions.”63

The limited amount of literature on non-European regions available in Czech had practical as well as discursive implications. For one, it was not until the interwar years that a national discourse on those regions could flourish with a regular exchange between experts on these subjects. The travelogues under scrutiny here exemplify this change in their mentioning of preparatory literature. In the late nineteenth century and throughout the first two decades of the twentieth century, literary references were mostly made to publications in German or English. Josef Kořenský, for example, referred mainly to travelogues and academic treatises in English and German in preparation for his trip around the world in 1893/94, referring only to the Czech writings of the Indologist Otakar Feistmantel.64 In 1901, the explorer Enrique Stanko Vráz again mentioned for his preparations of a trip to Siam works by European, American and even Siamese authors, but not a single book in Czech was part of his preparatory reading.65

It was only in the interwar period that the corpus of literature in Czech on non-European regions—both academic studies and travel descriptions—had reached a critical mass that could serve as a starting point for discussion and cross-references, and the amount of coverage varied strongly from region to region. The sculptor František Foit, who in 1932 traveled by car from Cairo to Cape Town together with the botanist Jiří Baum, stated that he had read “everything” that was related to Africa, and listed books by the Moravian explorer Emil Holub along with publications by the US-American film maker Martin Johnson and the French writer André Gide about his travels to the Congo and Chad.66

Only in 1934 could the physician Jaroslav Přikryl in his travelogue about Ceylon and South India refer—in addition to novels by Jules Verne, Rudyard Kipling and others—to literature mainly by his fellow countrymen and regional specialists Jiří Daneš (geographer), Karel Domin (botanist), Otakar Nejedlý and Jaroslav Hněvkovský (painters who lived in India for several years and wrote extensively about the country and their experiences there), Otakar Pertold (Indologist), and the explorer and widely published traveler Enrique Stanko Vráz.67

The limited amount of literature in Czech also had very practical implications, as the knowledge of foreign languages determined the accessibility of knowledge about those regions. The Czech school system, however, was focused entirely on Central European needs and traditions: in the Bohemian lands, language education concentrated mainly on German as well as on French in higher education. This focus continued throughout the interwar period. Proficiency in English, on the other hand, was limited to a small minority. In fact, English was not a mandatory school subject throughout the interwar period. The consequences of this educational decision in a global perspective were implied by Bohumil Pospíšil, a frequent traveler to Asia, when he warned in 1935 about the lack of interest in the English language at home and an ignorance toward its growing importance in a globalized world: “English was, is and will be the Alpha and Omega of all success east of Suez and west of Gibraltar. No declaration in French by our academics—[only] half savants in all practical matters—will be able to replace that.”68

Czech Choices in the Face of an Imperial World

In describing and debating their role as tourists in international contexts, Czech travelers reflected on their cultural and national identity and argued for an understanding quite different from that of an “imperial traveler.” It was in this discourse—led both in travelogues and in contributions to journals and magazines—that the Czech identity was drafted in contrast to the imperial (rather than the non-European) “Other,” both in social and in political terms.

A first vector in the discussion of national identity related to considerations on social status. Paired with a moral claim, the prototypical Czech tourist tended to stress his middle-class identity in open contrast to wealth and lavishness, but also to the political power of the imperial traveler. This was strongly linked to the more modest mode of traveling chosen by most middle-class tourists. The decision to stay in unassuming boarding houses rather than in grand hotels, to travel second class rather than first, as discussed above, may have been a financial necessity, but in the travelogues, it was presented as a moral choice. This is most evident in those passages in which Czech tourists write specifically about their choice of the small, yet comfortable boarding house over the luxurious hotels,69 or when a tourist opted for the cheaper mode of transportation, as did the engineer Josef Zdeněk Raušar on his way from Djelfa in Algeria to an oasis lying to the south in 1930. Choosing between two buses with different equipment, he stated that for Czech tourists, “the smaller one, the normal [bus] will do.”70 Other travelers stressed that they chose consciously and “with pride” second- or even third-class tickets for both train and boat passages.71 The specificity and singularity of this way of traveling was emphasized when as early as 1892 another traveler described how he tried to obtain a second-class ticket for the boat passage from Asyut in Middle Egypt up the Nile River—in vain, as it turned out: the captain persuaded him to go first class instead, as “for a European,” anything but traveling first class was inappropriate.72 Other travelers—if only a few—forewent European amenities altogether, as the writer Bohumil Pospíšil, who during his trip to China in 1935 stayed at local hostels, and explicitly called out this breach of expected behavior for European travelers when he stated that he “reduced the reputation of the white race” by living “like a native.”73 The refusal to accept certain norms as laid down for the imperial traveler, and therefore ignoring the maintenance of power as expected of metropolitan tourists, was frequently emphasized by various Czech tourists.74

