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]

Bibliography

 

Primary Sources

 

Rendeletek Tára [Repository of Decrees], 1882.

Report on the production of agriculture as returned at the tenth census (June 1, 1880), Department of the Interior, Census Office. (Embracing general statistics and monographs on cereal production, flour-milling, tobacco culture, manufacture and movement of tobacco, meat production.) Volume 12. Washington: Government Printing Office, 1883.

Tőzsdelap. Budapesti Áru-és Értéktőzsde Hivatalos Árjegyző Lapja, [Stock Exchange Paper] 1900–1914.

Zsidó lexicon [Jewish Encyclopedia]. Edited by Péter Újvári. Budapest: Pallas, 1929.

 

Secondary Sources

 

Bacher, Emil. A magyar malomipar [The Hungarian Milling Industry]. Budapest: Károlyi György kő- és könyvnyomdája, 1911.

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

Burchard-Bélaváry, Konrád. A malomipar az ezredéves országos kiállításon [The Milling Industry at the National Millennial Exhibition]. (Separate print from the eighth volumes of Sándor Matlekovits’s exhibition entitled “Az ezredéves kiállítás eredménye.”) Budapest: Pesti Könyvnyomda Rt., 1898.

Chandler, Alfred D. The Visible Hand. The Managerial Revolution in American Business. Cambridge–London: Belknap, 2002.

Fekete, Ignác. Az őrlési forgalom [The Processing Trade]. Budapest: Pesti Könyvnyomda-Részvénytársaság, 1900.

Fletcher, T. W. “The Great Depression of English Agriculture 1873–1896.” Economic History Review, New Series 13, no. 3 (1961): 417–32.

Fogel, Robert W. Railroads and American Economic Growth: Essays in Econometric History. Baltimore: John Hopkins Press, 1964.

Gärtner, Henrik. “A budapesti malmok jövedelmezősége és az őrlési forgalom” [The Profitability of the Budapest Mills and the Processing Trade]. Közgazdasági Szemle (1910): 775–95.

Halmos, Károly. “Lánczy Leó. Hagyomány és nonkonformizmus egy bankvezér történetében” [Leó Lánczy. Tradition and Nonconformity in the History of a Banking Leader]. In Sokszínű kapitalizmus. Pályaképek a magyar tőkés fejlődés aranykorából [Multicolored Capitalism. Career Images from the Golden Age of Hungarian Bourgeois Progression], edited by Marcell Sebők, 180–95. Budapest: KFKI Csoport – HVG Könyvek, 2004.

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

 

Bibliography

Primary Sources

 

“A kormány sürgeti a malomkoncentrációt” [The Government Urges the Concentration of Milling]. Pesti Tőzsde, March 4, 1926. 5.

“A pesti nagymalmok leépítik a gabonaőrlést” [The Big Mills in Pest Stop Grinding Grain]. Pesti Tőzsde, February 15, 1928.

“A Victoria malomnál minden rendben, de Bacher megosztja hatalmát” [Everything’s Alright in the Victoria Mill but Bacher Divides His Power]. Pesti Tőzsde, January 21, 1926. 3.

“Augusztus 1-től feltámad a malomegyezmény” [The Milling Agreement is Revived after August 1]. Pesti Tőzsde, July 9, 1925. 13.

Budapesti Kereskedelmi és Iparkamara éves jelentései [Yearly Reports of the Budapest Chamber of Commerce and Industry]. 1925−1932.

“Elvileg létrejött a vidéki malomkoncentráció” [In Principle, the Provincial Milling Concentration has been Established]. Pesti Tőzsde, May 13, 1926. 19.

Hönich, Henrik. “A magyar malomipar megmentése” [Saving the Hungarian Milling Industry]. Pesti Tőzsde, August 20, 1925. 1−2.

(K.) “A Concordia-malom titka” [The Secret of the Concordia Mill]. Pesti Tőzsde, April 1, 1926.

“Koncentráció vagy tröszt a malomiparban” [Concentration or Trust in the Milling Industry]. Pesti Tőzsde, May 27, 1926. 9.

Láng, Ármin. “Malomiparunk helyzete” [The Situation of Our Milling Industry]. Pesti Tőzsde, February 21, 1926.

Lesz-e fúzió a malomiparban?” [Will Be There a Merger in the Milling Industry?]. Pesti Tőzsde, December 15, 1927. 7.

“Malomholding helyett a régi malomkoncentráció feltámasztásáról tárgyalnak” [There Are Negotiations about the Resurrection of the Milling Concentration, instead of the Milling Holding]. Pesti Tőzsde, May 31, 1928. 6.

“Miért hiúsult meg az Első Budapesti Gőzmalom és a Borsod-Miskolci fúziója?” [Why did the Merger of the First Budapest and the Borsod−Miskolci Fail?]. Pesti Tőzsde, December 22, 1927.

“Nehezen születik meg az új malomholding” [With Difficulty, the New Milling Holding Comes into the World]. Pesti Tőzsde, May 24, 1928. 6.

“Óriási malomtröszt alakul” [A Huge Milling Trust is Being Formed]. Pesti Tőzsde, May 10, 1928. 7.

“Stux Sándor a Malomegyesület feladatairól és a malomkoncentrációról” [Sándor Stux on the Duties of the Milling Association and the Milling Concentration]. Pesti Tőzsde, July 8, 1926. 5.

“Stux Sándor az Első Budapesti Gőzmalom vezérigazgatója a malomipar kilátásairól, a malomrészvények árcsökkenéséről, a koncentrációról, amely nem jöhet létre” [General Manager of the First Budapest Steam Mill, Sándor Stux on the Perspectives of the Milling Industry, on the Fall of the Price of the Milling Shares, and on the Concentration that Fails to Come into Being ]. Pesti Tőzsde, November 8, 1928. 5.

“Százhúsz malom 10 éves koncentrációra kész” [One Hundred Twenty Mills are Ready for the Ten Years Milling Concentration]. Pesti Tőzsde, July 1, 1926. 5.

 

Statistics

 

Magyar Statisztikai Évkönyv. Új Folyam 1 [Hungarian Statistical Yearbook, New Series]. Budapest: Magyar Királyi Statisztikai Hivatal, 1893. Accessed September 1, 2015. http://konyvtar.ksh.hu/inc/kb_statisztika/statevkonyvek/1893/htm.

Magyar Statisztikai Évkönyv, Új Folyam 8 [Hungarian Statistical Yearbook, New Series]. Budapest: Magyar Királyi Statisztikai Hivatal, 1900. Accessed September 1, 2015. http://konyvtar.ksh.hu/inc/kb_statisztika/statevkonyvek/1900/htm.

Magyar Statisztikai Évkönyv, Új Folyam 18 [Hungarian Statistical Yearbook, New Series]. Budapest: Magyar Királyi Statisztikai Hivatal, 1910. Accessed September 1, 2015. http://konyvtar.ksh.hu/inc/kb_statisztika/statevkonyvek/1910/htm.

“A magyar korona országainak 1900. évi népszámlálása. Második rész, A népesség foglalkozása községenként” [Population Census of the Countries of the Hungarian Crown of 1900. Second Part. The Occupation of the Population by Settlements]. Magyar Statisztikai Közlemények, Új sorozat, 2. rész. Budapest: Magyar. Királyi Statisztikai Hivatal, 1904.

“A magyar szent korona országainak 1910. évi népszámlálása. Harmadik rész, A népesség foglalkozása részletesen és a vállalati statisztika,” [Population Census of the Countries of the Hungarian Saint Crown of 1910. Third Part. The Occupation of the Population in Detail and Statistics of the Enterprises]. Magyar Statisztikai Közlemények, Új sorozat. Volume 52. Budapest: Magyar. Királyi Központi Statisztikai Hivatal, 1914. Accessed September 1, 2015. http://konyvtar.ksh.hu/inc/kb_statisztika/Manda/MSK/MSK_048.pdf.

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

 

Secondary Sources

 

Chandler, Alfred D. Jr. Scale and Scope: the Dynamics of Industrial Capitalism. Cambridge–London: The Belknap Press of Harvard University Press, 1996.

Everitt, John, and Kempthorne, Roberta. “The Flour Milling Industry in Manitoba since 1870.” Manitoba History 26 (1993). Accessed August 23, 2015. http://www.mhs.mb.ca/docs/mb_history/26/flourmilling.shtml.

Farkasfalvy, Sándor. “Malomstatisztika” [Milling Statistics]. Magyar Statisztikai Szemle [Hungarian Review of Statistics] 4 (1926): 83–88.

Fear, Jeffrey. “Cartels.” In The Oxford Handbook of Business History, edited by Geoffrey Jones et al. Oxford: Oxford University Press, 2010. Oxford Handbooks Online. Accessed September 19, 2015. www.oxfordhandbooks.com.

Fligstein, Neil. The Transformation of Corporate Control. Cambridge–London: Harvard University Press, 1993.

History book of the General Mills Company. Accessed September 19, 2015. https://www.generalmills.com/en/Company/history.

Kirsch, János. “Malomipar”[Milling Industry]. In A magyar élelmiszeripar története [The History of the Hungarian Food Industry], edited by idem et al., 91–154. Budapest: Mezőgazdasági Kiadó, 1986.

Klement, Judit. “Apák és fiúk gazdasági stratégiái: egy magyar család a 19. és 20. században” [Economic Strategies of Fathers and Sons: A Hungarian Family in the Nineteenth and Twentieth Centuries]. Aetas no. 1–2 (2005): 69–92.

Klement, Judit. Gőzmalmok a Duna partján [Steam Mills on the Danube Riverside]. Budapest: Holnap Kiadó, 2010.

Klement, Judit. Hazai vállalkozók a hőskorban. A budapesti gőzmalomipar vállalkozói a 19. század második felében [Domestic Entrepreneurs in the Heroic Age. The Entrepreneurs of the Budapest Steam Mill Industry in the Second Half of the Nineteenth Century]. Budapest: ELTE 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. “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.

Klement, Judit. “How to Adapt to a Changing Market? The Budapest Flour Mill Companies at the Turn of the Nineteenth and Twentieth Centuries.” Hungarian Historical Review 4, no. 4 (2015).

Kövér György. “A budapesti malomipar felemelkedése – a központi bank információi tükrében” [The Rise of the Budapest Flour Milling Industry – in the Mirror of the Information of the Central Bank]. In idem. A felhalmozás íve. Társadalom- és gazdaságtörténeti tanulmányok [The Arch of Accumulation. Essays in Economic and Social History], 298−308. Budapest: Új Mandátum Könyvkiadó, 2002.

Lamoreaux, Naomi R. The Great Merger Movement in American Business, 1895–1904. Cambridge: Cambridge University Press, 1988.

Landes, David S. “A Rockefellerek – Szerencse, erényesség és vallásosság” [The Rockefellers – Fortune, Virtue and Piety]. In idem. Dinasztiák, családi vagyonok és vagyonos családok [Dynasties –Fortunes and Misfortunes of the World’s Great Family Businesses], 245−75. Budapest: Partvonal Kiadó, 2007.

Mérő, Katalin. “Részvényárfolyamok alakulása a budapesti értéktőzsdén, 1864−1943” [The Development of the Share Prices on the Budapest Stock Exchange, 1864−1943]. Statisztikai Szemle [Review of Statistics] 65, no. 12. (1987): 1239–59.

Perren, Richard. “Structural change and market growth in the food industry: flour milling in Britain, Europe, and America, 1850–1914.” Economic History Review 2nd ser., 43, 3 (1990): 420−37.

Pogány, Ágnes. “A Pesti Victoria Gőzmalom összeomlása” [The Collapse of the Pest Victoria Steam Mill]. Korall 14 (2003): 98–116.

Sándor, Vilmos. “A budapesti nagymalomipar kialakulása (1839–1880)” [The Evolution of the Budapest Big Milling Industry (1839–1880)]. In Tanulmányok Budapest múltjából [Essays from the History of Budapest]. Volume 13. 315–423. Budapest: BTM, 1959.

Schmitz, Christoper J. The Growth of Big Business in the United States and Western Europe, 1850–1939. Cambridge: Cambridge University Press, 2002.

Szterényi, József, and Ladányi, Jenő. A magyar ipar a világháborúban [Hungarian Industry in the World War]. Budapest: Franklin társulat, 1933.

Szűcs, Ernő. “A debreceni István Gőzmalom története 1848−1944” [The History of the István Steam Mill of Debrecen 1848−1944]. A Hajdú-Bihar Megyei Levéltár Közleményei [Proceedings of the Archive of Hajdú-Bihar County] 12. Debrecen: Hajdú-Bihar Megyei Levéltár, 1978.

Tomka, Béla. “A magyar malomipar finanszírozása (1895–1913)” [The Financing of the Hungarian Flour Milling Industry]. Korall 14 (2003): 79–97.

Tomka, Béla. Érdek és érdektelenség. A bank-ipar viszony a századforduló Magyarországán 1892−1913 [Interest and Disinterest. Bank–Industry Relations in Hungary of the Turn of Century 1892−1913]. Debrecen: Multiplex Média–Debrecen U. P., 1999.

Varga, Jenő. “A magyar kartellek” [The Hungarian Cartels]. In idem. A proletárdiktatúra gazdaságpolitikája. Válogatott írások, 1912–1922 [The Economic Policy of the Proletariat’s Dictatorship. Selected Writings], 41–100. Budapest: Kossuth Könyvkiadó, 1976.

Wengenroth, Ulrich. “Germany: Competition Abroad – Cooperation at Home, 1870−1990.” In Big Business and the Wealth of Nations, edited by Alfred D. Chandler Jr. et al., 139–75. Cambridge: Cambridge University Press, 1997.

Wilson, John F. British Business history, 1720−1994. Manchester–New York: Manchester University Press, 1995.

András Schlett

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

 

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Basic Cases of Innovation in Hungarian Agriculture between 1960 and 1990

Agrarian Technical Revolution

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

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

The general basic features of industrial agriculture are the following:

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

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

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

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

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

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

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

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

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

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

Product Restructuring and Economies of Scale

Two Successful Branches: Poultry and Corn

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

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

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

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

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

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

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

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

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

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

External Relations

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

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

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

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

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

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

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

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

Organizational Changes and New Organizations

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

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

 

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

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

 

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

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

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

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

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

Loyalty and Competence: the Managerial Revolution and Pressures of Innovation

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

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

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

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

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

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

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

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

Crisis and Path Dependence

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

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

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

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

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

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

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

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

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

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

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

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

Conclusions

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

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

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

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

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

 

Archival Sources

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

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

Bibliography

Ángyán, József. Az európai agrármodell, a magyar útkeresés és a környezetgazdálkodás [The European Agrarian Model: The Hungarian Search for a Path and Environmental Management]. Budapest: Agroinform Kiadóház, 2001.

Barát, Mária. A magyar gazdaság vargabetűje [A Detour in Hungarian Economy]. Budapest: Aula, 1994.

Bekker, Zsuzsa. Rendszerválság. Alkalmazkodási folyamatok a kelet-európai országokban 1970–1990 között [System Crisis: Adaptation Processes in the Eastern European Countries between 1970 and 1980]. Budapest: Aula, 1995.

Botos, Katalin, Mihály Patai, and István Szalkai. Pénzügyek és nemzetközi gazdasági kapcsolataink [Finances and International Economic Relationships]. Budapest: Közgazdasági és Jogi Könyvkiadó, 1980.

Bruszt, László. A centralizáció csapdája [The Trap of Centralization]. Szombathely: Savaria University Press, 1995.

Csete, László. A termelőszövetkezetek és az állami gazdaságok fejlődése [The Progress of Cooperatives and State Farms]. Budapest: AKI, 1985.

Csizmadia, Ernő. “Folytonosság és változások agrárfejlődésünkben a nyolcvanas évek elején” [Continuum and Changes in Our Agrarian Development in the Early 1980s]. Agrártudományi Közlemények 40 (1981): 108–19.

Evenson, Robert E., and Douglas Gollin. “Assessing the Impact of the Green Revolution, 1960 to 2000.” Science 2 (2003): 758–62.

Fertő, Imre, Pál Juhász, and Kálmán Mohácsi. Az agrárrendszer válsága és a kibontakozás lehetőségei [Crisis of the Agrarian System and Developmental Possibilities]. Budapest: Pénzügykutató Rt., 1991.

Gajdos, Géza, and András Éliás. Az agrár-külpiac megítélése [An Assessment of the Agrarian Foreign Market]. Budapest: AKI, 1978.

