The Habsburg Monarchy as a Customs Union: Economic Development in Austria-Hungary in the Nineteenth Century 0691641080, 9780691641089

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The Habsburg Monarchy as a Customs Union

The Habsburg Monarchy as a Customs Union Economic Development in Austria-Hungary in the Nineteenth Century

John Komlos

PRINCETON UNIVERSITY PRESS PRINCETON, NEWJERSEY

Copyright © 1983 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton New Jersey 08540 In the United Kingdom: Princeton University Press, Guildford, Surrey All Rights Reserved Library of Congress Cataloging in Publication Data will be found on the last printed page of this book Publication of this book has been aided by the Whitney Darrow Publication Reserve Fund of Princeton University Press This book has been composed in CRT Baskerville Clothbound editions of Princeton University Press books are printed on acid-free paper, and binding materials are chosen for strength and durability. Paperbacks, while satisfactory for personal collections, are usually not suitable for library rebinding. Printed in the United States of America by Princeton University Press, Princeton, New Jersey

To Karen

Contents

List of Figures ListofTables Preface Introduction ι. The Mid-Century Reforms

ix xi xvii 3 25

ESTABLISHMENT OF THE CUSTOMS UNION BETWEEN AUSTRIAAND HUNGARYIN 1850 THE EMANCIPATION OF THE PEASANTRY

2. Austro-Hungarian Agricultural Development until the 1870s

52

3. The Beginning of Modern Economic Growth in Austria

9°

4. Industrialization in Hungary

112

THE PATTERN OF GROWTH THE FLOUR INDUSTRY THE ROLE OF THE STATE FOREIGN CAPITAL IN THE HUNGARIAN ECONOMY AN ASSESSMENT OF HUNGARY'S INDUSTRIAL PERFORMANCE

5. Conclusion Appendixes

A. A Calculation of the Gains That Were Obtained in Consequence of the Forma tion of the Customs Union in 1850

214

υιιι : Contents

Β. Estimating the Economic Importance of the Peasant Emancipation C. A Comment on Recent Research on Aus­ trian Industrial Growth D. Agricultural Production Index for Hun­ gary, 1870-1913 E. Construction of the Industrial Production Indexes Bibliography

323

Index

339

List of Figures

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 3.1 3.2 3.3 4.1 4.2 4.3

Austrian Demand for Hungarian Grain, 1819-1837 Decrease in the Production of Grain in Hungary Proper by Counties, 1844-1864 Hungary's Exports in 1868 prices, 1850-1874 Internal Shipments of Grain in Hungary, 1850-1872 Hungarian Agricultural Expous, 1821-1875 in 1868 prices Hungarian Exports of Grain, Wool, Wine, Flour, and Livestock in 1868 prices, 1831-1875 Wheat Prices, Wages, and Paper Money in Circulation in Austria-Hungary, 1819-1868 Austrian D e m a n d for Hungarian Wheat, 1831-1850 Austrian Demand for Hungarian Rye, 1831-1850 World Demand for Austro-Hungarian Wheat, 1831-1850 Austrian Industrial Production in 1913 prices, 1776-1850 Steam Engines in Austria-Hungary, 1828-1863 Austro-Hungarian Imports of Producers' Goods, 1831-1850 Hungarian Production and Exports of Pig Iron, 1830-1854 Flour Production in Budapest, 1866-1913 Hungarian Government Expenditures and Investments, 1869-1913

66 69 70 71 73 76 80 87 88 89 93 105 106 117 140 153

x : Figures 4.4 4.5

4.6

Nominal M o n e y Balances of the Public in Austria-Hungary, 1867-1913 Nominal V a l u e of Total Hungarian Government Securities Issued and Those Held Abroad,1868-1913 Yield on Hungarian and Austrian Gold Bonds, 1881-1900

165

176 178

List of Tables

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13

2.14 2.15 2.16

Grain Production in Five Hungarian Counties, 1769 and 1844 Grain Production in Hungary and Croatia, 1789 and 1841 Grain Production in Transylvania and the Military Frontier, 1841 Grain Production in Hungary, 1868-1870 Grain Production in Austria, 1789, 1841, and 1869 Growth Rates of Grain Production in Hungary and Austria, 1789-1913 Per C a p i t a Annual Consumption of Grain in Hungary, 1789-1870 H u m a n Consumption of Grain in Hungary Estimated Hungarian Grain Exports, 1851-1866 Hungarian Agricultural Exports, 1831-1875 Hungarian Grain and Flour Exports, 1831-1873 R a t e of Growth of Hungarian Grain and Flour Exports, 1831-1873 Indexes of Wheat Prices, Wages, Paper Money in Circulation, and the Consumer Price Index, 1840-1911 Numbers of Sheep and Lambs in Hungary, 1851-1911 Quantity of Wool Sold at the Wool Markets of Pest, 1847-1872 Quality of Distribution of Wool Traded at Pest, 1853-1872

54 55 55 57 58 59 60 61 62 75 75 77

79 82 83 84

xii : Tables 2.17 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13

4.14 4.15

T h e Habsburg Monarchy's Balance of T r a d e in Grain and Flour, 1831-1859 Cotton Yarn Production in Bunzlau County of Bohemia, 1798-1824 Growth of the Iron, Cotton, and Woolen Textile Industries in Austria prior to 1850 Austrian Textile Exports to Hungary, 1823-1827 Estimated Growth of Austrian Industrial Production, 1780-1830 Industrial Production in Austria, 1776-1830 Hungarian Iron Exports to Moravia and Galicia, 1841-1850 Austrian and Hungarian Exports of Manufactured Goods, 1841-1850 Industrial Labor Force in Hungary, 1857-1900 Growth Rates of the Hungarian Ferrous Metal Industry, 1830-1913 Development of Hungary's Exports, 1844-1882 Selected Exports of Hungary, 1868-1882 Structure of Hungary's Manufactured Exports, 1868-1883 Growth of Pig Iron Production and Consumption in Hungary, 1819-1913 Hungarian Textile Exports by Destination, 1882 Structure of Hungary's Imports, 1844-1873 Sales of Leading Firms of the Hungarian Machine Industry, 1873-1896 Estimated Capacity of Hungarian Flour Mills, 1894 Distribution of Flour Mills in Hungary b y Power Source, 1863, 1906 and Quantity of Wheat Input, 1906 Hungarian Imports of Wheat (from Romania) and Exports of Flour, 1873-1886 Germany's Imports of Flour, 1872-1888