This general insistence on traveling second class allowed a second interpretation that usually connected this form of traveling with a widespread topos in Czech national self-perception during the interwar period, namely its democratic identity, strongly linked with the topos of a “small nation.”75 In the travelogues, the Czech “democratic principle” (demokratičnost)76 was argued as a world view that held all people as equal. More than once did this idea come up in a debate over a ride in a rickshaw; arguing that a “democratic” Czech should not be pulled by another human being, as Karel Cvrk noted in 1923 on his trip through Ceylon: “A Czech, who is used to equality-liberty-fraternity, is usurped by a strange feeling when here in Colombo he is supposed to be pulled by a man.”77 In the same year, but this time in Japan, the journalist František Václav Krejčí commented similarly about a rickshaw runner that “it is contrary to our Czech democratic principle to see a man doing the work of a horse for us.”78 In these quotes, an understanding of democracy and equality that encompassed all men across the globe was highlighted as an inherent feature of Czech nationality.

Finally, colonial life—the social etiquette of the European upper classes in imperial centers—was distinctly criticized. Czech tourists noted not only the strict dress codes for Europeans that seemed inadequate for the local climate, but also the restrictive social rules that prohibited even superficial contact between men and women in public, or the tediousness of colonial life.79 The sculptor František Foit noted in 1930 with some annoyance on his trip from Cairo to Cape town via the British-dominated city of Omdurman in Sudan that “nothing is allowed, everything is guarded and there is a fake morale everywhere.”80

This general skepticism toward local practices of European behavior in China, in Egypt, or in Algeria—though not necessarily shared by all travelers—was quite a common feature in Czech travelogues and is traceable beginning in the late nineteenth century until the end of the interwar period. This did not, however, imply a fundamental criticism toward imperial outreach or colonialism as such. Rather, the legitimacy of European involvement abroad was only rarely discussed and even less criticized; the political status quo was rarely questioned. This might be somewhat surprising as, since the late nineteenth century, the Czech national movement had been strongly based on an anti-Habsburg sentiment that declared the Austro-Hungarian Monarchy to be a “prison of nations” and therefore phrased itself often as oppressed. Only to a limited extent would this interpretation influence the perspective of European imperial involvement abroad.

Generally, most tourists acknowledged the benefits of modernization for the purpose of travel in vast regions of Africa and Asia, and connected these to the influence of the European imperial powers: railroads, tourist infrastructure and technology were clearly marked as a European influence on otherwise “medieval”81 or backward regions of “silence, sadness and hunger.”82

In the end, it was an in-between position that was taken by most travelers, who neither went “native” nor identified wholly with the imperial powers. As the zoologist Jiří Baum confessed in 1933:

 

The Czech nation can probably only sympathize with the natives, who were deprived of independence and the right to self-determination by the colonial governments, but on the other hand it is hard to dismiss that it is more comfortable to travel in all those world regions where the higher positions are held by Europeans.83

Conclusion

The “golden age of travel” saw the expansion of European tourism to most continents. The spread of the railroad network and tourist infrastructure in many ways streamlined travel as it created transportation hubs and tourist centers in certain parts of the world while others were—for the time being—left aside. Imperial endeavor was the motor of this homogenizing development, and in many cases it coined destinations, transport and lodging as well as food, rule and etiquette. Tourist infrastructure in colonial or imperial settings largely catered to “imperial travelers,” offering the familiar in the exotic while avoiding the “uncomfortable immersion in non-European cultures.”84

Non-imperial travelers, however, could not access all the infrastructure and especially the identity politics connected to “imperial tourism.” As generalized as some of the arguments had to be—not all British travelers were supporting imperial interests, not all Czech tourists were opposed to a higher level of comfort—the argument could be made that a different relationship to imperial power influenced the practices and experience of traveling in an imperial context, and therefore offered a different appropriation of these global processes. Economic means, language skills and access to knowledge influenced the choice of travel destinations as well as the travel mode: Czech tourists often shunned the luxury hotels and the elegant social events and rather opted for the less costly pension or boarding house and chose a second-class ticket instead of first class for their voyage. However, these choices were not based purely on economic considerations. Rather, the travelogues suggest a cultural argument, as they were debating the suitability of behavior abroad in the light of national identity. The self-understanding as a democratic and largely middle-class nation seemed for instance to demand the choice of simple, second-class travel. This also entailed a certain skepticism toward imperial rule, although its benefits for tourism were readily acknowledged, as modernization in the form of railroad tracks and imperialism were viewed as intrinsically linked. This discrepancy was not resolved during the travels. Instead, Czech tourists generally opted to stay outside colonial society and rather associated with fellow compatriots or Central European emigrants who frequented the same hostels or restaurants.