Huszár, Tibor. Kádár János politikai életrajza 2 [János Kádár’s Political Biography, 2]. Budapest: Szabad Tér Kiadó–Kossuth Kiadó, 2003.

Kaposi, Zoltán. “A magyarországi energiapolitika változásai a tervgazdasági rendszer időszakában” [Changes in Hungarian Energy Politics during the System of Economic Planning]. In 1956: Fordulópont a gazdaságpolitikában [1956: The Turning Point of the Economic Policy], edited by Katalin Botos, 117–18. Szeged: SZTE Gazdaságtudományi Kar, 2007.

Kiss, Albert. “A mezőgazdasági termelés struktúrája és anyagi-műszaki megalapo­zottsága” [The Structure and Material and Technological Bases of the Hungarian Agriculture]. In A mezőgazdaság fejlődésének szocialista útja. A legutóbbi két évtized mezőgazdasági tapasztalatai tükrében [The Socialist Way of Agricultural Development in Light of the Experiences of the Last Two Decades], edited by Károly Girus and Péter Simon, 27–29. Budapest: ELTE BTK, 1982.

Klenczner, András. “Új vonások az állami gazdaságok gazdálkodásában” [New Features in the Economy of the State Farms]. Gazdálkodás 11 (1982): 123.

Konrád, György, and Iván Szelényi. Az értelmiség útja az osztályhatalomhoz [The Intellectuals on the Road to Class Power]. Budapest: Gondolat, 1989.

Kornai, János. “Innováció és dinamizmus. Kölcsönhatás a rendszerek és a technikai haladás között” [Innovation and Dynamism: The Interplay between Systems and Technical Advancement]. Közgazdasági Szemle 1 (2010): 13–15.

Kornai, János. A hiány [The Deficit]. Budapest: Közgazdasági és Jogi Könyvkiadó, 1980.

Kornai, János. Eric Maskin, and Gérard Roland. “A puha költségvetési korlát” [The Soft Budget Constraint]. Közgazdasági Szemle 9 (2004): 777.

KSH. “Fontosabb gabonafélék vetésterülete 1921–2014. Agrárcenzusok – Hosszú idősorok – Táblázatok” [Hungarian Central Statistical Office: The Acreage of Main Crops, 1921–2014. Agrarian Census, Long Timelines, Charts]. Accessed November 27, 2015. https://www.ksh.hu/docs/hun/agrar/html/tabl1_4_1_5.html.

KSH. “Fontosabb ipari növények termésmennyisége, 1921–2013. Agrárcenzusok – Hosszú idősorok – Táblázatok” [Hungarian Central Statistical Office: The Production of Main Industrial Crops, 1921–2013. Agrarian Census, Long Timelines, Charts]. Accessed November 27, 2015. https://www.ksh.hu/docs/hun/agrar/html/tabl1_4_2_3.html.

Mezőgazdasági Statisztikai Évkönyv 1986 [Agricultural Statistical Annual 1986]. Budapest: Központi Statisztikai Hivatal, 1987.

Mises, Ludwig von. Economic Calculation in the Socialist Commonwealth. Auburn, Ala.: The Ludwig von Mises Institute, [1920] 1990.

Németh, Józsefné. A magyar mezőgazdaság európai összehasonlításban [Hungarian Agriculture in International Comparison]. Budapest: Központi Statisztikai Hivatal, 1985.

Orosz, István. “A modernizációs kísérletek főbb szakaszai a magyar mezőgazdaságban a XIX–XX. században” [The Main Phases of the Modernization Attempts in Hungarian Agriculture during the Nineteenth and Twentieth Centuries]. Múltunk 48, no. 2 (2003): 249–53.

Romány, Pál. “Az Agrárpolitikai Tézisektől a Nemzeti Agrárprogramig” [From the Theses of Agrarian Politics to the National Agrarian Program, 1957–1997]. In A magyar agrártársadalom a jobbágyság felszabadításától napjainkig [Hungarian Agrarian Society from the Liberation of the Serfs until the Present], edited by Péter Gunst, 345–437. Budapest: Napvilág Kiadó, 1998.

Romsics, Ignác, ed. Szabó István életútja Nádudvartól Nádudvarig [István Szabó’s Career: From Nádudvar to Nádudvar]. Budapest: Osiris Kiadó, 2012.

Schlett, András. Sziget a szárazföldön. A Bábolnai Állami Gazdaság története 1960 és 1990 között [An Island in a Mainland. History of the State Farm in Bábolna between 1960 and 1990]. Budapest: Szent István Társulat, 2007.

Schlett, András. “Zátonyra futott mezőgazdaság. A magyar agrárium külpiaci helyzetének alakulása az olajárrobbanás után,” [Shipwrecked Agriculture: Changes in the External Markets of Hungarian Agriculture after the Oil Price Boom]. In Regionális földrajzi tanulmányok. Közép-európai monográfiák, volume 7, edited by Lajos Veres, 121–23. Szeged: Egyesület Közép-Európa Kutatására, 2013.

Schumpeter, Joseph A. A gazdasági fejlődés elmélete [The Theory of Economic Development]. Budapest: Közgazdasági és Jogi Könyvkiadó, 1980.

Vági, Ferenc. “Vállalatiság és gazdaságirányítás” [The Nature of Companies and Economic Governance]. Gazdálkodás, 4 (1986): 32–33.

Varga, Gyula. “Az agrártermelés növekedésének és strukturális átalakulásának változatai” [Versions of the Growth and the Structural Transformations of Agrarian Production]. Gazdálkodás 23, no. 4 (1989): 1–10.

Varga, Zsuzsanna. Az agrárlobbi tündöklése és bukása az államszocializmus időszakában [The Rise and Fall of The Agrarian Lobby under State Socialism]. Budapest: Gondolat Kiadó, 2013.

Varga, Zsuzsanna. Modelltranszferek keletről és nyugatról: mezőgazdasági termelőszövetkezetek Magyarországon 1949–1989 [Model Transfers from East and West: Agricultural Cooperatives in Hungary, 1949–1989]. Doctoral dissertation, Hungarian Academy of Sciences, 2014.

Varga, Zsuzsanna. “Conflicts and compromises between the Hungarian socialist state and the peasantry: contextualising the “Hungarian agricultural miracle.” In Integration through Subordination. The Politics of Agricultural Modernisation in Industrial Europe, edited by Peter Moser and Tony Varley, 203–22. Turnhout: Brepols, 2013.

Varga, Zsuzsanna. “The ‘Modernizing’ Role of Agriculture in the Hungarian Economic Reforms.” In Zur Physiognomie sozialistischer Wirtschaftsreformen. Die Sowjetunion, Polen, die Tschechoslowakei, Ungarn, die DDR und Jugoslawien im Vergleich, edited by Christoph Boyer, 201–18. Frankfurt am Main: Max-Planck-Institut für Europäische Rechtsgeschichte, 2007.

Varga, Zsuzsanna. “Agriculture and the New Economic Mechanism.” Hungarologische Beiträge 14 (2002): 201–17.

Varga, Zsuzsanna. “Nyugati nyitás a magyar agrárpolitikában az 1960-as években” [Opening towards the West in Hungarian Agrarian Policy in the 1960’s]. In A történettudomány szolgálatában. Tanulmányok a 70 éves Gecsényi Lajos tiszteletére [In the Service of Historical Science. Essays in Honor of the 70-Year-Old Lajos Gecsényi], edited by Magdolna Baráth and Antal Molnár, 863–71. Budapest–Győr: Magyar Országos Levéltár, 2012.

Varga, Zsuzsanna. “The Impact of 1956 on the Relationship between the Kádár Regime and the Peasantry, 1956–66.” Hungarian Studies Review 34, no. 1–2 (2007): 155–76.

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

Zsuzsanna Varga

Opportunities and Limitations for Enterprise in the Socialist Economy

The Case of the Budapest Agricultural Cooperatives

 

To this day, there is widespread consensus in the secondary literature on agriculture in the socialist countries of the Soviet sphere according to which the “Termelőszövetkezet” (agricultural cooperative) in Hungary represented a unique path of development that diverged significantly from the Stalin kolkhoz model. In this article, I examine this process, focusing on the example of Budapest, the Hungarian capital. The natural features of the city (poor soil quality, land divided into small plots) did not really favor agricultural production. Furthermore, in the 1950s, the factories of the city offered higher wages, thus luring workers away from agriculture. The market pressures of the labor force set in motion a process of adaptation in agriculture. In comparison with the rest of Hungary, in Budapest the expansion of the sphere of non-agricultural activity of the agricultural cooperatives began earlier, and cooperative members were paid in cash instead of according to a Soviet-style model of remuneration based on work units. In response to the consumer demands of the population of Budapest, several innovative forms of vertical and horizontal integration emerged. I emphasize in my article that, in the case of the agricultural cooperatives, the important elements of entrepreneurial management took form before the introduction of the so-called New Economic Mechanism, for the most part as consequences of initiatives coming from below. Since these innovations were implemented before the relevant changes to the law had been made, a great deal depended on how the superior organs of government handled the lacuna between law and practice. In the 1960s, the agrarian lobby managed to exert sufficient influence on the government to prompt lawmakers to adjust the laws to conform, retroactively, to practice. In the 1970s, when the brakes were being put on the economic reforms, this phase displacement became a vulnerable point. Economic and administrative measures and even steps involving criminal prosecution were taken to limit the entrepreneurial independence of the agricultural cooperatives.

Keywords: collectivization of agriculture, communist regime in Hungary, divergence from the kolkhoz model, cooperatives, New Economic Mechanism

 

To this day, there is widespread consensus in the secondary literature on agriculture in the socialist countries of the Soviet sphere according to which the agricultural cooperatives in Hungary represented a unique path of development.1 In the course of my research, which has focused on the primary phases and the dynamics of the shift away from the kolkhoz model, I have noticed that there were significant local differences in this process. As I examined the regional particularities of this process, I began to study the agricultural cooperatives that came into being in Budapest more closely.2 The conditions were somewhat unusual. The quality of the soil and the plots was below average for the country. The arable land was divided into many parcels. If one also takes into consideration the fact that the vast majority of their members initially not only did not bring any lands to the agricultural cooperatives but also did not really have an understanding of agriculture, it becomes quite clear that there was little rational reason for creating the cooperatives. It is hardly coincidental that for years they operated at a loss, and during this period the membership was continuously changing. This tendency began to change in the mid-1960s, and by the mid-1970s the Budapest agricultural cooperatives were among the “wealthiest” in Hungary.3 Agriculture became an increasingly marginal part of their operations. They were active in food preparation and processing, as well as the engineering industry, chemical engineering, light industry, and an array of services. They created joint ventures with other agricultural cooperatives and collaborated with state enterprises. They had partnerships with numerous Western countries. As I studied this interesting process of adaptation, I became increasingly preoccupied with the question of what actually took place in these cooperatives. What internal and external factors might help us better understand this distinctive socialist “success story”?

In order to understand the history of the Budapest cooperatives, one must know a bit about the Stalinist model, which was the model for the leadership of the Hungarian Communist Party when it came to the transformation of agriculture in Hungary.4 In order to understand the Stalinist system of Soviet agriculture, one must go back to the late 1920s, at which time the Soviet Communist Party’s leadership decided to espouse a concept of economic development in which fast-paced development of heavy industry and military industry was a priority. Since the Soviet Union was unable to use foreign credit in order to implement this model, it turned to domestic resources. The income made from agriculture represented the most important internal resource.5 The compulsory delivery system and policy of price control ensured that the producer (the farmer) kept none of the profits made from his product. At the same time, the producer had to pay asymmetrically high prices for industrial products, and the gap between the prices of agricultural products and industrial products widened dramatically. Thus, agriculture became a kind of “inner colony.”

As a consequence of collectivization, a system came into being that ensured concentrated diversion of income from agriculture, as well as supervision and control over and discriminatory treatment of agricultural producers. The sovkhoz, or state farm (a contraction based on the Russian words, transliterated, sovetskoye khozyaystvo, or state ownership), was regarded as the most developed operational model. The other form of collective agriculture, the artyel (which became known as the kolkhoz, a contraction based on the Russian words kollektivnoye khozyaystvo, or collective ownership), was considered an inferior form of ownership, since it was based on group ownership by its members.6 Because of the different forms of ownership, workers belonging to the state sovkhozes were categorized as workers and therefore had a guaranteed monthly salary. In contrast, the incomes of members of the kolkhozes depended on the success (or failure) of cooperative farm. The success of a kolkhoz only became clear after it had fulfilled its obligations to the state (made obligatory deliveries, paid taxes, and made payments on loans) and set aside reserves for the upcoming year. The members of a kolkhoz received payment once a year. At the end of an economic year, whatever remained after obligations to the state had been met was divided among the members (for the most part in the form of produce).7 The 1935 kolkhoz model charter made this all compulsory.

The fact that the large agricultural estates (the kolkhozes and the sovkhozes) fulfilled their obligations to the state by delivering produce (in part through the system of compulsory deliveries and in part as a way of paying the machine and tractor stations for the work that was done with machines) also served to eliminate any ties between money and goods in this sector of the economy. The authorities also used payments in kind as a means of eliminating the role of money. The resources that were needed in order to ensure continuous production were distributed as allocations and remittances, like the investments of capital between the economic organizations.

Drawing an analogy with the material relationships between parents and children, János Kornai characterizes this degree of paternalism using the pair of terms “in kind allocation / passive acceptance” and “in kind allocation / active demand.”8 He links the qualitative change that took place in the relationship between the state and the micro-organization to the New Economic Mechanism.9 The Hungarian economic reform, which was introduced on January 1, 1968, was part of a wave of reforms in the socialist bloc that began gathering strength in the mid-1960s.10 The New Economic Mechanism constituted the end of an important stage in the history of the agricultural cooperatives. My research suggests that in their case, there was an important turning point in the previous era as well, specifically 1956, because of the abolition of the system of compulsory deliveries. For this reason, in this essay as in some of my other writings, I regard this as a significant milestone in the history of the agricultural cooperatives and divide this history into sections accordingly. In the first part of my inquiry I examine the characteristic features of the agricultural cooperatives of Budapest before 1956. In the second part, I consider the developments that took place after 1956. In the third, I examine the period following the introduction of the economic reforms.

Caught betwixt the Plan Targets and the Obligatory Regulations of the Kolkhoz Model Charter

In 1948/49, agricultural cooperatives began to be organized in Budapest and the rest of Hungary.11 The creation of the cooperatives in Budapest was justified with the contention that they would significantly improve food supplies for the industrial work force, which was becoming increasingly concentrated in the urban center. Three types of agricultural cooperative were permitted (types I, II, and III). Initially, all three functioned within the legal framework as farming cooperatives. The difference between these three types of cooperative groups lay in the amount of communal production and the manner in which the yield was shared.