85 98 99 102 108 no 115 118 119 119 120 121 122 123 124 125 128 !35

136 138 139

Tables : xiii 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28

4.29 4.30 4.31 4.32 4.33 4.34

Annual Rate of Profit of the Flour Mills in Budapest, 1873-1906 Growth Rate of Flour Exports from Hungary, 1831-1913 Hungarian Export of Flour, 1831-1913 Hungarian Industrial Growth, 1830-1913 Austrian Industrial Growth, 1830-1913 Comparison of Hungarian and Austrian Industrial Growth Rates, 1861-1912 V a l u e of Social Overhead Capital in Hungary, 1872, 1878, 1896 V a l u e of Government Property, 1872, 1878, 1896 Annual Growth Rate of Government Expenditures and Revenues, 1878-1912 Hungary's Balance of T r a d e on Merchandise Account, 1882-1913 State Subsidies to Industry in Austria-Hungary, 1868-1909 Growth of Mining and Smelting in Hungary by Districts, 1868-1892 Distribution of Hungarian State Securities by Country of Ownership and Total Nominal V a l u e Outstanding in Austria-Hungary, 1868-1913 Advances Paid on Goods by the Creditanstalt Bank, 1857-1870 Distribution of Assets in Austrian Financial Institutions, 1872-1900 Comparison of the Yield on Austrian and Hungarian Government Securities, 1876-1900 Hungarian Stocks and Bonds Held outside of the Customs Union, 1892, 1901 Hungarian Securities Held outside of the Customs Union, 1892-1901 Financial Investment in Hungary, 1905-1913

141 142 143 145 146 147 148 149 150 151 155 160

164 168 172 174 181 182 183

Xiv

: Tables

4.35 4.36 4.37 4.38 4.39 4.40 4.41 4.42 4.43

4.44 A.I A. 2 A.3 A. 4 B .I

c.i C .2 C.3

Nominal Value of Austrian State Securities Outstanding, 1880-1901 Hungary's Net Barter Terms of Trade with Austria, 1882-1913 Estimate of Foreign Holdings of Selected Aus­ trian Obligations on Dec. 31, 1901 Foreign Holdings of Austrian Obligations on Dec. 31, 1901 and Estimated German Share Foreign Companies Operating in Austria, 1864-1903 Correlation between Austrian and Foreign Interest Rates, 1872-1900 Correlations among German, French, and English Interest Rates, 1872-1900 Correlation between Austrian and Foreign Interest Rates, 1886-1900 Correlation between Yield of Austrian Bonds Denominated in Gold and Yield on Foreign Securities, 1872-1900 Growth of Industrial Product in Selected Countries, 1870-1913 Hungarian Exports to Austria, Official and Market Values, 1841 Hungarian Imports from Austria, Official and Market Values, 1841 Austrian Demand for Hungarian Grain in the Early 1840s and in 1850 Average Austrian Price Elasticity of Demand for Hungarian Grain, 1840-1850 Output Elasticity of Land in Hungary, 1855 Financial Assets in Austria by Type of Finan­ cial Institution, 1872 Financial Assets in Austria by Type of Finan­ cial Institution, 1872-1913 Growth of Assets in Austria by Type of Finan­ cial Institution, and Estimated Growth of Nominal GNP

187 192 196 198 199 201 202 202

203 208 224 226 229 230 235 246 247

248

Tables : xv C.4 C.5 D.I D.2 D.3 D.4 D.5 D.6 D. 7 D.8 D.9 D.IO D.I 1 D . 12 E.I E.2 E-3 E.4 E.5 E.6 E. 7 E.8

Estimated Growth of Per Capita Output in Austria, 1872-1913 Estimated Growth of Real Per C a p i t a O u t p u t in Austria, 1873-1884 Hungarian Agricultural Production, 1870-1915 Hungarian Agricultural Production, 1870-1915 Index of Hungarian Agricultural Production, 1870-1915 Croatian Agricultural Production, 1885-1915 Croatian Agricultural Production, 1885-1915 Index of Croatian Agricultural Production,

249 250 256 258 260 262 263

1885-1915 Total Hungarian Agricultural Production, 1885-1915 Agricultural Production in Hungary, 1869-1915 Agricultural Production in Hungary,

264

1896-1915 Agricultural Production in Croatia, 1885-1915 Agricultural Production in Croatia, 1 8 9 6 - 1 9 1 5 Agricultural Production in Croatia, 1865-1868 " I n p u t - O u t p u t " Ratios for the AustroHungarian Ferrous Metal Industry, 1841-1909

272 274 278 280

Average Values Used from T a b l e E. 1 Prices of Commodities Produced in the Mining Sector, 1913 Indexes of Industrial Production in AustriaHungary, 1830-1913 Sectoral Breakdown of Hungary's Manufacturing Production, 1830-1913 Sectoral Breakdown of Austria's Manufacturing Production in 1913 Prices, 1830-1913 Alternate Index of Austrian Industrial Production, 1861-1913 Growth of the Hungarian Mining Sector, 1831-1913

283

265 266

282

289 291 296 300 304 304

xvi : Tables E.9 E. 10 e.i 1 E. 1 2 E. 13 e.i4 E. 1 5

Growth of the Austrian Mining Sector, 1819-1913 Mining Production in Hungary, 1830-1933 Mining Production in Austria, 1819-1868 Index of Mining Production in Austria, 1869-1913 Mining Production in Austria, 1869-1913 V a l u e Added in Railroad Construction and Repair in Austria-Hungary, 1837-1913 Monetary Aggregates in Austria-Hungary, 1867-1913

304 305 311 313 315 317 319

Preface

The present text is a thoroughly revised version of my doc­ toral dissertation defended at the University of Chicago in 1978. I began my researches in 1974. Slowly I came to the painful realization that much that had been written within the past decade on the Austro-Hungarian economy had misled me, even if in subtle ways, and that many of the con­ tentions that I had accepted were not borne out by the statis­ tical evidence. In 1975 I therefore scrapped what I had been doing until then and proceeded to strike out in what I consid­ ered to be a new direction. I began to deemphasize the im­ pact of the mid-century reforms on economic development and to seek causes for the dynamic pattern of development that were consistent with the data I had gathered. The following pages could not have been conceived with­ out the emotional and intellectual support of Karen, my partner in this rather bizarre journey through time and space. My advisors at the University of Chicago, the late Professor Arcadius Kahan and Professor Donald McCloskey, provided ample criticism, without which the insights ex­ pounded herein would surely not have been achieved. In ad­ dition, Professors Emile Karafiol, Bert Hoselitz, William McNeill, and Gilbert Ghez were interested in my work and could be counted on for support at crucial junctures of my intellectual development. Scholars, librarians, and archivists in the United States, in Austria, and in Hungary were sufficiently enthusiastic about my research to overstep often the usual boundaries of formal protocol. At the Institute fur Wirtschaft und Sozialgeschichte in Vienna Dr. Erno Deak and Dr. Roman Sandgruber be-