In hindsight, the interwar period turned out to be the most suitable for getting to know the world, as Vladimír Hýl suggested in the quote appearing at the beginning of this article. By the time the “golden age of travel” came to an end just before World War II, the coordinates of travel had shifted, changing from leisure to flight. Some of the most popular tourist destinations on the African, Asian and American continents now became safe havens for those lucky enough to escape Central Europe. The postwar era saw new milestones in the history of public transportation, but it did not, however, see an upsurge in intercontinental tourism. By the time Mr. Hýl had turned 50 years of age in 1948, flying had become a frequent mode of traveling across the Atlantic, with its duration reduced to a mere 15 hours. At the same time, however, he might have had a hard time getting a travel permit: in the face of increasing political tensions, travel across the descending “Iron Curtain” became highly curtailed and strongly controlled. Freedom of movement was regained only in 1989, though is now again restricted mainly by economic means.

 

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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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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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Smutný, Bohumír. Potštejnská manufaktura na česko-kladském pomezí. Studie o východočeském plátenictví v letech 1754–1761 [The Potštejn Manufacture in the Bohemian-Silesian Border Region. A Study of East Bohemian Cloth Manufacturing in 1754–1761]. Hradec Králové: Vysoká škola pedagogická, 2002.

Smutný, Bohumír. “Hrabata pláteníky a pláteníci barony. Společenské a sociální skupiny v čele českého a moravského plátenictví ve 2. polovině 18. století” [Social Elite of the Bohemian and Moravian Linen Industry in the Second Half of the Eighteenth Century]. In Šlechtic podnikatelem – podnikatel šlechticem. Šlechta a podnikání v českých zemích v 18.–19. století [Noblemen as Entrepreneurs – Entrepreneurs as Noblemen. The Nobility and Entrepreneurship in the Bohemian Crown Lands during the Eighteenth and Nineteenth Centuries], edited by Jiří Brňovják and Aleš Zářický, 49–61. Ostrava: Ostravská univerzita, 2008.

Smutný, Bohumír. Brněnští podnikatelé a jejich podniky (1764–1948) [Brno Entrepreneurs and their Companies]. Brno: Statutární město Brno, 2012.

Spurný, František. “Příspěvek k dějinám sobotínských železáren v 50. – 70. letech 19. století. Biografie Aloise Scholze” [On the History of the Sobotín Ironworks in the 1850s–1870s]. Rozpravy Národního technického muzea 77 (1980): 81–90.

Spurný, František. “Friedrich Klein a poslední pokusy o záchranu severomoravského železářství” [Friedrich Klein and the Last Attempts at Rescuing a North Moravian Ironworks]. Rozpravy Národního technického muzea 82 (1981): 131–35.

Štaif, Jiří, ed. Moderní podnikatelské elity. Metody a perspektivy bádání [Modern Entrepreneurial Elites. Methods and Perspectives of Research]. Prague: Dokořán, 2007.

Štěpán, Václav. “Důlní podnikání bratří Kleinů v Ostravě a montanista Anton Péch (1822–1895)” [The Klein Brothers’ Coal Mining Business in Ostrava and the Mining expert Anton Péch]. Ostrava. Příspěvky k dějinám a současnosti Ostravy a Ostravska 18 (1997): 293–307.

von Saldern, Adelheid. Netzwerkökonomie im frühen 19. Jahrhundert. Das Beispiel der Schoeller-Häuser. Stuttgart: Franz Steiner Verlag, 2009.

Wehler, Hans Ulrich. Deutsche Gesellschaftsgeschichte III. Von der “Deutschen Doppelrevolution” bis zum Beginn des Ersten Weltkrieges 1849–1914. Munich: C.H. Beck, 1995.