The first agricultural cooperatives to be established in Budapest were of the third type, which most closely resembled the kolkhoz and which was regarded as the most developed.12 However, this did not mean that the founding members were so “ideologically advanced” in their thinking that they abandoned private farming and immediately decided in favor of the highest level of joint ownership or cooperation. Rather, in general workers in agriculture who had little or no land (and who often had come to the capital from rural parts of the country) came together in the hopes that, as beneficiaries of state support and lower taxes, they would have a better life, even if they would be obliged to make compulsory deliveries to the state. They were also thus able to get access to the state reserve lands, which was an important consideration. The market gardeners, milkmaids, and fruit-growing farmers who brought their produce to the Budapest markets showed no interest whatsoever in joining the cooperatives.13

After Greater Budapest was created in 1950 (which meant the administrative addition of 16 villages and 7 towns to the city and hence a dramatic increase in the size of the arable lands belonging to the capital), it seemed even more reasonable to put these lands to large-scale use. Farming was only done on a significant scale in the outer districts of the city.14 During the April 24, 1951 sitting of the Budapest Party Committee of the Hungarian Workers’ Party, the results of the collectivization campaign were summarized as follows:

 

An acceleration of our socialist development in the field of agriculture also took place in the capital in the first quarter of the year. In addition to the 11 agricultural cooperatives, with the assistance of the party committee the district councils helped the working peasantry of Greater Budapest form another 14 agricultural cooperatives.15

In the spring of 1951, of the 25 agricultural cooperatives in operation in Budapest, 13 were type I cooperatives. 986 families were living on them, and they had a total of 1,181 members and 5,873 cadastral yokes (one cadastral yoke equaled 0.57 hectares) of land, some 80 percent of which (4,665 cadastral yokes) was cultivated.16 These cooperatives constituted a very loose form of association, in which the members performed only the ploughing and sowing of the soil communally. The other tasks involved with husbanding the land were done individually. Every member had a claim to the harvest. They had to make contributions to cover the common costs of the cooperative and to ensure adequate reserves.17 Only one type II agricultural cooperative was formed, a so-called average distribution cooperative. It consisted of 10 members and lands totaling 100 cadastral yokes, 62 of which were cultivated.18

There were 11 type III agricultural cooperatives in Budapest, the so-called communal cooperatives, which were regarded as the most developed organizational form. 8 had been in operation since 1949. 3 were created as a result of a campaign in the autumn of 1950. They were home to a total of 486 families and had 603 members and a total area of 2,759 cadastral yokes, of which 82.7 percent (2,281 cadastral yokes) was cultivated. In the spring of 1951, the shared livestock consisted of 246 cattle, 76 horses, 687 swine, and 556 fowls. This alone indicates that the vast majority of the members had come from poor peasant backgrounds.19

It is worth examining in some detail the system of rules that governed the type III agricultural cooperatives, because this system exerted a decisive influence in the course of later developments, when the cooperatives became independent. The system was based on the kolkhoz regulations adopted in the Soviet Union in 1935, which remained in effect until 1969. According to these regulations, the members of the group turned the lands under their cultivation over for cultivation by the cooperative, whether the lands in question were in their possession or merely rented. They were given ground-rents in exchange. An individual family was permitted to maintain ownership of a household plot not more than one and a half cadastral yokes in size, though this included the area of the garden around the house. A household was also permitted to have a specified number of livestock.20 Beasts of burden, however, had to be turned over to the cooperative, as did farming implements, such as carts, sowing machines, plows, harrows, etc. The cooperative was obliged to pay a sum equivalent to the value of these things. Work groups and brigades of 6 to 10 people were created to perform the labor, and they worked together throughout the year under the supervision of a work group or brigade leader, whose instructions had to be followed. The members of the group were given a “work unit” in exchange for their labor, as was the Soviet model. A detailed table was issued in order to simplify the calculation of the “work unit,” though that time no one was obliged to take it into consideration.

The work unit served not only as a means of quantifying labor, it also was the foundation on which work was assessed as well.21 The brigade leaders would keep written record in the work unit book of how many work units a member had earned for work done in the course of the year. At the end of the economic year, the member would be given a share of the cooperative’s income on the basis of this written record. To be more precise, wages were only divided among the members of the cooperative after the cooperative had met its obligations to the state. As I have noted, the state acted as a proprietor, although the cooperative was not technically in its possession.22 The division of income on the basis of the remainder principle (i.e. on the basis of what remained after obligations to the state had been met), a system that was based on the Stalinist model, made it possible for the state to enforce its claims. But the cooperative was left to deal with the consequences. It is hardly coincidental that I often heard from members and leaders of cooperatives statements the essential gist of which was, “indeed the cooperative was a stepchild in comparison with the state farms.”

Among the consequences of this situation, the most serious for the members of the cooperatives was simply the fact that their income was unpredictable and constantly changing. Most of them responded by doing the minimum amount of work required in the cooperative to be entitled to the right to maintain a household agricultural plot. They provided for their families by cultivating their household plots and they were able to search for other occasional work in the area.23

In Budapest, where the members of a cooperative had significantly more costs on a monthly basis (transportation, utilities, etc.), the household plot was a less effective solution, especially for those who joined cooperatives with their own land, but not as gardeners. They needed cash. Furthermore, if a member of an agricultural cooperative in Budapest was not content with his income, he could get on a tram or bus and, within the space of a few stops, find work that would provide a regular monthly wage. Because of the forced industrial development of the first five year plan, there was a serious dearth of workers.24 Thus, no matter how strenuously the architects of the planned economy strove to eliminate market forces, the labor market continued to exert a strong influence, particularly in Budapest. This soon created serious problems. A report of the agricultural division of the Executive Committee of the Budapest Council issued in 1951 contained the following observation:

 

When closed, the accounts showed a deficit everywhere. This was because we were not able to ensure employment for the members in the wintertime, since the agricultural cooperative neither set aside money for this period nor had other forms of income, many of the members left the cooperative and found employment in factories.25

The Ministry of Agriculture reacted to the fluctuations in the cooperatives by increasing the severity of the regulations according to which they functioned. In 1951, they introduced a regulation according to which one could only leave a cooperative three years after having joined.26 In 1952, a resolution of the Council of Ministers raised the number of obligatory work units to 120 in general and to 80 for a woman with a small child. In the section of the resolution that dealt with work discipline one finds statements like the following:

 

Members must go to work regularly. […] For every day missed, 1-2 work units must be deducted from the work units of members who, in spite having been warned, do not go to work regularly. […] As of May 1, 1952, members of the agricultural cooperative can only undertake work outside of the cooperative with the written permission of the president or the director of the cooperative.27

The roots of the labor force problems lay in the fact that, because of the restrictive regulations, the cooperative had no say over how the products it created or the income from the sale of those products were used. Furthermore, the agricultural cooperative had no independence with regards not only to the division of income, but also in fundamental questions of production and cultivation. The instructions that were given by the Agricultural Cooperative Main Division of the Ministry of Agriculture concerning what the cooperatives should produce (and how much) were passed on by the Agricultural Department of the Budapest Council to the farms. The central crop plans also specified when the cooperatives should begin the work related to the various stages of cultivation. Given this, it is perhaps not surprising that in the 1950s cotton was included in the cooperatives’ obligatory crop plans, alongside wheat.28 As a perfectly logical corollary of the state’s paternalism, the cooperatives were not permitted to own their own machines. The Budapest machine and tractor station did the machine work for the cooperatives. This put the cooperatives in a very dependent, vulnerable position, since the machine and tractor station was not able to address the various problems that arose, often at the same time, on the two-dozen or so farms, and delays could cause considerable losses for the cooperatives.29

Every important question in the lives of the agricultural cooperatives was determined from above and outside. The cooperative was not even able to decide on simple matters, such as how many rubber boots the members would need for the autumn and winter months. Important questions, for instance who would serve as the president of a cooperative, were also not entrusted to the members. Leaders were usually assigned from above. The party center or the authorities in the ministry decided which member of the trusted cadre would be placed at the head of a given cooperative.30

In 1952, following a summer drought, these restrictions created a situation of crisis. The compulsory deliveries were also dramatically increased, as were the taxes that had to be paid by the cooperatives, and this also played a role.31 It was also significant that, at the time, it was not only so-called kulaks who were offering their lands to the state, smallholders and petty landowners were also trying to rid themselves of their plots. Faced with this situation, the state sought to procure produce from the agricultural cooperatives in order to compensate for the decline that had been brought about by the drop in productivity by individual farmers. In this context I would again mention the analogy drawn frequently by the subjects of my interviews, who likened the agricultural cooperatives to a stepchild. The state treated the cooperatives as if it were the owner and were able to dispose as it sought fit of a given cooperative’s produce and income. The state farms also enjoyed the advantages of state paternalism, since the state helped them when they were faced with financial difficulties and were unable to pay workers their minimum wages. In contrast, the agricultural cooperatives were left on their own by the state to deal with such problems, problems which in fact were caused by the multifold intervention of the state, for instance, a production structure that was not suitable to particularities of a given cooperative, the division of income on the basis of the remainder principle, or the insufficient knowledge of the leaders who had been “parachuted” into their positions from above.

Faced with these pressures, the agricultural cooperatives saw a potential solution in the expansion of their sphere of non-agricultural activities. By creating so-called ancillary enterprises, they hoped to provide work and income for their members that would complement earnings from agricultural production, which was obviously very seasonal.32 This was not easy, however, given the strict constraints of the regulations, since according to the philosophy of the Soviet kolkhoz, an agricultural cooperative could focus exclusively on primary agricultural production. This Soviet idea was foreign to the agrarian traditions in Hungary, but it caused a particularly large number of problems in the case of the cooperatives of Budapest. These farms, which dealt primarily with the production of vegetables and fruit, quite naturally would have liked to have prepared at least some of their products for the market and perhaps even to have had the chance to sell them.33

In the wake of the changes that began to be implemented following the death of Stalin, the assessments of the agricultural cooperatives shifted as part of the politics of the “new course.” The government of Imre Nagy, in order to prevent or at least curb the unravelling of the cooperatives, introduced numerous discounts.34 As part of the changes that were being made to agrarian politics, more emphasis was put on adapting to local circumstances, and this entailed a change in the assessments of the ancillary enterprises of the cooperatives, which at first meant the preparation, processing and sale of foodstuffs associated with agricultural production.

A separate governmental decree regulated the creation of ancillary enterprises in agricultural cooperatives, officially in order to increase the incomes of the members.35 The agricultural cooperatives could create ancillary enterprises individually and collectively, but only if these enterprises had some kind of connection to agricultural work and did not hamper the fulfillment of the primary tasks of production. The use of a foreign workforce was strictly forbidden, though it was possible, exceptionally and only with permission, if there was no one among the members of a cooperative with the proper expertise. The work that was done in the ancillary enterprises could only address the demands of the civilian population if there was no similar local industry and the executive committee of the council gave its consent. The decree distinguished between three types of ancillary enterprise:

1. production based (for instance, tree nurseries, mushroom growing, tile firing, stone mining, etc.)

2. processing (distillation, milk processing, grinding, etc.)

3. ancillary enterprises in the service industry (vegetable stores, flower stores, milk and dairy stores, etc.)

 

The fact that, in the free atmosphere of 1954 (not long after the death of Stalin), some 20 new forms of endeavor were being pursued in 63 ancillary enterprises clearly indicates the eagerness of the Budapest agricultural cooperatives to take initiative.36 In 1955, 49 essentially agricultural ancillary enterprises and landscaping divisions were in operation. Commercial trade took place in 56 market stands or businesses. The Budapest agricultural cooperatives maintained 36 vegetable and fruit businesses, 17 ornamental plant stores, and 3 milk and dairy businesses.37

When, with the forced resignation of Imre Nagy in the spring of 1952, the “new course” politics came to an end, the Budapest leadership rushed to declare its solidarity with the dogmatic line, which again was gaining strength. This is clearly discernible in the way in which the cooperatives were castigated for the work done in ancillary enterprises:

 

In many of the agricultural cooperatives, 30 percent and in some cases even 40 percent of the annual income is made not off agricultural production, but the work done in ancillary enterprises and direct speculative activity. In our agricultural cooperatives, people are engaged in every kind of trade, from making square rules to selling stockings, and yet comrades, we do not need agricultural cooperatives that prosper at any cost, that have let’s say an openly capitalist spirit, but rather cooperatives that operate according to strict regulations and grow stronger and develop on the basis of their own work.38

 

From then on, the expansion of the sphere of activity of the agricultural cooperatives became a question of both economic and political significance. The principles on which the criticisms of the cooperatives were based (the criticism of their profit orientation) remained a salient part of the debates concerning their sphere of activity over the course of the next several decades.

Increasing Scope of Action after 1956

Though it is not frequently characterized from this perspective, the 1956 Revolution was an important watershed in the history of agriculture in Hungary. The Kádár government, which rose to power in the wake of the Revolution with Soviet support, soon realized that while industrial production had essentially come to a standstill because of a general strike, any confrontation with the peasantry, which essentially was in possession of food supplies, would have unforeseeable consequences. In the interests of rapid consolidation, the new government was prepared to address the principal concerns and grievances of the peasantry. It put an end to the system of compulsory deliveries (which, indeed, had already been repealed once by the government of Imre Nagy) and it permitted members to leave or even dissolve the agricultural cooperatives.39 Two-thirds of the agricultural cooperatives in Hungary were dissolved, but this included only one of the cooperatives in Budapest.40

The most impactful of the measures that were taken was the elimination of the compulsory delivery system. By taking this step, the government put an end to an element of the planned economy that until then had been beyond question. After the system had been repealed, the state could only procure food supplies if it were prepared to pay realistic market prices. Thus instead of relying on compulsion as it had done earlier, the state used market incentives and structured its relationships with the individual producers, cooperatives, and state farms so as to meet address the interests and concerns of the producers. The rehabilitation of the agricultural marketplace, however, was limited, because prices were still determined not by the forces of supply and demand, but by the mechanisms of state price control.41

Thus the economic environment in which the agricultural cooperatives functioned changed drastically, but perhaps even more significant was the fact that they were given a chance to make changes to the regulations that governed them. In the power vacuum that emerged in late 1956 and early 1957, government control of the agricultural cooperatives slackened, since the party and state institutions were caught up in the processes of their own restructuring. Taking advantage of this, agricultural cooperatives across the country made important changes to their basic regulations. These initiatives, which came from below, can be divided into two main groups.42

The agricultural cooperatives sought to obtain more independence from the party and state institutions that interfered from the outset in their operations. This was made easier by the fact that there was a drastic reduction in the number of people working in the council apparatus, including people in the agricultural divisions. The agricultural cooperatives sought to make themselves independent of the machine and tractor stations by purchasing their own mechanical equipment. At first, it seemed as if they would have the support of upper echelons of government.43 Taking advantage of the opportunity, in 1957 the agricultural cooperatives purchased 8 Zetor tractors.44

The cooperatives sought, furthermore, to make adjustments, adapt to local circumstances, and assert control over the regulation of their own internal affairs, first and foremost the organization of production and labor and the system of wages and pay.45 This was true of the agricultural cooperatives that continued to function in Budapest. As they had been unable, because of the restrictions of the kolkhoz regulations on which they were modelled, to ensure their members an income that would have competed with the wages offered in the factories of the city,46 they saw a potential solution in the expansion of their sphere of activities.47 This enabled them to compensate for the fluctuations in income that were caused by the seasonal nature of production and provide advances for their members the whole year through.

One of the first initiatives of the seven agricultural cooperatives in Budapest came in late 1956 and early 1957 with the creation of distilleries. The discarded or unsold fruits that were piling up in the food shops and canning factories of the capital provided an ideal foundation for the production of spirits.48 These distilleries did a great deal to alleviate the serious financial problems faced by the agricultural cooperatives and enable them to pay their members regular monthly advances. In general, advances were made every month, but in some cooperatives they were made twice a month. The amount of the advances was set by the Agricultural Cooperative Main Department of the Ministry of Agriculture, and it could not exceed 60 percent of the anticipated value of the annual work unit. Later, the agricultural cooperatives asked the Agricultural Department of the Central Committee to allow them to raise this limit to 80 percent.49 The fact that at the time the Agricultural Division of the party center was more supportive of initiatives coming from below than the Ministry of Agriculture played a role in this. I will address the tensions that existed between the two a bit later in this article.

The agricultural cooperatives used other means in their attempts to address the problems that had arisen because of the work-unit system of remuneration. The principal problem was that, according to this system, a member of a cooperative as not motivated to work attentively and effectively, but rather sought to acquire as many work units as possible as quickly as possible with the mere appearance of work. This led to unusually dire problems in the agricultural cooperatives of Budapest, since, given the role the cooperatives played in providing food supplies for the population of the city, most of the work involved vegetable gardening, floriculture, and livestock farming, all of which are particularly labor intensive.

A system of work units based on efficiency and results began to be used in places where the products of labor were the most easily quantified. “Thus [these kinds of work units] were used first in the brandy distillation ancillary plants, where the members working in the distillery were given work units on the basis of the gross number of liters of alcohol produced.”50 In 1959, the Champignon mushroom cooperative in the X. district of the city introduced this system. The work of the different groups of laborers, who were physically separate from one another as they worked in different places, could be clearly measured. Units of laborers shared in the profits on the basis of the number of mushrooms gathered, i.e. the value of the yield of their work.51

Sometimes cash bonuses were also made. This form of remuneration was the most effective in branches of agriculture in which the results of a worker’s labor could be the most clearly quantified. Several agricultural cooperatives used this system effectively in dairy farming. For instance, in the Dózsa Agricultural cooperative in the XVII. district, a dairy farmer was given a specific sum in forint—not additional work units—on the basis of the amount of milk produced.52

In some of the agricultural cooperatives in Budapest, for instance the Kinizsi and Beloiannisz cooperative in the XI. district, the cooperative on Bécsi Boulevard in the III. District, and the Táncsics cooperative in the XX. District, a system of hourly and daily wages was used instead of work units.53 This represented the most radical departure from the kolkhoz principles of remuneration, since it completely eliminated the work unit by making the amount of time spent working (measured in days or hours) the basis on which work performed was assessed. The agricultural cooperatives tried to make monthly cash advances in compensation for days or hours of work (in other workers, as a divergence from the remainder principle, workers were not compelled to wait until the end of the year for payment), regardless of regardless of their economic fortitude.