χυιιι : Preface

came my indispensable friends. The latter generously pro­ vided me with numerous statistical series he had collected but not published on various aspects of Austrian industrial­ ization. At the Austrian Fulbright commission Dr. Anton Porhansl assisted me by enabling me to acquire library privi­ leges at the Nationalbibliothek. The staff of the Finanz- und Hofkammerarchiv, headed by Dr. Walter Winkelbauer, worked hard to satisfy my often capricious wishes. Mr. Haase of the Austrian Statistical Institute was also helpful. In Hun­ gary the members of the Historical Institute of the Academy of Sciences, whose guest I was, received me not as a stranger but as a fellow enthusiast. It may be unfair to single out but a few of them, but Messrs. Gyorgy Ranki, Laszlo Katus, and Peter Hanak were invariably at my service. Dr. Oscar Sashegyi assisted me at the National Archive there. Special thanks are due to the staff of the Hungarian Statistical Insti­ tute's Library, who put up with me for many days. Dr. Dezso Danyi and Gyula Benda were particularly interested in my progress. Finally, the East European librarian of the Univer­ sity of Chicago, Mr. Vaclav Laska, assisted me whenever he could. Financial support was provided by a Fulbright Award, by the International Research and Exchanges Board, by the Austrian Ministerium fur Wissenschaft und Kultur, by the Authur J. May Memorial Award, and by a grant from the Mellon Foundation administered by the University of Chi­ cago. Once the thesis was written many scholars offered sugges­ tions and criticisms on various portions of it. Among these were Rondo Cameron, Ivan Berend, Herman Freudenberger, Ira Glazier, David Good, Nachum Gross, Arnost Klima, Franklin Mendels, Eduard Marz, Alan Milward, and Rich­ ard Roehl. Their concern is appreciated. Scott Eddie, Laszlo Katus, Richard Rudolph, and Gyorgy Ranki devoted consid­ erable effort to commenting on the final manuscript in detail. They helped me to clarify my arguments in many places. It should be obvious, however, that the ultimate responsibility

Preface : xix

for the ideas expressed in the present work rests with the au­ thor. The rewriting of the manuscript for publication was un­ dertaken at the urging of Professors Scott Eddie and Alan Milward. I am grateful for their encouragement. Finally, I am indebted to Dr. Paul Mageli for editorial as­ sistance on the final version of the manuscript, to Mrs. Linda Durham for undertaking the arduous task of typing it, and to the editors of Princeton University Press, particularly to Gail Fillon, for making the dream a reality. Chicago May 1982

The Habsburg Monarchy as a Customs Union

Introduction

The present study explores the development of the Habsburg economy in the nineteenth century. Major emphasis is placed on quantitative aspects of the interaction between the two halves of the Monarchy, Austria and Hungary.1 Since the dissolution of the Monarchy in 1918 there has not been any study that is dedicated to the economic history of the Monarchy over a considerable time span, rather than of one region or autonomous political unit of it.2 Even the one possible exception to this generalization, Oscar Jaszi's celebrated work of 1929,3 was only incidentally a history of the economy. This research orientation is perhaps the reason why the economic development of the Monarchy, but espe­ cially the interaction between the Hungarian and Austrian halves, remained obscured, even though the question of the economic viability of the Austro-Hungarian Monarchy was ' Unless otherwise noted, Austria shall denote all the lands repre­ sented in the parliament at Vienna after 1867, even though I use the term prior to the establishment of parliament. Therefore the Italian provinces have been excluded from the present discussion unless other­ wise specified. By Hungary is meant the Kingdom of the crown of St. Stephen, that is, including Croatia and Transylvania. 2 Alan Milward and S. B. Saul make this point in The Development of the Economies of Continental Europe, 18^0-igi^ (Cambridge: Harvard Uni­ versity Press, 1977), p. 329. Krisztina Fink's book is an obvious excep­ tion to this, but it does not offer any new insights into the problem of the coexistence of the Austrian and Hungarian economies. See her Die osterreichisch-ungarische Monarchie als Wirtschaftsgemeinschaft. Ein historischer Beitrag zu aktuellen Integrationsproblemen (Munich: Siiddosteuropa-Schriften, Vol. 9, 1968). 3 Oscar Jaszi, The Dissolution of the Habsburg Monarchy (Chicago: Uni­ versity of Chicago Press, 1929).

^ : Introduction

invariably posed by historians of all political persuasions. However, understanding the economic development of the region became well nigh impossible by merely attempting to understand some of its parts. The focus of the work, then, is the analysis of the relative benefits conferred by the existence of the Habsburg common market on its two major constituent parts. In order to make cogent generalizations in this regard I had to understand the dynamics of the two economies. That necessitated the con­ struction of indexes of agricultural and industrial production in order to delineate major phases of development. Once that was accomplished the pattern which emerged contradicted in the main the hitherto accepted notions of the dynamics of growth and their probable causes. In fact, it became clear that the inadequate understanding of the temporal develop­ ment of the two economies has hitherto considerably hin­ dered the analysis of the relationship between them. When, in the last decade of her reign (in 1775) Maria Theresa eliminated the tariff barriers between Bohemia, Moravia, and the Austrian lands, 4 that part of the Habsburg Monarchy became one of the largest areas of free trade in Eu­ rope. The Kingdom of Hungary, partly as a consequence of the nobility's unwillingness to submit to direct taxation, re­ mained outside of the customs union, and the crown contin­ ued to levy an import as well as an export tax on trade be­ tween the two halves of the Monarchy. Yet, throughout the first half of the nineteenth century, a preferential trade rela­ tionship existed between Austria and Hungary. Each partner paid a lower duty on goods originating in the other's territory than on those from an outside source. After the upheavals of 1848/49, this internal tariff barrier was seen as a hindrance to 4 The customs union was subsequently enlarged to include West Galicia (1783), East Galicia (1796), Lombardy and Venetia (1822), Tirol (1825), Vorarlberg (1826), Krakau (1847), Parma and Modena (1853-1857), Liechtenstein (1852), Bosnia-Herzegovina (1879), Dalmatia (1880), and Trieste (1891). The tariff barrier between Hungary and Transylvania was lifted in 1784.

