This Day in European History (Austrian Bank Starts Panic)

May 11, 1931--Instead of achieving its intended effect of propping up the Austrian bank Creditanstalt, a capital infusion led by the Austrian government only ignited a continent-wide financial panic that destabilized European countries already staggering under massive war debt.

Americans are likely to think of the global recession of 2007-09 as unprecedented, but that only illustrates our mass ignorance of 20th-century history. The Creditanstalt crisis occurred a year and a half after the Great Crash on Wall Street, and to some degree even worsened the already grave economic situation in the U.S.

But the fact is that the Great Depression cut across the world, and the impact it made on other countries might have been even more devastating than what happened in the United States. Particularly in Central Europe, the mass upheaval it created damaged young and fragile democracies, making possible the rise of Adolf Hitler.

Creditanstalt began to appear more often in op-ed columns and on blogs last year, such as this analysis by Gregory White in June, as the implications of national financial crises began to be considered. It all made for chilling reading.

World War I might be said to have created three sets of victims. The first, of course, were those who died in the conflict; the second, the veterans wounded physically or mentally during the fighting; and the third, the larger public, which paid dearly for years afterward for the financially ruinous war.

By 1931, a number of countries were buckling under their war debt. Almost in tandem, the gold standard that held sway before the war came under unrelenting pressure. Though bankers felt the necessity of maintaining gold as a standard, more and more people began to move their deposits out.

In the spring of 1931, losses at Creditanstalt were so steep that, under Austrian law, the bank could have been compelled simply to shut down. A financial support operation backed by the Austrian government, the National Bank and the House of Rothschild was designed to stem the losses.

From this point on, a series of cascading events put the Central European economy into a tailspin:

* By early June, credit for all of Austria was exhausted, leading the Austrian National Bank to pledge more.

* The Austrian National Bank got a new round of credit, but the Austrian government had to go hat in hand for a two-to-three-year loan.

* France, under new Prime Minister Pierre Laval (later executed for collaborating with the Nazis) demanded that Austria give up its customs union with Germany. The Austrian leadership’s refusal to do so led to its fall.

* The bankruptcy revealed at Creditan-Anstalt led to a run on German banks, too; a 25 percent depreciation in the British sterling; several other national central bank runs, including the Bank of France, the National Bank of Belgium, the Bank of France, the Netherlands Bank and the Swiss National Bank.

* That, in turn, brought an increase in interest rates in the U.S. from 1.5 to 3.5 percent.

A little more than a month after the beginning of panic in Austria, President Herbert Hoover had grown sufficiently concerned that he urged a one-year moratorium on all intergovernmental debts, and just about every economy in the West had signed on.

But the initial confidence soon withered. So many speculators were demanding gold that, by mid-December, only the U.S. and France maintained the gold standard. Within a few more years, even that would change.

Things became so bad in Germany’s Weimar Republic that citizens began to take more seriously the ravings of a far-right lunatic, Adolf Hitler.