These approaches to remuneration seemed suitable as a means of mitigating fluctuations in the agricultural cooperatives, though because they constituted a departure from the regulations of a kolkhoz, they led to heated debates among the people who crafted agricultural policy, who were preparing to complete the process of collectivization. The Ministry of Agriculture, which was led by Imre Dögei (who represented the dogmatic line), opposed these initiatives from below because they would provide members with an income (whether it be money or payment in kind) over the course of the year, before the cooperative had met its obligations to the state. Thus, the agricultural cooperatives were getting around the remainder principle. This principle was, after the practice of compulsory deliveries, the second most powerful tool used by the state to enforce its interests. According to Dögei, the use of alternative forms of remuneration would undermine the ability of the cooperatives to fulfill their obligations, in particular their obligations to the state. Even more disconcerting, in his view, was the fact that the initiatives taken by the cooperatives were a departure from the regulations of the kolkhoz model (and particularly the work unit), which was regarded as unchangeable. In contrast, the Agricultural Division, headed by Lajos Fehér (it functioned alongside the Central Committee), contended that the new solutions, which created new incentives for workers, would motivate the members of the agricultural cooperatives to take a greater interest in improving production from the perspective of both quality and quantity, and this was very much in the interests of the state.54

The Budapest leaders found Fehér’s reasoning more persuasive, as the following citation concerning the concluding phase of collectivization shows:

 

The introduction of a system according to which income was shared and bonuses were paid on the basis of the final product and output contributed to the creation of a favorable mood. In most places, the members of our agricultural cooperatives joyously welcomed the introduction of the new system of division of income. […] The fact that in most of the cooperatives advances on work units were paid every month also helped foster a love of work and a good general mood.55

 

However, all over the country the process of collectivization was accompanied by problems (drops in production, the migration of important segments of the workforce) so dire that the party leadership found itself compelled to confront the gravity of the risks it would face if it were to return to the dogmatic agricultural policy that had prevailed before 1956. At the beginning of 1960, Dögei was dismissed from his position at the head of the Ministry. Dögei was replaced by Pál Losonczi, an innovation-minded agricultural cooperative president.56 Under Losonczi, a distinctive approach to problem solving was adopted. Every year, at the beginning of the year, the Ministry would disclose the remuneration strategies and solutions that—while they were in violation of the legal provisions—would create incentives for the members of the agricultural cooperatives. With the introduction of these semi-legal measures, the scope for action of the cooperatives increased step by step, which contributed to growth in income for their members.57

The agricultural cooperatives of Budapest adapted well to this new atmosphere of “anything that has not been expressively forbidden is permitted.” Production in the ancillary enterprises was particularly lively. In the XX. district, for instance, each of the agricultural cooperatives pursued significant endeavors, in addition to traditional agriculture. The three cooperatives stored and packaged potatoes, which would be one of the staples of the winter diet for the city. Several cooperatives used their sandy areas for the production of sand and in doing so gained land that could be used for agricultural cultivation. In the Sasad cooperative in Buda, for example, alongside cultivation of plants and livestock farming (the main branches of enterprise), ancillary enterprises also came to play important roles. The latter included distillation, preserves, a tile workshop, a limestone mine, a landscaping enterprise, an automobile plant, and a maintenance workshop. There was also an artificial flower workshop in the cooperative, and the cooperative shops sold wreaths and flowers.58 The spread of these kinds of ancillary enterprises contributed to the creation of forms of undertaking that were distinctly market oriented.

Government decree 3004/3/1960 (XI. 17.) gave the work of the agricultural cooperatives a new direction. The decree concerned state support provided for the cooperatives, but it also addressed questions concerning the auxiliary and the processing plants, as well as the cooperative construction brigades. According to the decree, the primary responsibility of the construction brigades was the completion of the shared construction projects of the cooperative, the renovation of the buildings used by its members, and the construction of new dwellings for its members. If there was no local industry in the given community, the ancillary plants were allowed to continue operation for the members and the local population without having to obtain the express permission of the authorities.59

By the beginning of 1961, the complete socialist reorganization of agriculture in Hungary had been completed. According to official statistics, in Budapest there were 25 agricultural cooperatives in operation with a total of 17,114 cadastral yokes and 3,469 members.60 While collectivization had been effectively implemented, dire problems of production arose, and the country was compelled to import both breads and meat.61 The leaders of the Kádár regime were compelled to confront the fact that, without the proper mechanization of agriculture, the country would remain very much in need of the members of the agriculture cooperatives and their families as a labor force, but at the same time they recognized that the classic Soviet kolkhoz model did not provide the necessary material incentives for this labor force. Under pressure from the agriculture lobby, which formed around Lajos Fehér (secretary of the Central Committee of the Hungarian Socialist Workers’ Party and a member of the Political Committee),62 the party leadership gave its consent for the adoption, at least temporarily, of a solution which rested on the use of household plots and a system of remuneration that addressed the failings of the work unit system.63 In Budapest, the household plots were not as significant a factor as they were in the more rural parts of the country. The primary goal was to convert to a system of wages paid in cash. As a consequence of this, the Budapest agricultural cooperatives soon realized that, whatever clever solutions they might devise to replace the work unit system, the impact of these innovations would be limited as long as the remainder principle remained in force. A trifling quantity remains trifling, however equitable its distribution.

In the first third of the 1960s, Fehér and his circle, having confronted the limitations of the solutions that were being proposed from below, crafted a comprehensive agricultural reform plan that outlined all of the financial, legal, and administrative measures that would have been necessary in order to begin to address the various challenges. The implementation of these measures, however, was postponed for various reasons.64 When the upper echelons of the political leadership finally reached a decision regarding the New Economic Mechanism, these agricultural reforms lent a significant dynamism to the process. Since the agriculture lobby had a clearly outlined platform for reform, it soon came forward with concrete suggestions, and thus in 1966 and 1967, i.e. before the actual introduction of the New Economic Mechanism, important reform measures were already underway.

Of these measures, Law III. of 1967 was among the most significant. It contained innovative steps based on the concepts of self-management and equal rights.65 The agricultural cooperatives were granted the right to make decisions concerning their incomes. They were no longer bound to planning, and thus could reach their own decisions concerning cultivation and working plans. They would have to deal with the economic consequences of their decisions. The law also stipulated that the agricultural cooperative was not simply an independent legal entity, but, furthermore, an entity with no legal superior (no trust, or territorial or production management). I.e. it represented itself in all respects.

In order for independent enterprise management to emerge, it was first important to ensure the necessary financial background. As I have mentioned, the agriculture lobby realized that the difficulties of material incentivizing could not be addressed, neither from the perspective of individual members nor from the perspective of the cooperative as a whole, as long as the system of pricing failed to reflect accurately the costs and the yield. Thus, prices were raised and credit concessions were made in 1966/67 with the aim of providing the foundations for self-financing, or in other words of transforming the majority of the cooperatives into “independently managed enterprises.” This meant, quite simply, that returns from sales would guarantee regular salaries for the members of the cooperatives and, from then on, the cooperatives would have the necessary resources to ensure adequate circulating capital, funds to replace fixed capital assets that had been used, and funds to procure some of the implements necessary to increase production and repay loans that had been taken out for this purpose. At the same time, revenues were not sufficient to cover the investments entirely. Investment policy was one of the main limitations on the entrepreneurial independence of the agricultural cooperatives, and it was a tool that was quite deliberately kept in the hands of the regime.66

This all affected the members of the cooperatives, since numerous changes were introduced in the distribution of income as the cooperatives came to resemble independent enterprises. Perhaps the most important of these was the elimination of the system based on the remainder principle. The 1967 law stipulated that wages paid to members over the course of the year would be considered a cost of production by the cooperative. It also specified that these wages took precedence over the demands of the state and recovery of the material costs of production. These measures created a fundamentally new situation with regards to incentives for the members of the cooperatives. With the creation of a legal foundation for regular salaries, a new approach had come to prevail, according to which the members of a cooperative (like other workers) were guaranteed a predetermined wage based proportionally on work performed and paid regularly and continuously.

It is worth noting that, of the local initiatives that had already become part of common practice in the cooperatives (though they were departures from the kolkhoz model) and that, with the adoption of the new law, were made part of legal practice, most concerned remuneration, the organization of production and labor, and household farming. The decree concerning the implementation of the law addressed remuneration as well, but it allowed for the use of any form of remuneration that corresponded to the principles of socialist distribution.

The transformation of the agricultural cooperatives into increasingly independent enterprises also meant organizational restructuring with regards to economic decisions, as jurisdiction was transferred from bodies of state oversight to the cooperatives themselves, which until then they had only exercised self-management as a matter of form. Earlier, the spheres of activity of the cooperatives had been determined essentially in an administrative manner by the district councils, the enterprises with which they had concluded contracts, and the local offices of the bank, which had used political pressure at times, but usually had relied on economic tools, such as loans and offers of support (or withdrawal of support).

In recognition of the transformation of the cooperatives into semi-independent enterprises, the 1967 law brought to an end the earlier narrow restrictions that had limited their sphere of activity. According to the new regulations, in addition to agriculture, the cooperatives could also pursue food processing, acquisition, sales, and services. A cooperative could use its implements, buildings, and equipment to perform tasks and provide services to address the needs of its members and their families, but also other cooperative and state enterprises, institutions, societies, and the general population.

The Situation after 1968: “If the Yields of a Cooperative are Bad, That Is Suspicious. If they are Good, That is Even More Suspicious.”

The secondary literature on socialist economic history has tended to emphasize, as one of the distinct features of the New Economic Mechanism, that it gave the socialist economic organizations a striking degree of independence. My research suggests that, in the case of the agricultural cooperatives, the important elements of entrepreneurial management were not introduced as a result of the New Economic Mechanism, but rather had emerged earlier, in large part as a consequence of initiatives from below. These solutions, which had been crafted in the course of everyday practice, had gradually shifted from the “tolerated” category to the “supported” category (the cultural politics of the Kádár regime classified things as “tiltott, tűrt, támogatott,” or “forbidden, tolerated, and supported”) thanks to the pragmatism of the agriculture lobby. The 1967 law provided legal recognition and protection for these innovations. This interesting prologue explains why the field of agriculture, and within agriculture, the cooperatives, were able to adapt the most rapidly to the situation that emerged following the introduction of the New Economic Mechanism.67 The Presidium of the Alliance of Budapest Agricultural Cooperatives, a new organization responsible for the defense of the interests of the cooperatives, offered the following assessment of the pre-1967/68 period:

 

The opportunities ensured by the new law pertaining to the agricultural cooperatives have significantly furthered the emergence of independent, entrepreneurial farming, in spite of the fact that individual laws and economic regulations, passed with delay, temporarily hampered work. […] The cooperatives’ yields over the past year demonstrate the soundness of the measures that were taken as part of the reform of the system of economic management. The leaders and members of the cooperatives understood its aims and were able to take advantage of the tools it provided, and it created a favorable political and economic environment for their operations.68

By 1968, as a consequence of a process of unification that had been underway, only 14 agricultural cooperatives remained in Budapest.69 Alongside the increasing specialization that took place over the course of the decade, the dynamic development of the ancillary enterprises of the cooperatives was also striking. The revenues brought in by these enterprises grew in terms of net and gross earnings more rapidly than the revenues brought in by the basic activities of the cooperatives (in 1968/68, for instance, they grew by 130 percent), and they jumped from 20 percent of the cooperatives’ total income to 47 percent.70

The Óbuda agricultural cooperative pursued a wide range of endeavors in the III. district, Szentendre, Pomáz, and Csobánka. The president of the cooperative, Ferenc Varga, offered the following explanation for its successes:

 

The various endeavors undertaken in addition to the basic activity [of the cooperative] are wide-ranging. Industrial undertakings comprise revenues from an array of products and manifold services. In addition to the production of foodstuffs, within the framework of other industrial undertakings the mine, the metal works, and the workshop in which elements used in buttons, rubber, ironworks and concrete are made are also turning out products, and we are also engaged in packaging, automobile and refrigerator repair, motorized winding, cleaning, and other service industries. Of the industrial endeavors, export packaging has the largest volume.71

 

In the first half of the 1970s, fifty-five units were involved with domestic trade enterprises in this agricultural cooperative alone, including a flower shop, a grocery store, a clothing store, and a seed shop.

Providing foodstuffs for the population of the capital remained one of the primary responsibilities of the Budapest cooperatives, in spite of the fact that the revenues brought in by work done in agriculture and food processing constituted only a small percentage of the total income. With regards to the needs of the population of Budapest, the most substantial contributions made by the cooperatives involved vegetables, poultry, mushrooms, and flowers. Their entrepreneurial spirit was quite evident in these enterprises. They endeavored to sell as much of their products as possible (for instance poultry meat, eggs, milk, and mushrooms) in their own stores or market stalls, and not to state enterprises.72 At the time, the agricultural cooperatives in Budapest had 135 stores of their own (74 of which were grocery stores, while the other 61 were flower stores).

Construction work done outside the cooperative was also part of the cooperatives function of addressing the needs of the population of Budapest. They were commissioned by the councils to build schools and kindergartens and renovate and make repairs to residential buildings. Their contributions to the service industries were similarly important. For instance, they set up several automobile repair shops.

As a consequence of the expansion of the scope of activity of the cooperatives and the shifts in the ways in which taxes and fees were levied, in 1968 the Budapest cooperatives had to pay some 120 million forint to the state, in comparison with 38 million in 1967. Of this, 70 million went to the city council (as property tax, income tax, and sales tax), 41 million more than in 1967. Because of changes that were made to the system of social insurance and security and the growth in the number of people working as part of the cooperatives, their direct costs in taxes and fees paid to the state grew by more than a factor of four.73

These data clearly demonstrate that by the end of the 1960s, the agricultural cooperatives of Budapest were in a process of dynamic growth because of the successes of their ancillary enterprises. Similar processes were underway in the agricultural cooperatives nationwide thanks to their successful adaptation to the New Economic Mechanism. The members of the cooperatives profited, but so did the population in general and the regime itself.

In light of this fact, it may seem surprising that at the beginning of the 1970s a press campaign was launched according to which the agricultural cooperatives had achieved their successes not through hard work and judicious adaptation, but rather by swindling, defrauding, and speculating. The criticisms targeted the ancillary enterprises first and foremost, thus it is not surprising that the Budapest cooperatives were put in the spotlight.74 According to one of the most frequently repeated contentions, staff and workers in the industrial units were given so much in the way bonuses and various benefits that, combined with their wages, these forms of remuneration vastly exceeded the hourly wages earned by workers in state enterprises who performed essentially the same tasks, even taking into consideration the benefits these workers were given. This allegedly led to income inequalities between the Budapest cooperatives and the industrial enterprises. Furthermore, by offering better pay and benefits, the agricultural cooperatives effectively lured skilled workers away from the state sector.

Népszabadság (The People’s Freedom), the main newspaper of the Communist Party in Hungary, participated intensively in the campaign against the agricultural cooperatives. On February 3, 1971, for instance, it printed an article according to which, between 1968 and 1971, the Shared Independent Agricultural Industrial Enterprise (Mezőgazdasági Ipari Közös Önálló Vállalat, or MIKÖV), a joint venture of the Vörös Október (Red October) and the Sasad cooperatives in Budapest, had illegally paid an innovation fee of more than 500,000 forint to its trade partners, in exchange for which its trade partners were to place an order for the enterprise’s low-quality products. After the inquiry had been completed, the Central People’s Control Committee (Központi Népi Ellenőrzési Bizottság, or KNEB) issued a report denouncing MIKÖV. The newspaper article, however, did not end here:

 

It is comforting, then, that the process of holding to account has begun in this matter. It is nonetheless perplexing, however, that until the public interest announcement was made, for years the people at the enterprise of the two cooperatives in question, who are now being held accountable, were able to pursue their business dealings without hindrance. How was this possible? A swindler or a fraud can always pop up in an industrial plant and try his luck to see if he can illegally get his hands on a higher income without working. But no one can profiteer like this for years at a single enterprise or an industrial plant turning out billions in production value. The fate of such a half-million forint sum is soon exposed. Why? Alongside other safeguards, first and foremost because the internal and external system of control is strict and consequential, and it effectively protects public funds.