Introduction : 5

the strengthening of the central institutions of the Monarchy and as an anachronistic vestige of mercantilism. Conse­ quently, at the urging of Minister of Commerce Karl von Bruck, it was lifted on October 1, 1850.5 The elimination of the internal tariff barrier was but one edict in the history of the modernizing central power whose major goal was the creation of a unified state. Though not of paramount importance, economic motives, too, were present. In post-Renaissance Europe, with the development of a commercial-monetized economy, demand for goods became more elastic, and the inefficiencies caused by the barriers to trade weighed more heavily on the respective economies. In France internal tariff reforms were undertaken by Colbert, contin­ ued by Turgot, and completed by the Revolution of 1789. In Russia, internal customs duties were abolished in 1753. Shortly after Waterloo, the German states, at Prussia's initia­ tive, began taking similar steps; these efforts culminated in the formation of the Zollverein in 1834. Besides the AustroHungarian case, the mid-century witnessed a further flurry of elimination of barriers to trade between semi-autonomous provinces. The frontier between Russia and the czar's Polish dominions, between the Zollverein and the Tax Union, be­ tween Denmark and the Duchies of Schleswig-Holstein and within the Swiss cantons were all eliminated.6 The "Habsburg customs union" remained intact even after the famous Compromise (Ausgleich) of 1867 between Franz Josef and the Hungarian dominant circles led by Ferenc Deak restored autonomy and parliamentary life to the Hungarian lands. Because the economic aspects of the compromise were renegotiated decennially the relationship between Austria and Hungary at times appeared less perma5 The tariff on cattle was eliminated as early as the summer of 1850 because of the high prices prevailing in Austria. On the other hand, the duties on salt, tobacco, and other commodities, on which a consump­ tion tax was levied, remained in effect until May 1, 1851. 6 W. O. Henderson, The Zollverein (Cambridge: The University Press, •939)> P- 229·

6 : Introduction

nent than it actually turned out to be. Although the attacks on the union from within were numerous, and at times formidable, it nonetheless survived. It finally took no less a conflagration than the Great War (1914-1918) and the revo­ lutions in its aftermath to abolish the free market in Central Europe. The consequences of the destruction of the common market for the splintered economies, one might add, were di­ sastrous. Assessments of the economic efficacy of the common mar­ ket have reflected the spectrum of East-Central European politics. Evaluations varied from utter condemnation of it as a colonial relationship to a mild praise of its benefits sprin­ kled with the caveat that it was, on the other hand, responsi­ ble for the lopsided development of Hungary's industry. Be­ fore World War I scholars usually referred to the reforms positively,7 although at times for the wrong reasons. Due to the erroneous supposition that production prior to 1850 had been stagnating, the incorrect conclusion was reached that the growth of exports in the 1850s was due, in large part, to the formation of the customs union.8 In the 1920s OscarJaszi argued that the customs union was "one of the most out­ standing centripetal forces" keeping the Monarchy intact. Yet he also contended that the forces were weakened to a large extent by the policy of the Hungarian landed oligarchy of raising the cost of living, thereby turning the masses against the customs union, and increasing the likelihood of the Monarchy's dissolution.9 In the 1950s Hungarian histori7 Rudolf Sieghart, Zolltrennung und Zolleinheit (Vienna: Manz'sche k.u.k. Hofverlag, 1915), p. 205. Louis Eisenmann, Le Compromis austrohongrois de 186j-etu.de sur Ie dualisme (1904; reprint ed. Hattiesburg, Miss.: Academic International, 1971), p. 665. 8 Elek Fenyes, Az ausztriai birodalom statisztikija es fildrajzi leirdsa (Pest, 1857), p. 151; Henrik Ditz, A Magyar Mezogazdasag (Pest, 1869), p. 290; Budapester Handels- und Gewerbekammer, Beitrage zur Geschichte der Preise ungarischer Landesproducte im neunzehnten Jahrhundert naeh den notirungen des Pester Marktes (Budapest, 1873), p. xxxiii. 9 Jaszi, Dissolution, pp. 185-212.

Introduction : y ans condemned the customs union outright for having re­ duced Hungary to colonial or half-colonial status, 10 a charac­ terization that had been the standard interpretation by eth­ nocentric historians as early as 1802. 11 After 1959, this view was tempered somewhat. The emphasis on Hungary as a col­ ony was discontinued but the pernicious effects of the mo­ nopolization of Hungary's extractive industry and transpor­ tation system by Austrian finance capital continued to be stressed. In addition, the infant-industry argument continued to be advanced in an effort to show that the customs union put the Hungarian economy at a disadvantage. 12 By the mid-1960s, a group of liberal-Marxist economic his­ torians (inter alia, Ivan Berend, Peter Hanak, Laszlo Katus, and Gyorgy Ranki), centered at the Hungarian Historical Institute, had begun to emphasize the positive aspects of the union as well as the negative ones. In a path-breaking article that was first published in the West, Peter Hanak praised the advantageous aspects of the international division of labor and concluded that Hungary's benefits from the union in the economic sphere were greater than her losses. 13 The con­ sensus has emerged among Hungarian economic historians that the enlarged market had offered more advantages than 10 Vilmos Sandor, A Tokes gazdasdg kibontakozasa MagyarorszAgon 1849-1900 (Budapest: Kossuth, 1958), p. 3; Vilmos Sandor, Nagyipari fejlodes Magyarorsz&gon, 1867-1900 (Budapest: Szikra, 1954), p. 15· " Jaszi, Dissolution, p. 186. Gregor Berzeviczy, Ungarns Industrie und Cornmerz (Weimar, 1802), p. 186. Henry Marczali, Hungary in the Eigh­ teenth Century (Cambridge: The University Press, 1910), p. 99. 12 Ivan Berend and Gyorgy Ranki, The Development of the Manufacturing Industry in Hungary (1900-1944) (Budapest: Akademiai Kiado, i960), pp.