Zářický, Aleš. “Moravskoostravští měšťanští podnikatelé na cestě od rodinných firem k nadnárodním společnostem. K problematice změn forem podnikání na konci 19. a na počátku 20. století” [Bourgeois Entrepreneurs in Moravian Ostrava on the Path from Family Firms to Multinational Companies. On Issues of Changes in Forms of Business in the Late Nineteenth and Early Twentieth Century]. In Královská a poddanská města od své geneze k protoindustrializaci a industrializaci [Royal and Subject Towns from Their Genesis to Proto-industrialization and Industrialization], edited by Jiří Jurok, 221–49. Ostrava–Nový Jičín–Příbor: Ostravská univerzita, 2002.

Zeumer, Sandra. Die Nachfolge in Familienunternehmen. Drei Fallbeispiele aus dem Bergischen Land im 19. und 20. Jahrhundert. Stuttgart: Franz Steiner Verlag, 2012.

 

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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Katus, László. “Magyarország gazdasági fejlődése (1890–1914)” [The Economic Development of Hungary]. In Magyarország története 1890–1918, volume 1 of 7, edited by Péter Hanák, 268–402. (Magyarország története tíz kötetben.) Budapest: Akadémiai Kiadó, 1978.

Klement, Judit. “Válság egy húzóágazatban – a 19. századi malomipar példája” [Crisis in a Leading Branch – the Example of the Nineteenth-Century Milling Industry]. In Gödörből gödörbe. Mindennemű válságok Magyarhonban a 19. és 20. században [From Pothole to Pothole. All Kinds of Crises in Hungary in the Nineteenth and Twentieth Centuries], edited by Csaba Katona, 79–90. Szombathely: Mediawave Közalapítvány–Vas Megyei Levéltár, 2011.

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.

Klement, Judit. “Az őrlési forgalom jelentősége a fővárosi malomvállalatok néző­pontjából” [The Significance of the Processing Trade from the Perspective of the Mill Enterprises of Budapest]. In Piacok a társadalomban és a történelemben [Markets in Society and History], edited by Károly Halmos, Zsuzsanna Kiss, and Judit Klement, 211–20. (Rendi társadalom – polgári társadalom 26.) Budapest, Hajnal István Kör, 2014.

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.

O’Rourke, Kevin H. “The European Grain Invasion, 1870–1913.” The Journal of Economic History 57, no. 4 (1997): 775–801.

Pogány, Ágnes. “Bankárok és üzletfelek. A Magyar Általános Hitelbank és vállalati ügyfelei a két világháború között” [Bankers and Clients. The Hungarian General Credit Bank and Its Business Clients in the Interwar Period]. Replika 25 (1997): 55–66.

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.

Radnóti, József. Pesti pénzoligarchák [Financial Oligarchs of Pest]. Budapest: May János Nyomdai Műintézet, 1929.

Rostow, Walt W. The Process of Economic Growth. New York: W. W. Norton & Company Inc. 1962.

Rostow, Walt W. The Stages of Economic Growth. A Non-Communist Manifesto. Cambridge: Cambridge Univ. Press, 1990.

Sándor, Pál. A XIX. század végi agrárválság Magyarországon [The Late Nineteenth-Century Agricultural Crisis in Hungary]. Budapest: Akadémiai Kiadó, 1958.

Sándor, Vilmos. Nagyipari fejlődés Magyarországon [The Development of Large-Scale Industry in Hungary]. 1867–1900. Budapest: Szikra, 1954.

Schröter, Harm G. “Cartelization and Decartelization in Europe, 1870–1995: Rise and Decline of an Economic Institution.” The Journal of European Economic History 25, no. 1 (1996): 129–53.

Thernesz, Vilmos. “Magyar malomipar helyzete a 20. század első felében” [The Situation of the Hungarian Milling Industry in the First Half of the Twentieth Century]. In Műszaki innovációk Magyarországon [Technological Innovations in Hungary], edited by Walter Endrei, 109–33. Budapest: Akadémiai Kiadó, 1995.

Tomka, Béla. “Személyi összefonódás (interlocking directorates) bankok és iparvállalatok között a századforduló Magyarországán” [Interlocking Directorates between Banks and Industrial Enterprises in Hungary at the Turn of the Century]. Replika 25 (1997): 37–46.

Tomka, Béla. Érdek és érdektelenség. A bank-ipar viszony a századforduló Magyarországán, 1892–1913 [Interest and Disinterest. The Relationship between Banks and Industry in Hungary at the Turn of the Century, 1892–1913]. Debrecen: Multiplex Media–DUP, 1999.

Tomka, Béla. “A magyar malomipar finanszírozása (1895–1913)” [The Financing of the Hungarian Milling Industry (1895–1913)]. Korall 4, no. 14 (2003): 79–97.

 

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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