Perhaps no one is monitoring this agricultural cooperative enterprise? Formally, a board of directors consisting of leaders of the two founding agricultural cooperatives exercises control over the legal supervision of this enterprise, as well as the executive committee of the Agricultural Division of the Budapest Council and the Ministry of Agriculture and Food. Nonetheless, in practice extensive opportunities were available for underhanded dealings that infringed on public interests.

 

It is worth noting the conclusions reached by József Sólyom, the author of the article:

 

Such fine agricultural cooperatives as Sasad and Vörös Október should never have given their names (or their money) to such a dubious enterprise. But since they did, they must now take careful note to obeying the laws strictly, lest anyone violate them. […] Today there is plenty of money in these cooperatives not only for bread, but for spreads as well. This case should shock them: they can avoid problems like this if they really do keep their own enterprises under strict control, if they thoroughly audit the finances and management of their cooperatives. This lesson should be put to good use, and not only by the agricultural cooperatives involved.75

 

This attempt to sway public opinion was part of a larger political struggle the essential question of which was the continuation or the repeal of the 1968 reforms. The agricultural cooperatives found themselves in the crosshairs of the supporters and the opponents of the reforms. One side characterized them as a positive example to be followed, while the other pointed to them as proof positive of the negative effects of the reforms.

A campaign of persecution was launched against the agricultural cooperatives the essential point of departure of which was that indeed the cooperatives had achieved their successes dishonorably, by swindling and breaking the law. According to the accusation, the forbearing conduct of the leaders of some of the cooperatives, who paid no mind to ethical or political considerations, had encouraged violation of the law. Allegedly, this indulgence was plainly obvious in the excessive wages that were paid to staff, the efforts that were made to lure workers away from other sectors of the economy, the pursuit of various lines of work without the proper permission from the state, laxity when it came to financial records, and creative interpretations of the law.

In the first half of the 1970s, police and judicial proceedings were launched against more than 1,000 leaders of agricultural cooperatives. Nationally, this meant 10-15 percent of the total number of people belonging to this group.76 My research has shown that the first step was always a so-called people’s control investigation. Historians of the Kádár era have devoted little attention to this organ of government, which was created in 1957, though it was active all over the country and played an array of roles, all the under direct supervision of the party.77 From the perspective of the agricultural cooperatives, the organs of people’s control were particularly significant because, after 1967, given the fact that the cooperatives enjoyed a larger degree of independence than they had earlier, in principle no other body of government had the right to inspect the ways in which they managed their affairs. One should add, at the conclusion of an investigation the people’s oversight committees could propose disciplinary proceedings that might also involve having to pay compensation. In more serious cases, they were obliged to file reports with the police and the prosecutor’s department.

Every year, the party leadership set the work plan for bodies responsible for the people’s oversight. In 1972, the Central People’s Control Committee examined the transport activities of the agricultural cooperatives. It is worth noting that, while this investigation involved 39 cooperatives nationwide, 13 of them were in Budapest.78 In the first half of the 1970s, the recurring themes of the people’s oversight investigations included abuses by the ancillary enterprises, the illegal or improper use of state support, and violations of storage contracts. There were also many inquiries that focused on closing account balances and document forgery. According to my calculations, the number of investigations launched by bodies of people’s control rose continuously until 1975, and a growing proportion of these inquiries ended in criminal denunciations.79

The Budapest agricultural cooperatives, which were regarded as allies of Lajos Fehér and were under close scrutiny by the party, were not spared the attacks, the gravity of which varied.80 In some cases, the leaders of a cooperative were “only” issued a warning at the conclusion of a people’s control investigation. If abnormalities were discovered to have taken place, a cooperative had to pay compensation to other farms. Sometimes show trials were even launched against the leaders of a cooperative. The Rozmaring (Rosemary) Cooperative had acquired a good reputation for its high-quality flower stores, and not only in Budapest, but in the (not exclusively socialist) countries of Central Europe to which it sent its exports.81 The president, Alajos Kovács, was known as an entrepreneurial leader eager to succeed. He was a member of the presidium of the National Council of Agricultural Cooperatives, and he had a good relationship with Lajos Fehér, one of the leading figures of the economic reforms. The Rozmaring trial was very clearly a show trial, as is made plain by the fact that articles disparaging the cooperative were printed in the dailies well before the decision of the court had been reached. The following excerpt gives a good sense of the tone of these articles:

 

Some of the staff of the cooperative […] cautioned the president many times: if he continued to lead the cooperative in this manner, he would find himself on the accused bench. President Alajos Kovács, however, did not believe this: ‘Exaggerated administration, strict regulation,’ he said, ‘would weaken the effectiveness of trained leadership.’ In the Rozmaring Gardening and Agriculture Cooperative—as is now clear—bribery was one of the most important tools of effectiveness: this criminal gang’s business venture flowered for a long time. The leaders of the cooperative, who according to the indictment caused damages to the national economy of almost one-million forint, are now waiting in custody for their trial to begin.82

In the autumn of 1976, when the article cited was printed in Esti Hírlap (Evening News), several leaders of the cooperative, including the president, had already been in custody for months. One might well wonder why a person like Alajos Kovács, who was known all over the country, needed this. He himself later shared the following recollections in an interview:

 

Returning to the interrogation: it’s quite true that they were able to keep you in a state of stress. A real criminal would have laughed at the whole thing, but this was not my situation. Once they had dictated whatever they felt was important, they put it in front of me for me to sign it. In all sincerity I didn’t even read it. They did not cause me any physical harm, but the feeling of helplessness […] I cannot express the atmosphere. They had learned how to create this atmosphere very well. It would be slanderous of me to say that they were not civilized police. They never maltreated me. […] But the atmosphere that they created, one cannot express it. A neurotic or inexperienced person breaks under it.83

The president had a shrewd grasp of what was at stake at the time when he was being held in custody. As the study of similar trials makes clear, the accused were held in custody for long periods of time as a general matter of practice. This was in part simply because the process of gathering the evidence in support of the accusation (which had been hastily cobbled together at the order of the regime) was slow. This was one reason why the police strove to prompt the accused to confess. Many agricultural cooperative presidents spoke in interviews of the tools that were used in the investigation stage of the proceedings. At first, the attorney who had been given the task of serving as Kovács’s defense had tried to persuade him to confess, as indeed did his cell mate, who had been recruited by the regime.84

I came across many instances of infringements of the rights of the accused, not only in the investigation stage, but also in the courtroom proceedings. For instance, exculpatory witnesses were hardly called to testify. Even more importantly, criminal law, which was modified in 1971, created numerous channels for interference, which allowed for judicial bias—and therefore political pressures—to prevail.85

In the end, in the trial that was launched against the Rozmaring Cooperative charges were brought against 22 people and 120 witnesses were called to testify. The hearing in the court of first instance lasted from November 23, 1976 to March 15, 1977. On December 21, 1977 the High Court of Justice issued its ruling.86 It found Alajos Kovács not guilty of any crimes committed as part of a conspiracy to commit unlawful acts and also not guilty of the crime of breach of trust. He was reprimanded only for having failed to take adequately resolute measures to ensure compliance with the rules concerning the handling of enterprise documents. In other words, he was found not guilty. However, in order to find some justification for having held him in custody for months, the court imposed a fine of 20,000 forint, which it regarded as paid in exchange for time spent in remand. In the meantime, of course, he had lost his position as president and the Rozmaring Cooperative had been merged with another cooperative, and a new president had been chosen for the new, larger cooperative that thus had come into being.87

The criminal proceedings that were launched against the leaders of agricultural cooperative clearly demonstrate that the demands that were made concerning market forces and efficiency at the time of the New Economic Mechanism never became (and never could have become) as important as the unchanging ideological precepts. Figures within the regime were able to take coercive measures against the agricultural cooperatives and their leaders by referring to the leading role of the working class and the superiority of the state-owned sector of the economy.

 

* * *

 

The three decades of agricultural history presented in this essay clearly demonstrate that the successful adaptation of the Budapest agricultural cooperatives depended in part on the extent to which they were able to free themselves from the limitations of the kolkhoz model and in part on the responses of the representatives of power when initiatives that were raised from time to time from below overstepped the regulations prescribed by law. In the 1960s, in part in response to the pressures of the agriculture lobby, the leading organs of the cooperatives addressed this lacuna between law and practice by making changes after the fact to the regulations in order to make them better correspond to the challenges faced in practice. In the 1970s, when the brakes were being put on the economic reforms, this phase displacement became a vulnerable point. Economic and administrative measures and even steps pertaining to criminal law were taken to limit the entrepreneurial independence of the agricultural cooperatives. Unfortunately, this took place at a time when, following the dramatic leap in the price of oil worldwide, effective adaptation to market forces would have been more important than ever if the regime had seriously hoped to salvage the Hungarian economy.

 

Archival Sources

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

XV.20. Microfilm.

XVII.130 Documents of the Budapest People’s Control Committee, 1957–1989.

XXIII.110. Documents of the Executive Committee of the Agricultural Division of the Budapest Council, 1950–1978.

XXXV.95.a. Documents of the Budapest Committee of the Hungarian Workers’ Party, Leading bodies, 1948–1956.

 

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

XVII-2-a Documents of the Central Control Committee, 1957–1989.

XX-10-e Head Criminal Court Division of Supreme Prosecutor’s Department, 1952–1996.

M-KS-276.f. Documents of the Hungarian Workers’ Party, 1948–1956.

M-KS-288.f. Documents of the Hungarian Socialist Workers’ Party, 1956–1989.

Bibliography

Primary Sources

 

Esti Hírlap [Evening News], 1976.

Figyelő [The Observer], 1961.

Magyar Közlöny [Hungarian Gazette], 1948, 1954.

Magyar Nemzet [Hungarian Nation], 1962.

Népszabadság [The People’s Freedom], 1957, 1971.

 

Mezőgazdasági termelőszövetkezeti törvény. Földjogi törvény [Agricultural Cooperative Law. Law Concerning Land Rights]. Budapest: Közgazdasági és Jogi Könyvkiadó, 1968.

Törvények és Rendeletek Hivatalos Gyűjteménye [Official Collection of Laws and Regulations], 1951, 1952, 1956.

 

Interview with József Pál, June 8, 2011 (in the possession of the author)

 

Budapest Statisztikai Évkönyve [Budapest Statistical Almanac]. Budapest: KSH, 1962, 1977.

Mezőgazdasági Statisztikai Zsebkönyv [Agricultural Statistical Pocketbook]. Budapest: KSH, 1976.

Vass, Henrik, and Ágnes Ságvári, eds. A Magyar Szocialista Munkáspárt határozatai és dokumentumai 1956–1962 [Documents and Resolutions of the Hungarian Socialist Workers’ Party]. Second, augmented edition. Budapest: Kossuth, 1973.

 

Secondary Sources

 

Boross, Marietta. “Bolgár és bolgár rendszerű bolgár kertészetek Magyarországon 1870–1945” [Bulgarian and Bulgarian-style Gardens in Hungary, 1870–1945]. Ethnographia 84, no. 1–2 (1973): 29–52.

Boyer, Christoph, ed. Zur Physiognomie sozialistischer Wirtschaftsreformen. Die Sowjetunion, Polen, die Tschechoslowakei, Ungarn, die DDR und Jugoslawien im Vergleich. Frankfurt am Main: Max-Planck-Institut für Europäische Rechtsgeschichte, 2007.

Davies, Robert William. The Soviet Collective Farm, 1929―1930. Cambridge, Mass.: Harvard University Press, 1980.

Erdmann, Gyula. Begyűjtés, beszolgáltatás Magyarországon 1945–1956 [Harvesting and Deliveries in Hungary, 1946–1056]. Békéscsaba: Tevan Kiadó, 1993.

Hare, Paul G., Hugo K. Radice and Nigel Swain, eds. Hungary: A Decade of Economic Reform. London: Allen and Unwin, 1981.

Hirkó, Judit. “A piacozó rákospalotaiak a 19–20. században (1850–1945)” [The People of Rákospalota at the Marketplace in the Nineteenth and Twentieth Centuries (1850–1945)]. Első Század 8, no. 2 (2009): 61–85.

Honvári, János. A gépállomások története, 1947–1964. A gépállomások és a magyar mezőgazdaság gépesítésének története 1947–1964 [The History of the Machine and Tractor Stations, 1947–1964. The Machine and Tractor Stations and the History of the Mechanization of Agriculture in Hungary, 1947–1964]. Győr: Távtan, 2003.

Horváth M., Ferenc. “A ‘népi ellenőrzés’ Magyarországon 1957–1989” [“People’s Control” in Hungary, 1957–1989]. Levéltári Szemle 40, no. 4 (1990): 29–40.

Horváth, Miklós, ed. Budapest története a forradalmak korától a felszabadulásig [The History of Budapest from the Era of Revolutions to Liberation]. Budapest: Akadémiai Kiadó, 1980.

Huszár, Tibor. Kádár János politikai életrajza [János Kádár’s Political Biography]. Volume 2. Budapest: Szabad Tér Kiadó–Kossuth Kiadó, 2003.

Keresztényi, Nándor. Csepeli agrárszövetkezők: a Duna Termelőszövetkezet 25 évének krónikája [The Agricultural Cooperative of Csepel: A Chronicle of 25 years of the Danube Agricultural Cooperative]. Budapest: Duna Tsz, 1986.

Keresztényi, Nándor. Zugligettől a Pilisig: a Rozmaring Termelőszövetkezet első negyedszázada [From Zugliget to Pilis: The First 25 Years of the Rozmaring Agricultural Cooperative]. Budapest: Rozmaring Mgtsz, 1982.

Kondor, Attila Csaba. “Iparpolitika és iparfejlesztés Budapesten az 1960-as években” [Industrial Policy and Industrial Development in Budapest in the 1960s], in Budapest az 1960-as években [Budapest in the 1960s], edited by István Feitl, 65–80. Budapest: Napvilág Kiadó, 2009.

Kornai, János. A hiány [Shortage]. Budapest: Közgazdasági és Jogi Könyvkiadó, 1980.

Kornai, János. A szocialista rendszer. Kritikai politikai gazdaságtan [The Socialist System. Critical Political Economics]. Budapest: HVG, 1993.

Kő, Tamás, ed. 25 év a sasadi dombokon [25 Years in the Sasad Hills]. Budapest: Sasad Kertészeti Mg. Tsz, 1975.

Merl, Stephan. “The Role of Agriculture in Soviet Industrialization.” In Communist Agriculture. Farming in the Soviet Union and Eastern Europe, edited by Karl-Eugen Wädekin, 3–22. London–New York: Routledge, 1990.

Nyékes, István. Budapest mezőgazdasága [The Agriculture of Budapest]. Budapest: Magyar Mezőgazdasági Múzeum, 1959.

Ö. Kovács, József. “The Forced Collectivization of Agriculture in Hungary, 1948–1961.” In The Collectivization of Agriculture in Communist Eastern Europe. Comparison and Entanglements, edited by Constantin Iordachi and Arnd Bauerkämper, 211–42. Budapest–New York: CEU Press, 2014.

Pető, Iván, and Sándor Szakács. A hazai gazdaság négy évtizedének története 1945–1985. I. Az újjáépítés és a tervutasításos irányítás időszaka 1945–1968. [The History of Four Decades of Domestic Economy, 1945–1985. Volume 1. The Period of Rebuilding and Command Economic Planning, 1945–1968]. Budapest: Közgazdasági és Jogi Könyvkiadó, 1985.

Pittaway, Mark. The Workers’ State: Industrial Labor and the Making of Socialist Hungary 1944–1958. Pittsburgh, University of Pittsburgh Press, 2012.

Pünkösti, Árpád. Vasalt ruha mángorolva [Ironed Garb, Mangled]. Budapest: Múzsák, 1989.

Schlett, András. “Másolás – Adaptáció – Útfüggőség. Az agrártechnikai forradalom közgazdasági tanulságai Magyarországon” [Imitation – Adaptation – Path Dependency. Economic Lessons of the Revolution in Agricultural Technology in Hungary]. In A mában élő tegnapok: tanulmányok a XIX. és XX. század történetéhez [Yesterdays Living in Today: Essays to the History of the 19th and 20th Centuries], edited by M Kiss Sándor, ifj. Bertényi Iván, and Fejérdy Gergely, 159–77. Piliscsaba: PPKE BTK, 2011.