»> 3 · 13 Peter Hanak, "Hungary in the Austro-Hungarian Monarchy: Preponderancy or Dependency?" Austrian History Yearbook 3 (1967): pt. I, pp. 260-302. It was published in Hungary four years later: Szazadoki no. 5, 1971, pp. 903, 931. For a discussion of how this consensus emerged see Peter Hanak, "Historizalas es Tortenetiseg a kiegyezes vitajaban," in Magyarorszag a Monarchiaban, Tanulmdnyok, ed. Peter Hanak (Buda­ pest: Gondolat, 1975), p. 194.

8 : Introduction

disadvantages for Hungary,14 a view that Austrian historians have also espoused.15 Nevertheless, the association with Aus­ tria is still faulted by Hungarian scholars for the overexten­ sion of the food-processing sector in Hungary and for the vir­ tual absence from Hungary of the industry associated most frequently with the industrial revolution: textile production. The price Hungary had to pay for the advantages of the common market, one Hungarian economic historian has as­ serted, was "the extraordinary backwardness of the textile in­ dustry."16 Such an argument assumes implicitly, without any substantiating evidence, that there were no other constraints, such as lack of skilled workers or the lack of capital accumu­ lation, on the development of the textile industry. It also overlooks the possibility that the low level of development of the textile industry was, in a sense, a benefit to Hungary: in­ stead of being forced to develop a textile industry for reasons of national pride, Hungary could concentrate on the produc­ tion of those goods in which it had a comparative advantage. Since Hungary's comparative advantage lay precisely in the area of food processing, industrialization could unfold most efficiently only if based on such products as flour. Any other 14 Peter Hanak, "Economics, Society and Socio-political Thought in Hungary during the Age of Capitalism," Austrian History Yearbook 11

(i975):"3· 15 Sieghart, Zolltrennung, p. 200. H. C. Siegfried Strakosch, Die Grundtagen der Agrarwirtschaft in Osterreich (Vienna: F. Tempsky, 1916), p. 374. Herbert Matis, Osterretehs Wirtschaft, 1848-igi3 (Berlin: Duncker u. Humblot, 1972), p. 403 16 Laszlo Katus, "Economic Growth in Hungary during the Age of Dualism 1867-1913, A Quantitative Analysis," Social-Economic Re­ searches on the History of East-Central Europe, ed. E. Pemlenyi (Budapest: Adademiai Kiado, 1970), p. 77. Gyorgy Tolnai is a vocal advocate of the view that, by destroying the nascent textile industry in the 1850s, Austria prevented the formation of capital in Hungary and thereby re­ duced it to a colony. He seems to believe that there is but "one road to capital accumulation," but he fails to show an actual decline in peasant domestic textile industry after 1850, mainly because data are not ex­ tant. See his A paraszti szovo-fonoipar es a textilmanufaktura Magyarorszagon {1840-1849). (Budapest Akademiai Kiado, 1964).

Introduction : g

policy would have imposed costs that are disregarded by the advocates of more "balanced" industrialization. By the late nineteenth century, when Hungarian industri­ alization went into full swing, economic development in Eu­ rope was usually characterized, not by further expansion of the textile industry, but by the growth of heavy industries such as machine-building or by the incorporation of new technologies such as electricity; these served as the technolog­ ical equivalent of the textile industry, insofar as they were the major source of capital accumulation in that epoch. In Hun­ gary, however, special conditions prevailed: ample sources of raw materials favored the growth of the food-processing in­ dustry. Yet, along with the food industries, Hungarians de­ veloped the electrical engineering and ferrous metals indus­ tries as well. These were industries in which profits were to be had. The textile industries of Europe, on the other hand, were extremely competitive as early as the mid-century; by the 1870s, they were no longer particulary profitable. Developing a textile industry during the second half of the century would, therefore, not have served Hungary as a meaningful source of capital accumulation. Hence, emphasizing the lag­ gard development of the textile sector serves only to obfus­ cate the main issue in Hungary's industrialization. This monograph begins with an analysis of the so-called static effects of the creation of the customs union in 1850. The evidence implies that, although the pre-1850 constraint on trade was indeed a nuisance, it was not a major hindrance to modernization. In fact, in both economies the rhythm of development after the post-Napoleonic depression can only be characterized as distinctly modern. That is to say, the "nineteenth century" began in 1825 and not in 1850. My calculations indicate that the gains accruing to Hun­ gary in consequence of the establishment of free trade were small, amounting to a percent and a half of gross national product. This was a "once and for all" gain, in the sense that it caused a single upward shift in the growth of output rather

ίο : Introduction

than an acceleration that would have continued indefinitely. Since the tariff between Austria and Hungary was a small percentage of the price of exchanged commodities, a finding of this order of magnitude is plausible. Of course, the dependence of the two economies on each other increased over time: in 1913, Hungary exported 20 percent of its GNP to Austria. It is difficult, however, to pro­ pose the proper counterfactual that would measure the eco­ nomic significance of the customs union in 1913 in the same way as we have done for the year 1850. The reason is that we would have to make a guess at the duties that would have prevailed between the two countries in the absence of the common market. If they had not been significantly larger than the duties that existed during the early part of the twentieth century vis-a-vis the outside world, it is doubtful that Hungary, with her inherent locational advantages, would have lost a large share of the Austrian market for her agricultural products. The importance of the common mar­ ket, as far as commodity trade is concerned, is unlikely to have increased greatly after mid-century. Although the long-range effects of the establishment of free trade cannot be determined with precision, there is plentiful evidence for the view that the immediate effects of the aboli­ tion of the customs barrier were quite small. The absence of significant changes in the pattern or rate of growth of Hun­ gary's foreign trade after the elimination of the tariff barrier supports this assertion. Austrian industrial growth was also well under way by mid-century, and failed to respond notice­ ably to the creation of the common market, either qualita­ tively or quantitatively. This is corroborating evidence that the gains to Austrian industry from free trade with Hungary were not substantial. Further research and analysis reveal that not even that other major reform of the period, the emancipation of the peasantry, was of sufficient economic significance to induce a boom in Hungarian agricultural production in the 1850s or 1860s. This is an important finding, since hitherto these dec-