Schlett, András. “Success and Failure of the Hungarian Agrarian Model.” Arhivele Totalitarismului / Totalitarianism Archives, 74–75. (2012): 96–108.

Schlett, András. Sziget a szárazföldön. A Bábolnai Állami Gazdaság története 1960 és 1990 között [An Island on the Mainland. The History of the State Farm in Bábolna between 1960 and 1990]. Budapest: Szent István Társulat, 2007.

Sipos, Levente. “Reform és megtorpanás. Viták az MSZMP agrárpolitikájáról (1956–1958)” [Reform and Baulking. Debates on the Agrarian Policy of the HSWP, 1956–1958]. Múltunk 36, no. 2–3 (1991): 188–97.

Swain, Nigel. Collective Farms Which Work. Cambridge: Cambridge University Press, 1985.

Swain, Nigel. “Eastern European Collectivization Campaigns Compared, 1945–1962.” In The Collectivization of Agriculture in Communist Eastern Europe. Comparison and Entanglements, Edited by Constantin Iordachi and Arnd Bauerkämper, 497–534. Budapest–New York: CEU Press, 2014.

Varga, Ferenc. “Szövetkezet a főváros peremén” [Cooperative on the Edge of the Capital]. Gazdálkodás 26, no. 11 (1982): 46–52.

Varga, Zsuzsanna. “Hatalom, büntetőjog és termelőszövetkezetek Magyarországon az 1970-es években” [Power, Criminal Law, and Agricultural Cooperatives in Hungary in the 1970s]. Jogtörténeti Szemle 5, no. 4. (2003): 10–21.

Varga, Zsuzsanna. “Kiútkeresés az agrárszektor válságából az új szakasz (1953) idején” [The Search for a Way out of the Crisis in the Agrarian Sector during the New Phase (1953)]. Századok 148, no. 1 (2014): 117–32.

Varga, Zsuzsanna. “The Impact of 1956 on the Relationship between the Kádár Regime and the Peasantry, 1956–66.” Hungarian Studies Review 1–2 (2007): 155–76.

Varga, Zsuzsanna. Politika, paraszti érdekérvényesítés és szövetkezetek Magyarországon 1956–1967. [Politics, the Assertion of Agrarian Interests and Cooperatives in Hungary, 1956–1967]. Budapest: Napvilág, 2001.

Varga, Zsuzsanna, “Why is Success a Crime? Trials of Managers of Agricultural Cooperatives in the Hungary of the 1970’s.” Hungarian Studies Review 2 (2013): 149–76.

Viola, Lynne. “Collectivization in the Soviet Union: Specificities and Modalities.” In The Collectivization of Agriculture in Communist Eastern Europe. Comparison and Entanglements, edited by Constantin Iordachi and Arnd Bauerkämper, 49–78. Budapest–New York: CEU Press, 2014.

Wädekin, Karl-Eugen. “The Soviet Kolkhoz: Vehicle of Cooperative Farming or of Control and Transfer of Resources.” In Cooperative and Commune, edited by Peter Dorner, 95–116. Madison: The University of Wisconsin Press, 1977.

 

Translated by Thomas Cooper

Zsombor Bódy

Enthralled by Size Business History or the History of Technocracy in the Study of a Hungarian Socialist Factory*

 

In this essay, I examine the extent to which the terms and concepts of business history are useful in furthering an understanding of the development of a socialist enterprise, the Hungarian Ikarus bus factory. I come to the conclusion that the factory, which manufactured buses for all of the member states of COMECON (Council for Mutual Economic Assistance, 1949–1991), was not really able to take advantage of and turn a profit off of the economies of scale that the enormous market offered. The reason for this was that the socialist enterprise was not able to bring technological advancement in line with the need to make profit. The large investment in the bus factory rested on a technocratic vision which mechanically linked technical development with the solution to economic problems. This technocratic vision, which was found both in the West and in the countries of the Eastern Bloc, fit particularly well into the system of state socialism.

Keywords: Ikarus, bus manufacture, technocracy, socialism, business history

 

Scholarship on the economic history of the socialist era for the most part consists of macro-level analysis of economic processes, which are often linked with a kind of sociology of the functioning of the so-called planned economy. These inquiries continue to this day to draw heavily on the classic work by János Kornai.1 There are also works of social and cultural history that deal first and foremost with the enormous investments of the Stalinist era, but they tend to draw their impetus not from any particular interest in economic history. Rather, they arrive at interpretations of the tremendous investments in industry and the construction of new cities somewhat metaphorically as narratives of the phenomenon of the socialist or Stalinist system as a whole.2 Microeconomic inquiries, which focus on the history of one or only a few enterprises, are almost absent from the secondary literature on the economic history of the socialist period.3

The visible hand was very noticeably present in the socialist corporate management, but the ways in which it functioned and the results of its presence have to this day only rarely been made the subject of study.4 The two factors that played key roles in the history of the evolution of large companies in the United States, namely the requirements of economies of scale (which stemmed in part from technological development) and reductions in transaction costs (through the incorporation of the various manufacturing processes and business activities into a single enterprise) are clearly problems that can be studied in the history of the socialist economies. For the specialization within the COMECON (Council for Mutual Economic Assistance, 1949–1991), the economic organization under Soviet leadership, was based on the idea that the investments in big enterprises would unquestionably be profitable due to economies of scale, since they would be producing for a far bigger market than the domestic one, and that would make possible the use of the most modern technologies. In this essay, I examine the extent to which the terms and concepts of business history are useful in furthering our grasp of the growth of socialist large companies by focusing on a single case study, the history of the Ikarus Bodywork and Vehicle Factory. I also consider how the socialist enterprise and the system of economic management functioned when they had to deal with the problems of the interrelationships between technological development and economies of scale, problems that had been dealt with very effectively by American large enterprises.5

As an alternative to the approach of business history, I will also make some contentions concerning the conclusions at which one may arrive if one attempts to interpret the socialist system of economic management and company management from the perspectives of the history of technocracy. The history of technocracy in the twentieth century is a promising subject of study because the emergence of technocracies itself was a significant phenomenon in determining the Western and Eastern poles of the Cold War era, though it did not take place in the same way on both sides of the Iron Curtain. The history of the technocratic approach and its supporters, the “experts,” is one of the themes that can enable us to go beyond the separation of the history of the “Eastern bloc” and the “West,” a borderline that to this day remains difficult to cross in the writing of history. In both the communist East and the West, technology was a determining factor in the transformation of social structures and everyday life, and the linking of considerations of technical rationality and efficiency with the call for oversight and management of social and economic problems, which was the central element of technocracy, was characteristic of both blocs.6

The object of my inquiry is the Ikarus bus factory, which was one of the success stories of Hungary’s industry in the 1960s, 1970s and 1980s. The company, which exported most of its output to COMECON markets, was one of Europe’s biggest bus factories for a long time. The regime presented the international successes of the Ikarus buses, which were in fact primarily successes achieved in the Eastern bloc and in developing countries, as a source of socialist national pride. The presentation of the Ikarus buses in a manner that associated them with domestic political concerns was an important and successfully used tool of the Kádár-regime’s portrayal of itself to Hungarian society. This strategy was so successful that Ikarus, as one of the country’s few globally successful companies, still evokes a sense of nostalgia in many.7

My study aims to examine the so-called “Road vehicle program 1965–1975,” which was launched in the wake of the COMECON agreement of 1963. This agreement assigned the manufacturing of large buses within the Eastern bloc to Hungary. The investment program concentrated primarily on the Ikarus plant, and it was designed to develop the company to a level at which it would be capable of meeting the needs of all the socialist countries for buses. In addition to a number of smaller companies, the Győr Rába Magyar Vagon- és Gépgyár (Rába Hungarian Wagon and Machine Factory in Győr) and the Csepel Autógyár (Csepel Automobile Factory) as suppliers were also recipients of the investments of the program. The program was based on the idea that the investment would unquestionably be profitable due to economies of scale, as Ikarus would be producing for a far bigger market than the domestic one. One of the key questions of my research was whether the picture “broadcast” at the time of the success of the Ikarus investment program was accurate. To put differently, I have tried to determine whether, when measured according to the standards of business history, integration into the COMECON actually created favorable circumstances for Hungary and whether the larger market of which Hungary became a part actually brought useful advantages from the perspective of economies of scale.8

In the course of my work, however, I encountered a problem that initially seemed to be an issue of source criticism. Namely, the company and the organizations overseeing it did not produce any statements or analyses revealing whether the investments of the 10-year Ikarus development project actually brought a matching return, to put it in today’s economic terms. In the economic management of socialist Hungary, they did not apply the concept of profitability in the sense generally used in economics and everyday business calculations. Although efforts were made to measure success and efficiency and to improve productivity in various ways, the concepts applied differed from those used today. The differences between the economic concepts applied at the time and those used today meant that, in order to answer my original question, I first had to clarify the meanings of the various categories applied in socialist economic management and the concepts that were used to measure the results. One might well ask what criteria drove the decision-makers in connection with the “Road vehicle program” and what concepts they intended to use to measure success. Thus, the question of how those in charge of managing the economy at the time were thinking, a question which could be regarded as part of the history of mentality, seemed as important as the one concerning the plausibility of the economic successes allegedly achieved by the Ikarus factory through its integration into the COMECON.

The Antecedents to and Preparatory Steps for the Road Vehicle Program

First, I would offer a brief sketch of the preliminary history of the Ikarus plant and the origins of the bus development program in the first half of the 1960s. Ikarus’ predecessor companies, the Uhri brothers’ vehicle body factory and the far smaller original Ikarus plant, which made coolers for combustion engines, were nationalized in 1947, before the general nationalization of industrial plants. After they had been nationalized, the two plants were merged.

It might seem self-evident that the collectivist socialist regime would favor community transport over private motoring and that a fundamentally ideological commitment lay behind its support for the development of the bus network and bus manufacturing. In reality, this was not the case. In fact, the regime did not have a specific transport policy concept based on ideological criteria.9 In the early period, those in charge of transport policy focused primarily on the railways and freight transport and did not concern themselves with the problems of road passenger transport.10 The fact that Ikarus was nevertheless able to develop and start manufacturing new types of vehicles in pre-1956 times was probably the result of the work of engineers and transport experts committed to bus manufacturing, people who were in mid-level positions at the company or served in various organizations of the planned economy.11 1956 (a year of unrest that culminated in the uprising against Soviet occupation in late October and early November) brought about a change in the development of Ikarus. There were substantial fluctuations of output at the time, and the types designed during this period did not prove successful. This was a consequence of the fact that the staff of engineers and the plant management, which had enjoyed successes before 1956, disintegrated or could not continue their work in part for political reasons.12 It must be noted, however, that the engineers and experts who left Ikarus at the time to emigrate or who were removed for political reasons after the revolution were replaced by equally well-prepared engineers, who often also had had to leave their former workplaces for political reasons. They came primarily from the army or from the defense industry, from which they had been removed because their loyalty to the Kádár-government had been thrown into question by the regime.

At the same time the political leadership also became seriously interested in Ikarus. One of the reasons for this was the attention paid by the Kádár-leadership to infrastructural developments that improved the quality of life. The other one was the Eastern Bloc’s policy of placing COMECON cooperation onto new foundations. The intention was to coordinate five-year plans rather than simply focusing on foreign trade agreements, as earlier had been the practice. Attempts to coordinate the plans proved unsuccessful (though the Soviet partner continued to propose this at later stages) because the planning procedures and particularly the interests of the individual member states were far too divergent. Nevertheless, while planning as a whole was not coordinated, the economies of the individual socialist countries, which until then had been rather autarky-oriented, began to cooperate. This cooperation went beyond barter trade and was introduced in various areas of production. The partnerships were based on the idea that the manufacturing of individual products must be conducted wherever would be most advantageous given the local traditions, geographical conditions and existing production capacities, and comparatively less favorable production capacities in the other socialist countries must be dismantled. Officials saw “parallel capacities” (as they referred to the existence of enterprises that performed the same functions within the COMECON) as a squandering of resources. In their assessment, competition made no sense in the economic space integrated into the COMECON. Consequently, industrial expert committees were established within the international organization of the COMECON, and they began working out the production specialization of the member states.13 In the course of these negotiations, bus manufacturing belonged to the authority of the forum that bore the title “COMECON Standing Committee for Economic and Scientific-Technical Cooperation in the Machine Industry, Section no. 7 for the Manufacturing of Automobiles, Tractors and Farm Machinery.” During the series of negotiations, which took about seven years and included various twists and turns, the Hungarian political leadership and vehicle industry expert circles consistently battled to ensure that the manufacturing of large long-distance and city buses would be allocated to Hungary.

There was an extensive road vehicle industry research base operating in the country at the time, Járműfejlesztési Intézet (JÁFI, Research Institute for Vehicle Development), and in addition to the staff of the three large companies concerned—győri Rába Magyar Vagon- és Gépgyár (Rába Hungarian Waggon and Machine Factory in Győr), Csepel Autógyár (Csepel Automobile Factory) and Ikarus—, certain sections of the staff of the ministries were also involved in the issues. In fact, even the Ministry of Postal Affairs had a Research Institute for Automobile Transport at one point. These professional circles worked with visible commitment and a kind of planning ethos on the development of Hungary’s bus manufacturing, and when expert-level talks with COMECON partners came to a standstill, they tried to mobilize the Hungarian political leadership in the interest of the cause.14 The mentality and professional ethos of these engineering circles and their visions of modernity were in harmony with the regime’s official economic doctrines in their enthusiasm for planning even in the absence of any deeper Marxist commitment. From the engineering perspective, the internal requirements of technical/technological design were a given priority, and the laws of a market economy, which, for example, demand that investment be used as efficiently (inexpensively) as possible, constituted impediments. Thus, the elimination of the “anarchy” of the markets through the institution of central planning would also have appealed to engineers who were not necessarily Marxists or leftists, and this constituted a basis on which these engineers could get involved in various projects of the “building of Socialism.”

While the Soviet Union had more influence at the COMECON talks on the specialization of bus manufacturing than the other countries, the Soviets did not simply dictate the terms. The other COMECON countries also had some room for manoeuvre in the early 1960s. In the end, the Hungarian endeavour proved largely successful, as the manufacturing of large buses was “allocated to Hungary” through a COMECON agreement in 1963, with Czechoslovakia alone retaining its manufacturing of large buses, although for domestic purposes only, not for export. In order to support the development plans of Ikarus, even while the talks were underway the experts tried to determine the projected bus requirements of the COMECON countries all the way up to 1980. This itself reveals one of the characteristics of socialist planning. The aim was not to survey the projected solvent demand for the buses. Given that they were attempting to look ahead 20 years, this would not have been possible anyway. They tried to calculate the natural demand for buses in the Eastern Bloc. In order to do this, they analysed the bus fleets of forty of the world’s developed countries in proportion to their populations, by bus categories, and calculated in passenger-kilometres, and they compared these results with the existing bus fleets of the socialist countries in order to estimate the projected development. This planning provided the basis for the Hungarian claims for bus manufacturing at the COMECON talks, and the argument made in favor of selecting Hungary seems to have been more convincing than the arguments made in favor of other countries, which were not as thoroughly supported with similar calculations. Thus, the manufacturing of larger-category buses was allocated to Hungary by the COMECON, even if the manufacturing of Hungarian Csepel trucks, for example, had to be sacrificed in exchange for the bus monopoly. After the COMECON agreement had been concluded, they launched the “Road vehicle program,” which primarily involved increasing the production capacities of the Ikarus factory. Ikarus’ two main suppliers, Csepel and Győr, were also affected (as were further suppliers, if indirectly).

The technocrat groups active in the vehicle industry were obviously attracted by the opportunity to use calculations involving resources and demands on a far larger scale than the calculations suited for Hungary in connection with bus manufacturing.15 This criterion also influenced the politicians who made the investment decision. The documents drawn up by the planning office in preparation for the decision were all based on the single argument that it is not worth developing the bus manufacturing capacity or developing modern bus types to meet the Hungarian requirements alone because that would not be efficient. The index number used to prove this was the daily per capita production value calculated for the company. According to the calculation, if the capacities of Ikarus were increased to suit the demands of the entire Eastern Bloc, per capita daily production value would grow to 148 percent of its level in 1960 by the end of the investment program. What is implied by the per capita daily production value index number that the decision-makers had in mind in the early 1960s? It is obvious at first glance what is not implied. There are no calculations concerning the return of the investment amount. It seems that such calculations simply were not prepared. From the perspective of the planners and economic policy decision-makers, the proportion of the invested amount and the projected profit was not a question in the early 1960s. Later on, after the economic reform of 1968 in Hungary, such calculations were required before investments, but their reliability remained questionable. In the early 1960s, however, development was measured in natural indicators, specifically in terms of the number of buses, and per capita daily production value was used as a measure of efficiency. This indicator, of course, contained a number of arbitrary elements, as the estimates regarding the future price of the buses were rather uncertain. Further background calculations were even more uncertain, however.

Due to the country’s negative foreign trade balance at the time, particular attention was paid to the proportions of exports and imports. Developing bus manufacturing capacities were expected to improve the particularly negative export-import balance of the vehicle industry substantially, even with the projected increase in passenger car imports. From the point of view of the foreign trade balance, however, whether the countries involved were socialist or capitalist countries made a difference. In the case of investments, the level of import demand from capitalist countries was generally a priority indicator, since the country was constantly struggling with a foreign currency shortage in connection with the financing of imports from Western countries. Here they calculated with the indicator of the foreign currency return per one USD worth of imports, and in the case of Ikarus they found that a far more favorable foreign currency revenue ratio could be achieved relative to import costs by manufacturing the buses in larger volumes and exporting them. Of course, when calculating the foreign currency revenue ratio, they took into account not only the buses sold for dollars, but also the socialist imports that were offset by Ikarus buses, which could replace imports from capitalist countries. This means that they did not just calculate with the actual foreign currency revenue, but also included estimated foreign currency savings that could be achieved through socialist imports.16 The series of investments of the “Road vehicle program” were launched on the basis of these calculations.17

The Launch of the Road Vehicle Program

The program was launched in 1965 and continued for ten years. The investments also affected the Rába plant in Győr and the Csepel Automobile Factory, since Ikarus only manufactured the bodies and assembled the buses. On the whole, the three companies employed about 40,000 people and constituted one of the biggest manufacturing industry complexes in the country. For Rába, which manufactured the engines for the buses, they purchased a license from the German MAN group, so imports of Western technology played a part at the start in this case as well, as it did in many other industrial projects in the Eastern Bloc.

The program managed to achieve its objective in terms of volume, as they manufactured 12,000 buses a year in the first half of the 1970s as targeted, while also switching over to new types, and progress was also made in modernizing production technology. The buses were sold in socialist countries and a number of developing countries. The buses exported to the Middle East and other Third World countries were perhaps the most unambiguous business successes for Ikarus, as well as an assembly plant established in Iraq. The company managed to establish a presence in these countries in the 1960s and 1970s with competitively-priced, hard-wearing buses. More than 30,000 buses were sold to the German Democratic Republic (GDR) alone, but Ikarus buses could also be seen in the public transport of Hamburg at one time. However, the relationship between these quantitative performances, the modernization of production technology and economic efficiency remains questionable.

At the end of the 1960s, the factory’s management effectively rejected in a report the idea of economic efficiency, a criterion required after the economic reform of 1968. They pointed out that they were not able to take rentability into consideration while they were focusing on meeting quantitative targets, developing new types and applying new technologies.18 According to the report prepared for the Ministry of the Metallurgy and Machine Industry, it was almost impossible to determine whether Ikarus was profitable, as state funding was present at so many levels and in so many forms in the production and sales process, not to mention the maze of various foreign exchange rates, which made the economic rentability of production opaque.19 Another reason why it was difficult to calculate the profitability of Ikarus was that part of the profit appeared at the large suppliers, which had better chances of passing on their actual costs to Ikarus through their prices after the economic reform of 1968 than Ikarus could do through the export prices of the buses. Reports prepared by the management of MOGÜRT (Magyar Országos Gépkocsi Üzem Rt. [Hungarian National Road Vehicle Works Co.]), the foreign trade company exporting Ikarus buses, revealed that the price of the buses did not depend directly on production costs in any of the markets. It was in the domestic market that prices best reflected the changes in costs. In the various socialist markets, the price of the buses was influenced by political power relations. At one time, for example, the buses sold to the Soviet market were cheaper than those exported to the GDR.20 In the case of the buses made for “capitalist export,” although these exports were highly appreciated because they brought in convertible currency, costs were relatively high due to the relatively small sizes of the series and the various individual requirements (as these vehicles were never exactly the same as the vehicles made in large series for the socialist markets). Nevertheless, foreign currency revenue counted as an achievement regardless of the cost.21 For that matter, foreign trade within the COMECON was rather bureaucratic.

There were long-term master agreements, for example, designating Hungary for the manufacturing of large-category buses. These were broken down to the individual countries through annual bilateral trade agreements. And finally, based on the annual trade agreements, there were specific contracts regarding the deliveries, assigning prices, numbers of units and deadlines. These contracts, however, were not usually concluded by the manufacturing companies themselves, but by foreign trade companies enjoying a monopoly and overseen by the Ministry of Foreign Trade. The contradiction built into the system meant that the management of Ikarus prepared its plans based on long-term master agreements and annual trade agreements, and these agreements never coincided with the actual stock of orders. In the course of the reform, a number of large companies were granted independent foreign trade rights in Hungary, but this almost never happened in the other socialist partner countries.

Ikarus and, in general, the other enterprises involved in the road vehicle program were in an extremely tense relationship with MOGÜRT, which had a monopoly in foreign trade. In 1961, Ikarus and the Csepel Automobile Factory negotiated and prepared a statement of their common standpoint in which they presented their grievances with regards to MOGÜRT. They contended that MOGÜRT was unable to organize the provision of necessary replacement parts. There were more than enough in stock, but in some countries there was nonetheless a dearth of parts. MOGÜRT itself had replacement parts made that could be sold for profit, while the parts that could only be produced at a cost it ordered from the Ikarus plant and Csepel Automobile. In the contracts with foreign partners, MOGÜRT agreed to provide an unjustifiable quantity of replacement parts the price of which, however, could not be covered on the basis of the price of the vehicles that had been fixed in advance. MOGÜRT also expected the factories to cover the costs of the production of the brochures and instruction manuals for the vehicles, which was a significant burden because they had to be both detailed and precise with regards to the given product. However, since there was a wide variety of types, changes to the texts (editing, typesetting, translation) represented a tremendous cost. Furthermore, they were often not completed by the time orders had been placed. MOGÜRT, however, charged a penalty for missing or incomplete printed materials.22 On many individual points, the enterprise in charge of exports and the businesses responsible for production had conflicting interests. With the revenue made through the sale of buses, they were only able to earn a profit at each other’s expense.

The modernization of the technology was also not free of conflict. The management of Ikarus and the offices of the Ministry were well aware of a number of problems surrounding bus manufacturing. They tried to follow innovations of the global vehicle industry continuously (a special technical press monitoring department was established for this purpose), and they believed that, in contrast with the design of the buses, manufacturing technology in the early 1960s was less up-to-date by international comparison. Production also fluctuated radically, with rather substantial differences from one month to the next. The higher echelons of management had to struggle to replace the industrial culture with which people were familiar with the industrial culture deemed up-to-date by the technocratic approach, which placed emphasis on the importance of large-scale production. The annual factory inspections that were done by the organs of upper management represented regular assessments on the basis of the criteria of modernization and efficiency, as well as the struggle with the work force’s attachment to the work culture with which they were familiar, but which was seen as obsolete by the technocrats.23

A long explanatory report that was written by the chief engineer of Ikarus sheds light on the details of all this. The report concerned the critical contentions made in the course of one of the factory inspections. Essentially, according to the technocratic reproaches, the factory was not using adequately detailed plans or adequate technological documentation. In his reply, chief engineer Hirmann did not dispute the validity of the claim and the expectation, but he noted the difficulties that were presented by the production and use of the technological documentation and adherence to the proper production guidelines. As he observes, the design division did not have the capacity to prepare detailed plans for every type and every series, as the series themselves were too diverse, and the technological division was also unable to draw up complete documentation of the production technology because it was simply too understaffed. In addition, any efforts that were made to provide complete documentation were met with decisive opposition in the workshops:

 

[The leadership of the enterprise] attempted at the launch of type 55 to do everything according to the prescriptions, but this striving was thwarted by opposition in the workshops, which were not willing to acknowledge that the manner ordered by the upper-level management was correct when, until then, a different approach had been fine, and they deviated from the documentation, and the design and technological divisions were unable, because of their small size, to keep this within bounds or record the deviations. […] The workers see the documentation as completely unnecessary and they will only be sufficiently convinced to take an interest in this question after long educational efforts have been made, because for the moment they only see the unpleasant side. […] This causes a particularly difficult problem in the case of the few old skilled laborers who really can do good work and, because they have seen many solutions, tend to feel what is this young engineer or technician doing explaining things to me, someone who was doing far better things back when he was still a little child.24

They were unable to document the many variations in the different types or the practical solutions that were devised in the course of manufacture, and indeed the skilled laborers did not see the need for this. The Technical Oversight Department of the Automobile and Tractor Industry Trust, which was charged with the task of ensuring that methods of production met technological standards, complained a great deal about this, though they often had occasion to observe that in the workshops their efforts to enforce standards were regarded as a hindrance to production. A former Ikarus designer recalled the experienced car-body ironworkers (they were nicknamed “sheet-metal emperors”), who were able to accomplish any task by hand before the installation of the stamping machines that were well-suited to the production of large series.25 This old work culture, however, did not harmonize with the technocratic approach, which was oriented around large-scale production.

The Road Vehicle Program betwixt Economic Integration into the Empire and the Scale of Business in Hungary

By 1966, the fundamental transformation of production technology had expanded as a consequence of new and significant investments. However, from a certain perspective the efforts to use the most modern technologies overshot the mark. There was no doubt concerning the modernity of the technology, but there might be questions regarding the profitability of the application of modern solutions. Economists at the time determined that technological modernization in the Csepel Automobile Factory, for instance, would hardly yield a profit. In order to manufacture the shells of the Ikarus vehicles, automated up-to-date welding equipment was purchased from Switzerland that could only be used economically in the case of the manufacture of very large series. Although in the perception of the ministerial apparatus the purchase of the automated Swiss machinery would ensure that the techniques used in production were modern, and the factory leadership regarded it as a solution to the problem of understaffing, though Ikarus always needed different versions of the shells because it produced vehicles for buyers from the Third World and the West in comparatively small numbers. Thus the machinery, which was suitable for the economical production of large-scale series, continuously had to be stopped and adjusted to weld together new, differing shells. The Csepel Automobile Factory and Ikarus were exclusive partners in the 1970s. In other words the former essentially only supplied these frames for the latter and the latter ordered all of the necessary shells from the former. 26

Many times Ikarus also faced the problem of modern technologies that were only economically practical when used on a large scale. As early as the late 1950s, in the course of the inspections that were done by the upper level authorities for economic management, the observation was made that some of the expensive machines that had been purchased from western European countries were not in use.27 These machines included the up-to-date stamping equipment, which according to the original plans was supposed to fill the needs not only of Ikarus but also the entire vehicle industry in Hungary, and later a modern varnishing workshop where for a time a varnishing material was used that was regarded as out-of-date. Even as late as 1964, one still found complaints in the factory inspection reports according to which the individual production phases that represented different technological levels could only be coordinated with “crafty tricks” (in the report one finds the word “kunststiklikkel,” a somewhat slangy Hungarian word), and management had the creativity of the experienced workforce to thank for these tricks.

After 1966, thanks to the new investments, Ikarus began to use assembly-line production techniques when a new line moving system was created. There was, in principle, one production line suitable for manufacturing the buses of various size and purpose belonging to Type 200, which, however, were assembled largely from identical components for the Soviet and other socialists “markets.”28 At the same time, even in this case the use of modern technologies was not always profitable or economical. They not only produced large series of buses for the socialist countries, but also regularly manufactured buses in smaller numbers for Third World and Western countries, for which they had to take into consideration the particular wishes of the customer. In the second half of the 1960s and in the 1970s, these vehicles were therefore put together using separate workshops, alongside the equipment designed for the production of large-scale series. Naturally this dramatically increased the costs. Additional problems arose because Ikarus was, first and foremost, an assembly plant, in accordance with the vision at the time of the up-to-date enterprise. In other words, Ikarus itself only produced the bodywork of the vehicles, and it assembled the buses out of the main units and component parts delivered by the suppliers.

Ikarus had continuous problems with the suppliers (problems that in the end remained unsolved), or, to use the language of socialist economic management, the “cooperation partners.” Socialist economic management saw the manufacture of series on a large-scale as the essential criterion of economical production and parallel production capacities as a waste of resources. For this reason, Ikarus had only a single supplier for most of the main units and components, and usually the supplier could only deliver the product in a single kind of transport. This left Ikarus at the mercy of the suppliers, since it could not turn to other potential partners in the event of a problem with quality and it faced difficulties when filling smaller orders from clients in the West or the Third World, since when it came to the parts for “deviating types” (to borrow the terminology used at the time), there was not an adequate array from which to choose on the market.

The differing technical quality of the parts that were provided by the various suppliers also caused problems. The economic management strove to ensure that the parts met high technical standards, though this was not always possible. Some of the high quality parts made the buses more expensive for the socialist and the Third World markets, which already constituted a loss for Ikarus, since the additional costs stemming from the higher technical standards of the components were not reflected in the prices. In other cases, parts that did not meet high technical standards were a source of problems, because they could not be used in the production of the buses intended for the “non-socialist market,” where good quality was a basic expectation. The shock absorbers (which were obtained through an English license), the breaking system (obtained through the license with Knorr), the starting engine (obtained through the license with Bosch), and the engine produced by Rába (obtained through the MAN license, and too small for use in the largest buses29) increased the production costs of the buses, while the anterior bridge supplied by the Soviet Union (which was designed for trucks), the Czechoslovak gear shift, and the Polish distributor pump brought down the quality of the final product in comparison with the expectations of the Western markets.30 The suppliers, furthermore, were often incapable of providing the parts at the pace necessary for Ikarus. This problem was often solved by using parts in the buses that were produced for urgent orders that had been manufactured on the spur of the moment or, when this was not an option, simply by taking the parts from vehicles made for other, less pressing orders.31

Ikarus expected the superior authorities to arrive at solutions to these difficulties. When no other options were available, the authorities had to address the problems by issuing instructions to the suppliers regarding concerns of quality or adherence to deadlines. Given its role, it is worth examining this mode of operation not only on the level of the enterprises but also on the level of the management that dealt with this entire branch of industry. From many perspectives, the superior authorities, which to be more specific meant at first the Automobile and Tractor Directorate of the Ministry of Metallurgy and Machine Industry, then later the ministry’s Automobile and Tractor Trust (1963–1967) and then, following the cessation of this trust, the ministry’s head division in charge of the Road Vehicle Program (1967–1975) handled Ikarus, the Csepel Automobile Factory, the Rába factory and the other enterprises with which they worked as parts of one large enterprise group. Thus one might well ask whether or not this gave rise to the same kinds of advantages that were created by the development of large enterprise in America.

In Northern America, large businesses came into being because some technologies could be put to use more economically only in the case of large-scale production. Large-scale production meant both the use of assembly-line production techniques and the entirety of the process of turning the finished product to account, which included the well-organized marketing of a product that was identified by its brand name. From the perspectives of labor productivity and reduced transaction costs it proved more effective to bring all of the various production and marketing functions under the umbrella of a single enterprise than to address these needs simply on the basis of market contracts. One of the conditions of the existence of big business was the emergence of a managerial apparatus that performed the tasks involving the organization of the various functions within a single enterprise, in other words the development of modern entrepreneurial management, which was becoming increasingly technical and effective.32

From many perspectives, the main ministerial department responsible for the Automobile and Tractor Industry Trust and, later (as of 1967), the Road Vehicle Program treated Ikarus and its most prominent partners as if they were the various units of a single large enterprise. However, according to the indicators, this did not bring about the kinds of advantages which served as the foundations for the business successes and potentials for continuous technological innovation of the American enterprises.33 A comparison of the development plans of the Automobile and Tractor Industry Trust and the analyses that were done by Ikarus of the activities of the Trust is revealing. According to the ideas that were formulated at the time of its establishment, the Trust was going to be the economic unit responsible for management issues, such as concluding contracts in order to bring the products of the enterprises that belonged to it to the market, coordinate production development, centralize administration of raw materials acquisition and the labor force, integrate the production of machine tools into the branch of industry, and professionalize (and specialize) the production of parts.34 Instead of performing these functions, however, the Trust functioned essentially as an entity that played supervisory roles and set the prices that were used in the industry (including the prices of components that cost only a few hundred forint). According to Ikarus’ own analyses, the Trust was not able to perform many of the tasks for which it would have been responsible according to the plans.35 It did not actually function as unit responsible for economically effective management, but rather served merely as a forum for strategic decisions regarding the branch of industry in question and an arbitrator in the conflicts that arose between the various individual enterprises. Furthermore, the structure of its own was functioning parallel to the organs of the enterprises, since it had numerous organs of its own, such as control and allocation of materials, development of production techniques, and a personnel department. Thus it is hardly coincidental that the overall structure as such did not lead to the advantages usually associated with centralization, nor could the benefits, brought about by the creation of a system in which management was close to production, be earned by the enterprises.