Introduction : /1

ades have been counted among the halcyon days of Hungar­ ian agriculture.17 The legal reforms of 1848 are invariably seen by historians of the Austro-Hungarian Monarchy as epoch-making achievements that enabled the economy to shed the con­ straints imposed upon it by the remnants of the feudal order. We are told that after 1850 the agricultural sector could be rationalized, while at the same time the disappearance of precapitalist economic formations freed the manufacturing sector from the shackles which had been imposed on its de­ velopment. We are even led to believe that "1848 ushered in a new epoch"18 or that the mid-century reforms were "fol­ lowed by a phase of increased economic activity."19 So emi­ nently plausible and so much in congruence with common sense have these assertions appeared that they have been taken for granted by most scholars. My researches on the economy of the Monarchy, however, have found no evidence to substantiate the above notion. The mid-century reforms cannot be viewed as a watershed in the development of either sector of the economy. Of course, agriculture did eventually begin to register con­ siderable gains in the late 1870s. It is difficult to ascribe this development, however, to events separated from it by three decades, in the absence of any plausible mechanism that would work itself out, so to speak, after such a long lag. This is particularly true because of the existence of more proxi­ mate causes: the influx of Austrian capital and the substan'7Gyorgy Szabad, "Az onkenyuralom kora (1849-1867)," in Magyarorszdg Tortenete (Budapest: Akademiai Kiado, 1979), vol. VI, pt. !> P- 556. 1 Ferdinand Tremel, Wirtsckaft- und Sozialgeschichte Ostenetchs (Vienna: Franz Deuticke, 1969), p. 319. 19 Herbert Matis and Karl Buchinger, "Osterreichs Industrielle En­ twicklung," in Die Habsburgermonarchie 1848-1918, Vol. I: Die Wirtschaftliehe Entwicklung, ed. Alois Brusatti (Vienna: Der Osterreichischen Akademie der Wissenschaften, 1973), p. 118. Ivan T. Berend and Gyorgy Ranki, "Ungarns Wirtschaftliche Entwicklung, 1849-1918," in ibid, p. 462.

12 : Introduction tially increased demand for grain provided by the growth of the flour industry. In any event, the emancipation of the peasantry was by no means a precondition for the development of the agricultural sector. Ceteris paribus, the market would undoubtedly have re­ placed the lord-peasant relationship which had prevailed be­ fore 1850 by a more impersonal one, based on money rents. On the other hand, recent developments in many areas of Eastern Europe show that modernization is not incompatible with a social relationship in which the peasants are allowed to work a small plot of their own in exchange for the labor they provide to the collective. Is this not fundamentally the same principle of servile labor that prevailed prior to 1850? There has been an attempt to retain the significance of the mid-century reforms, in spite of the absence of a pronounced response from the agricultural sector, by arguing that the reason the reforms did not bear fruit was either the lack of capital or the rudimentary nature of the transportation net­ work.20 Such assertions, however, merely disguise the obvious implication of the argument, namely, that the binding con­ straint on agricultural development was not the servility of the peasants but other economic factors, altogether indepen­ dent of institutional considerations. In Chapter 2,1 examine the pattern of growth of the agri­ cultural sector in Austria and in Hungary. In spite of the paucity of the data and in spite of the rudimentary nature of the extant data, the quantitative indication is that the hith­ erto accepted periodization of Hungary's agricultural devel­ opment has been rather misleading. Hungarian agriculture prior to the revolution of 1848 has been traditionally seen as close to stagnating, except for the production of wool for the Austrian market.21 Even such a careful economic historian as 20 Harm-Hinrich Brandt, Der Osterreichische Neoabsolutismus: Staatsfinanzen und Politik 1848-1860 (Gottingen: Vandenhoeck und Ruprecht, 1978), 2:1006. 21 One scholar writes that "... the rate of growth of agricultural pro­ duction in Hungary between 1825 and 1847 . . . only kept pace with the growth of population, and production per capita did not rise." Katus, "Economic Growth," p. 51.

Introduction : 13

Laszlo Katus asserts that productivity per capita in the agri­ cultural sector did not rise in the Vormarz. Only after 1850, it has been argued, did modernization of Hungary's agricul­ tural sector commence. Gyorgy Szabad stresses the impor­ tance of the 1850s themselves, while Laszlo Katus thinks that the watershed was not reached until the 1860s. The analysis in Chapter 2 reveals, however, that subse­ quent to 1850 the rate of Hungarian agricultural develop­ ment did not differ quantitatively from that of the preceding epoch, although there was some substitution of bread grains for feed grains in production. Perhaps it was this pattern of substitution, coupled with the unusually good harvest of 1867 and 1868, that misled previous researchers, who as­ sumed that these symptoms were indicative of the overall de­ velopment of the agricultural sector. Yet, measured in con­ stant prices, the rate of growth of cereal production is estimated to have been the same before and after 1850. This result confirms the hypothesis that only relatively small gains (calculated in Chapter 1) accrued from the creation of the customs union and the emancipation of the peasantry. Rather than stressing the importance of the 1850 reforms to the development of Hungarian agriculture, I have identi­ fied the increased demand for grain by Austrian consumers after 1828 as the major determinant of the growth of Hun­ garian cereal production until 1877. This was the first signifi­ cant benefit to accrue to the Hungarian economy from its close ties to Austria. In fact, without the Austrian market, Hungarian grain production would have stagnated in per capita terms. Within the past dozen years a number of studies have been published on the pattern and timing of Austrian industrial­ ization. Many of them concentrated on the latter half of the nineteenth century in order to identify the beginning of the industrial revolution in Austria. In spite of considerable ef­ fort, no consensus has emerged except the generalization about the relatively gradual pace of industrial growth in Austria, a pattern to which Richard Rudolph has referred as "leisurely economic growth."