Yet the economic organization for the management of the ever-shifting vehicle industry was nonetheless not the main source of problems. The structural problem of this branch of the economy actually was that while the finished products (in this case the Ikarus buses) could be produced at profit in large quantities in a small country (the COMECON marketplace made this possible), the network that provided the parts necessary for the manufacture of the finished products could not function on a similarly large scale. Hungary was not capable of producing economically the parts and main units. Indeed as a consequence of the principle of specialization, even in the best case scenario in the COMECON marketplace only one provider could be found, and that provider enjoyed a monopolistic position. This hampered attempts to deal with problems concerning quality from the outset, since the entity that placed an order was unable, instead of using the existing provider, to turn to a competitor. The efforts of the ministry in question to provide Ikarus with technologically up-to-date parts lead to a situation rife with contradictions, and not simply because for some of the buyers this made the buses unnecessarily expensive, but also because the production practices of the suppliers were not always cost effective. As of the end of the 1960s, the size of the series of buses produced by Ikarus corresponded to the technological equipment that had been built, though the economically profitable series did not mean the same thing for the suppliers of the main unit or individual replacement parts as it did for the bus factory. The investments and the technologies purchased from the West thus did not bring in returns adequate to cover their cost, neither in the case of the engines produced by the Rába factory on the basis of the MAN license nor in the case of the small parts. In North America and Western Europe, behind the large enterprises that bore the brand names of their finished products, there was an array of producers and suppliers of larger and smaller parts and main units in the vehicle industry, and these enterprises were usually extremely specialized. Thus outside of the national boundaries one was always able to find an appropriate range of products to choose from and, seen from the other side of the exchange, producers of parts could always find more potential clients on the market. The rigid COMECON cooperation, which strove to eliminate parallel capacities and therefore competition as well, made this impossible, and within the framework of the scale of enterprise in Hungary the vertical development of the entire vehicle industry would have been impossible from the outset.

Ikarus’ impressive results in the area of production, results which it achieved first and foremost with the production of the 200 series of buses for the Soviet Union and other “friendly markets,” ultimately constituted a pitfall.36 The series, which was unusually large in its scale, was a consequence of a very particular circumstance, namely that the orders were being placed by a large, centralized empire. In other parts of the world the management and operation of local and long-distance bus transport was always broken into smaller units. Thus there was no other entity that would have purchased buses in such large numbers for a prolonged period of time. (The situation in the automobile market was different.) Ikarus continued to manufacture the Type 200 bus line for the Eastern bloc for a long time even when it was already regarded as obsolete and the new design meant to replace Type 200 buses was ready. Socialist countries continued to accept these in the 1980s, as they did not really have a choice due to Ikarus’ quasi monopoly position within the COMECON. Thus, Ikarus did not have to switch over to serial production of the new types until around the time of the change of systems, when its earlier recipient markets suddenly turned into real, ever-shrinking markets. Under the conditions of real competition, the company, which lacked capital and could no longer reckon with government investments, became increasingly indebted. In the mid-1990s, the government tried to tackle this problem by privatizing the company, but it was unsuccessful.

 

* * *

 

Returning to one of our question on the efficiency of the COMECON integration, we can establish that although this kind of integration offered some benefits through economies of scale and the production capacities created for the Eastern bloc allowed companies such as Ikarus to enter the market in other countries as well (primarily in developing countries), nevertheless, the balance on the whole was negative. Although the Ikarus buses and, through related maintenance work, supply of spare parts or the training of local workforce, Hungarian experts found their way to many countries worldwide, the semi-globalization based on the planned economy and the elimination of competition never created a globally competitive company and was not able to contribute to the development of the applied technology.

The other lesson to be learned on the basis of my inquiry is that the conceptual tools of business history are less applicable to the study of the history of socialist enterprises. To be more precise, when one applies them it becomes clear that the “visible hand” of socialist economic direction was not able to obtain the same results from the perspective of increased labor productivity and reduction of costs as large enterprise management in capitalist markets. The reason for this was not simply the absence of the market from the dynamics or, in the event of a setback, the absence of appropriate feedback. In the nationalized economy of the socialist state, the borders of an enterprise were blurry. From many perspectives, a branch that functioned under central management could be considered an enterprise, but at the same time it was unable to operate like an enterprise, for the branch never became a well-integrated unit, even in the period of oversight in which it was in the form of a trust. Individual enterprises had conflicts of interest because they had to divide the revenues of the branch among themselves in a zero sum game.

On the level of this branch of industry, the distinctive socialist technocratic approach (the complexities of which I mentioned in the introduction) was decisive. There are virtually no studies on this question in the Hungarian secondary literature, though on an international level we are dealing with an increasingly prominent trend in the scholarship on the socialist era.37 The technocracy that emerged in the wake of World War II assumed it would find solutions to economic and social problems through the spread in the active application of scientific knowledge, and it held this vision of cybernetic efficiency—a vision that today seems even antiquated—as valid, regardless of political standpoint. This technocracy, and in particular its engineering version, harmonized well with the needs of the political systems which put planning in the center of their focus. In most of the socialist countries, the technocratic vision of modernization began to replace Marxist ideology, particularly in the 1960s, and it was able to create some measure of loyalty toward the regime among the people who played the roles of technical experts, even among members of the younger generation.38 (The fact that in the 1980s half of the well-trained engineers of the world worked in the Soviet Union was one of the consequences of this faith in a kind of technical rationalism.39) However, in the prevailing conditions of the socialist state, the implementation or adoption of technical rationalism was not ensured by considerations of self-interest or internally motivated, independent participation of the actors, which would have compelled every player to accept a more efficient solution. Rather it was dictated by the regime, by a system that was both one of bureaucracy and one of power. Thus the tension between the aim of maintaining the system of rule, the solidarity of the bloc, and technical efficiency remained, since technical efficiency would have required more wide-ranging cooperation with external partners, which would have increased the scope for action of the individual players, and this would have represented an attack on the system of power.40

The socialist regime and ideology essentially made it impossible for the system of differentiated operations that is required by modern technological standards to emerge in the economic sphere, as such a system would have been founded on the autonomous movement of the various players in the economy. Instead, socialism attempted to transform a technocratic vision that appeared to be free of politics or rather prior to politics into a reality. This vision was based on the notion that technological modernization and economic profitability always went hand in hand. Yet as a consequence of this assumption the most important ability of modern organizations, the ability to learn and remain adaptable, was lost, for either the real challenges never even reached them or the organizations were only able to deal with these challenges in a distorted form.41

Archival Sources

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

XIX-F-6-h Kohó- és Gépipari Minisztérium, Beruházási Főosztály [Ministry of the Metallurgy and Machine Industry, Main Investment Division], 1953–1975.

XXIX-F-1-a Autó- és Traktoripari Tröszt [Automobile and Tractor Industry Trust], TÜK Iratok, 1960–1967.

XXIX-F-187-r Ikarus Karosszéria és Járműgyár, Rendszerező iratok [Ikarus Bodyworks and Road Vehicle Factory, Organizational documents], 1947–1974.

Bibliography

Bódy, Zsombor. “Der Ikarus-Bus als ungarische und sozialistische Ikone. Die symbolische Aufladung alltäglicher Objekte mit politischen Bedeutung.” Österreichische Zeitschrift für Geschichtswissenschaften 21, no. 2 (2010): 152–72.

Boyer, Christoph. “Einleitung.” In Zur Physiognomie sozialistischer Wirtschaftsreformen. Die Sowjetunion, Polen, die Tschechoslowakei, Ungarn, die DDR und Jugoslawien im Vergleich, edited by Christoph Boyer, IX–XLII. Frankfurt am M.: Klostermann, 2007.

Chandler, Alfred. The Visible Hand. The Managerial Revolution in American Business. Cambridge, MA–London: The Belknap Press of Harvard University Press, 1977.

Chandler, Alfred. Scale and Scope. The Dynamics of Industrial Capitalism. Cambridge, MA–London: The Belknap Press of Harvard University Press, 1990.

Ciesla, Burghard. “Die Vision von der planbaren Mobilität. Entwürfe des öffentlichen Nahverkehrs in der DDR (1949–1990).” In Geschichte der Zukunft des Verkehrs. Verkehrskonzepte von der frühen Neuzeit bis zum 21. Jahrhundert, edited by Hans-Liudger Dienel and Helmuth Trischler, 223–44. Frankfurt–New York: Campus, 1997.

Dokumentumok a magyar közlekedés történetéből 1945–1949 [Documents on the History of Transportation in Hungary], edited by Béla Pálmány. Budapest: Új Magyar Központi Levéltár–Közlekedési és Postaügyi Minisztérium, 1981.

Finta, László. Földön – vízen – levegőben. Uhri testvérek története 1941-től 1942-ig. Finta László tanulmánya 2008–2012 [On Land – on Water – in the Air. The History of the Uhri Siblings. An Essay by László Finta, 2008–2012]. Budapest: published by the author, n.y. [2012].

Germuska, Pál, and János Honvári. “A közúti járműgyártás története Győrött 1945-től 1990-ig” [The History of the Production of Road Vehicles in Győr from 1945 to 1990]. In Győr fejlődésének mozgatórugói [The Driving Forces of Development in Győr], edited by János Honvári, 21–111. Győr: Universitas–Győr Nonprofit KFT, 2014.

Germuska, Pál. “A magyar fogyasztói szocializmus zászlóshajói: Hadiipari vállalatok civil termelése 1953–1963” [The Flagships of Hungarian Consumer Socialism: The Products of Defense Industry Enterprises for Civilian life, 1953–1963]. Korall 33 (2008): 62–80.

Gestwa, Klaus. Die “Stalinistische Großbauten des Kommunismus” Sowjetische Technik- und Umweltgeschichte 1948–1964. Munich: Oldenbourg, 2010.

Graham, L. R. The Ghost of the Executed Engineer: Technology and the Fall of the Soviet Union. Cambridge, MA: John Hopkins University Press, 1993.

Halmos, Károly. “A nagyvállalkozás történeti elmélete. A.D. Chandler Jr. három munkája” [The Historical Theory of Large-scale Enterprises. Three Works by A.D. Chandler Jr.]. Korall 14 (2003): 117–34.

Heumos, Peter. “‘Der Himmel ist hoch, und Prag ist weit!’ Sekundäre Machtverhältnisse und organisatorische Entdifferenzierung in tschechoslowakischen Industrie­betrieben (1945–1968).” In Vernetzte Improvisationen. Gesellschaftliche Subsysteme in Ostmitteleuropa und in der DDR, edited by A. Schuhmann, 21–41. Cologne–Weimar–Vienna: Böhlau, 2008.

Horváth, Sándor. A kapu és a határ. Mindennapi Sztálinváros [The Gate and the Border. Everyday Sztálinváros]. Budapest: MTA TTI, 2004.

Jajesniak-Quast, Dagmara. Stahlgiganten in der sozialistischen Transformation. Nowa Huta in Krakau, EKO in Eisenhüttenstadt und Kuncice in Ostrava. Wiesbaden: Harrassowitz, 2010.

Jenei, Károly, and Szekeres, József. Az Ikarus Karosszéria és Járműgyár története 1895–1980 [The History of the Ikarus Bodyworks and Road Vehicle Factory]. Budapest: Ikarus Karosszéria és Járműgyár, 1981.

Josephson, Paul. R. Totalitarian Science and Technology. New York: Humanity Books, 1996.

Kotkin, Stephen. Magnetic Mountain: Stalinism as a Civilisation. Berkeley: University of California Press, 1995.

Kozma, Ferenc. “Külgazdaság-stratégiai kihívások a hatvanas évtizedben” [Foreign Trade Strategy Challenges in the 1960s]. Múltunk, no. 4 (2001): 78–106.

van Laak, Dirk. “Technokratie im Europa des 20. Jahrhunderts – eine einflussreiche ‘Hintergrundideologie.’” In Theorien und Experimente der Moderne. Europas Gesellschaften im 20. Jahrhundert, edited by Lutz Raphael, 101–28. Cologne: Böhlau, 2012.

Pető, Iván, and Szakács, Sándor. A hazai gazdaság négy évtizedének története 1945–1985 [Four Decades in the History of the Domestic Economy, 1945–1985]. Budapest: KJK, 1985.

Sattler, Friederike. “Unternehmerische und kompensatorische Netzwerke. Anregungen der Unternehmensgeschichte für die Analyse von wirtschaftlichen Netzwerkstrukturen in staatsozialistischen Gesellschaften.” In Vernetzte Improvisationen. Gesellschaftliche Subsysteme in Ostmitteleuropa und in der DDR, edited by A. Schuhmann, 139–55. Cologne–Weimar–Vienna: Böhlau, 2008.

Schivelbusch, Wolfgang. Entfernte Verwandtschaft. Faschismus, Nationalsozialismus, New Deal 1933–1939. Munich–Vienna: Fischer, 2005.

Schulze Wessel, Martin. “Zukunftsentwürfe und Planungspraktiken in der Sowjetunion und der sozialistischen Tschechoslowakei: Zur Einleitung.” In Zukunftsvorstellungen und staatliche Planung im Sozialismus. Die Tschechoslowakei im ostmitteleuropäischen Kontext 1945–1989, edited by Martin Schulze Wessel und Christiane Brenner, 1–18. Munich: Oldenbourg, 2010.

Schweitzer, Iván. A vállalatnagyság [Enterprise Size]. Budapest: KJK, 1982.

Soós, Károly Attila. “Műszaki színvonal és gazdaságosság. Beruházási döntés egy központi fejlesztési program keretében” [Technical Standards and Economic Efficiency. Investment Decision within the Framework of a Central Development Program]. In Vállalati magatartás – vállalati környezet [Corporate Conduct – Enterprise Environment], edited by Márton Tardos, 285–94. Budapest: KJK, 1980.

 

Translated by Thomas Cooper

 

András Cieger

National Identity and Constitutional Patriotism in the Context of Modern Hungarian History

An Overview*

 

Since the end of the eighteenth century, Hungarians have considered themselves a nation of the “millennial constitution” and a “nation of lawyers.” What meanings, identity-founding values, and interpretations of the past are associated with the concepts of constitution and constitutionalism in Hungarian public thinking and scientific discourse? Furthermore, to what extent is there any consensus concerning principles, and how coherent is the context of Hungarian constitutionalism as a product of national history? In this overview, I show how the political program of constitutionalism underwent a transformation from an elite-project to a common emotional foundation of constitutional patriotism in 1848. I also examine how, after the Austro-Hungarian Compromise of 1867 and in the interwar period, the emotional bonding of citizens to their political institutions weakened and several myths of the Hungarian exceptionalism gathered strength in scientific and political discourses. Four decades of socialism extinguished almost completely any sense of constitutional consciousness, already only flickering, among the people, as well as their trust in the world of politics. Finally, the many examples of embittered debates on symbolic questions after the regime change in 1989/90 and the much-criticized circumstances of the drafting of a new constitution in 2011 demonstrate convincingly that a constitutional patriotism based on broad societal consensus has not yet formed in Hungary. The successive political regimes used constitutional values and the memory of the struggles for constitutionalism only as symbols or slogans to reach their short-term political aims. The political elites in Hungary utilized the constitutional consciousness of the society instead of working to strengthen it.

Keywords: constitutional patriotism, national identity, Hungarian history, symbolic politics