14 : Introduction

As far as the timing of this process is concerned, opinions vary. Nachum Gross, in his pioneering work on the subject, identified the period between 1865 and 1885 as perhaps'the most dynamic of the century.22 Subsequently, he shifted his emphasis slightly to the period 1851-1873, basing his conten­ tion on the growth of coal consumption.23 The Austrian eco­ nomic historian Eduard Marz stressed the upswing around the turn of the twentieth century,24 a view that was at one time supported by Richard Rudolph.25 More recently, how­ ever, Rudolph has emphasized the importance of the 1850s and 1860s.26 In short, practically every upswing of the busi­ ness cycle after 1850 is advocated as the most important pe­ riod in Austria's industrialization. In contradistinction to the above positions, David Good devoted considerable effort to developing the argument that industrialization proceeded, during the years between 1873 and 1913, at a more or less uniform rate, and that hence nei­ ther symptoms of a "take-off" nor those of a depression are detectable in that period.27 Arguing for an even more ex22 Nachum Gross, "Austrian Industrial Statistics, 1880/85 and 1911/13," Zeitschrift fur die Gesamte Staatswissensehafl 124 (Feb. 1968):64. 23 Nachum Gross, "Economic Growth and the Consumption of Coal in Austria and Hungary, 1831-1913," Journal of Economic History 31 (Dec. 1971):910. 24 Eduard Marz, Osterreichische Industrie- und Bankpolitik in der Zeit Franz Joseph I. Am Beispiel der k.k. priv. Osterreichischen Credit-Anstalt fiir Handel und Gewerbe (Vienna: Europa, 1968), p. 375. Idem, "Zur Genesis der Schumpeterschen Theorie der Wirtschaftlichen Entwicklung," in On Political Economy and Econometrics (Warsaw: Polish Scientific Publishers, 1956), P- 371· 2j Riehard Rudolph, "Austria, 1800-1914," in Banking and Economic Development. Some Lessons of History, ed. Rondo Cameron (Oxford: Ox­ ford University Press, 1972), p. 29. 26 Richard Rudolph, "The Pattern of Austrian Industrial Growth from the Eighteenth to the Early Twentieth Century," Austrian History Yearbook 11 (1975):17; idem, Banking and Industrialization in Austna-Hungary. The Role of Banks in the Industrialization of the Czech Crownlands, 1 873-19'4 (Cambridge: Cambridge University Press, 1976), p. 7. 27 David Good, "Stagnation and Take-Off in Austria 1873-1913," Economic History Review, 2nd ser. 27 (Feb. 1974):72-88. For an elabora­ tion and criticism of this work see Appendix B.

Introduction : /5

treme position, Alexander Gerschenkron, in his last but least satisfactory work, described an economy that experienced mainly "missed opportunities" and "false starts."28 Although in their analysis of industrial development these scholars concentrated their attention mainly on the second half of the century, they did allude to the significance of the years prior to 1850. Gross asserted that "the first period of modern economic growth in Austria extended from the late 1820s to the end of the 1840s."29 Rudolph, who constructed a quinquennial industrial production index reaching back to 1830, suggested that industrial growth had been well under way before the boom of the 1850s. Furthermore, he noted that "by the 1820s and 1830s the proto-industrial stage of manu­ facturing was to a certain degree superseded by one based on factory production and increased mechanization."30 More recently, Thomas Huertas emphasized the significance of growth in the 1840s and 1850s. 1 (For a more thorough analysis and critique of this literature see Appendix C.) In addition, a number of researchers who specialized in in­ dustrialization of the eighteenth and early nineteenth cen­ tury have advocated the importance of the pre-1850 era. In a quantitative study written more than thirty years ago, Jerome Blum asserted forthrightly that the "beginning of in­ dustrial development fell in the period between 1815 and 1848."32 Arnost Klima has suggested similarly that "during 28

Alexander Gerschenkron, The Economic Spurt That Failed (Princeton: Princeton University Press, 1977). 29 Nachum Gross, "Industrialization in Austria in the Nineteenth Century" (Ph.D. diss., University of California at Berkeley, 1966). 30 Rudolph, "Pattern of Austrian Industrial Growth," pp. 8, 17, 22; and idem, "Social Structure and the Beginning of Austrian Economic Growth," East-Central Europe 7 (1980):207. 31 Thomas F. Huertas, Economic Growth and Economic Policy in a Multin­ ational Setting: The Habsburg Monarchy, 1841-1865 (New York: Arno Press, '977). PP- 3ff32Jerome Blum, "Transportation and Industry in Austria, 1815-1848," Journal of Modern History 15 (1943):26. Johann Slokar stated in 1914 that the foundations of Austria's industry were laid dur­ ing the reign of Francis I, that is, between 1792 and 1835. According to him, a new period of development began in 1830. Johann Slokar, Ges-

16 : Introduction

the first half of the XIXth century . . . large-scale mechaniza­ tion was introduced . . . in the Bohemian and Moravian cot­ ton and woolen industries." 33 Though the significance of the pre- 1850 era is therefore vaguely acknowledged, the details have remained obscure. A systematic quantitative effort reaching back into the eigh­ teenth century has not been undertaken to document the rate and pattern of industrial development, as has been done for the latter half of the nineteenth century. Moreover, since scholars tend to specialize in either the early or the latter part of the century, a comparison of the rhythm of industrializa­ tion in the two periods has not been effectively made. The conviction has emerged, and continues to linger, that the two periods differed fundamentally. The upshot is an inadequate conceptualization of the origins of industrialization in Aus­ tria. Chapter 3 of the present study examines the growth of Austrian industry during this woefully unexplored first third of the nineteenth century, based on a time series of output, and advances the thesis that the Austrian-Bohemian lands entered the modern industrial phase of economic develop­ ment by 1825/1830. I do not conceptualize the beginning of intensive growth after 1825 terms of a "great spurt" or a "take-off into self-sustained growth" but as the first of many cyclical upswings in the nineteenth century which was not overtaken by a prolonged period of stagnation. Because of the paucity of relevant research, the strategic factors respon­ sible for the beginning of industrialization are not analyzed in detail; however, I do point out that the role of the Hun­ garian market was not indispensable to the growth of this sector. chichte der bsterreichischen Industrie und ihrer Forderung unter Kaiser Franz I. (Vienna: F. Temsky, 1914), pp. 105, 637. 33 Arnost Klima, "Industrial Growth and Entrepreneurship in the Early Stages of Industrialization in the Czech Lands," The Journal of Eu­ ropean Economic History 6 (Winter 1977):557.

Introduction : /7

The growth of Hungarian industry is analyzed in Chapter 4. We learn that the easy access to the Austrian capital mar­ ket was crucial to the beginning of industrialization in Hun­ gary in the late 1870s. Until recently the first upsurge of in­ dustrial activity in Hungary was believed to have occurred after 1867 and to have come to an abrupt halt in 1873 after the crash of the stock market, only to begin anew after 1887.34 From this pattern, especially from the upswing after 1867, scholars have generally concluded that the political consolidation that followed the compromise with Austria was a significant element in Hungary's industrialization. The pattern of economic development I discerned was at variance with this view. Although transportation and bank­ ing did expand considerably during the post-1867 upswing, the cyclical advance of the industrial sector was not conspicu­ ously more intense than during some of the previous booms experienced in Hungary.35 Might, however, at least the fi­ nancial and infrastructural boom be ascribed to the new po­ litical freedom in 1867? I seriously doubt it for several rea­ sons. For one thing a mechanism should be offered by which a plausible chain of causation would work from the polity to the economy. I have not yet seen such a suggestion. Secondly, the world economy experienced a boom contemporaneously with the Hungarian boom. It seems unlikely that Hungary would have been isolated from world economic development whatever political configuration was dominant since the business cycles in Hungary were invariably influenced by the world economy and in fact correlated highly with it. The worldwide infrastructural expansion of the 1850s, for in34 Katus,

"Economic Growth," pp. 55-58. might have been misled into believing that industrial performance was unusually strong in this period by the formation of a large number of corporations after 1867. This, however, cannot be in­ dicative of industrial production during the early stages of development in particular. The appearance of numerous large steam flour mills was also deceptive, as they were initially substitutes for flour mills conven­ tionally powered. 35 Researchers

18 : Introduction stance, certainly found its counterpart in Hungary even though it was governed at the time from Vienna by the "ab­ solutist" government. In short, I cannot discern a clear rela­ tionship between the political orientation of the regime gov­ erning Hungary and the pattern of development. On the other hand, the argument that regaining some de­ gree of autonomy in the political sphere eventually allowed the Hungarian government a certain flexibility in economic policy, and that this flexibility in economic policy had cer­ tain beneficial effects (even if these were not necessarily felt immediately), does have a certain appeal to me. In main­ taining an autonomous fiscal policy the government surely did have a profound impact on the economy, often, though not invariably, with very positive results. In adopting a pol­ icy of industrial promotion the government might also have accomplished results that would not have been of paramount importance to the central government in Vienna. However, the impact of these policies came much later than the 1867 upswing that followed the Ausgleich, but, I believe, was not caused by it. In contrast to the view that relegates the period between 1873 and 1887 to minor importance, the finding presented in Chapter 4 is that within a few years after the beginning of a depression in Austria in 1873 influx of foreign, predomi­ nantly Austrian capital into Hungary was channeled, through the purchase of government securities, into invest­ ments in the infrastructure, into increasing government ex­ penditures, and, through the purchase of large tracts of forest land from the great landlords, into agriculture. Without Austrian capital as a catalyst, the beginning of industrializa­ tion in Hungary would have been impossible in the 1870s because the rate of domestic accumulation was inadequate for the task. The simultaneous expansion of agricultural pro­ duction would have been equally impossible. Shortly after 1896 the advances of both industrial and agricultural pro­ duction practically came to a halt as a consequence of the re­ cession of Austrian capital. After nearly a decade of stagna­ tion the influx of new funds correlated well once again with

Introduction : ig

the acceleration in industrial production between 1906 and i9!3·

The business cycle in Hungary after 1867 followed gen­ erally the cycles evinced by Austria's industry with perhaps one or two year deviations at the peaks. Yet the intensities of the cycles were out of phase with one another. That is to say, those cycles in which industrial growth in Austria was above average, Hungary's was below average, and vice versa. The link in this reciprocating relationship was the flow of funds between the two halves of the Monarchy. This was over­ looked previously, perhaps because the periodicity of Hun­ gary's industrial growth had not been properly sketched. Thus, without the ties to Austria, Hungary's economic de­ velopment would have been slowed and considerably post­ poned. The advances of its industrial and agricultural sectors can be traced to the close relationship to the Austrian mar­ ket. Scott Eddie's analysis of the relative benefits conferred by the existence of the customs union in the late nineteenth and early twentieth century contrasts with the findings out­ lined above. His finding is that the tariff policy of the Mon­ archy altered the terms of trade between Austria and Hun­ gary in Austria's favor by increasing the domestic price of manufactured goods above the world price more than it in­ creased the domestic price of agricultural goods. He con­ cludes that 5 or 6 percent of the value of Hungary's exports was tantamount to a tax to Austria's benefit.36 This tax would, however, have been fully offset by the transfer of funds from Austria to Hungary. After all, the repudiation of the 1.6 billion Kronen debt outstanding in 1914 might be conceptualized as a refund to Hungary of the tax burden im­ posed by the tariff distortions in Austria's favor. While the inception of development in Hungary was due in no small part to the "Austrian connection," Austria, on the other hand, could probably have done as well without 36 Scott Eddie, "The Terms of Trade as a Tax on Agriculture: Hun­ gary's Trade with Austria, 1882-1913," TheJournal of Economic History 32 (Mar. 1972):1. Idem, "Cui Bono? Magyarorszag es a Dualista Monarchia Vedovampolitikaja," Tortenelmi Szemle 19 (1976):163.

20 : Introduction

Hungary. To be sure, its real sector benefited to some extent from the ready access to the Hungarian market. This is espe­ cially true for the cotton textile branch. During the early stages of its growth (in 1841), Austria exported as much as 30 percent of its cotton textile output (measured at market prices—see Table 3.3) to Hungary. To what extent this sector was of strategic importance to Austria's early growth remains to be explored. Yet the advantages offered by Hungary as an open market for Austrian industrial goods were largely coun­ terbalanced by the outflow of Austrian capital into Hungary, which accounted in part for the slow economic development in Austria during the two business cycles after 1873. This conclusion is not predicated on the assumption that all capital that went into Hungary would have been invested in industrial enterprises in Austria had the common market not existed. Presumably, however, more Austrian capital would have been invested at home, because opportunities for lucrative investment existed in Austria throughout the period of the common market. Such opportunities, I believe, would have been more likely to have been exploited had Austrian investors not enjoyed the easy option of placing their money in relatively risk-free Hungarian bonds. Friedrich Hertz has recognized that "Hungary derived greater profits from the economic union than any other part of the Empire." 37 In some sense this ought not be particularly surprising. A relatively backward economy has more to gain materially from a marriage with a more advanced one as long as the relationship is not predicated on coercion but on the free exchange of goods, services, factors of production, and ideas. 38 A smaller nation, too, has more to gain than a 37

Friedrich Hertz, The Economic Problem of the Danubian States (1947; reprint ed. New York: Howard Fertig, 1970), p. 52. 38 This ought not be construed as relegating the Prebisch thesis to an intellectual junkyard. My subjective evaluation of the potentialities of Hungarian industrial development, however, leaves no room for its ap­ plication in this context. Speculating further, I would guess that the thesis might have been applicable with some cogency to a hypothetical customs union formed, say, between Great Britain and Bohemia in the late eighteenth century.

Introduction : 21

larger one.39 So does a nation that already conducts a large share of its foreign trade with the partner country before the establishment of the customs union.40 On all these theoretical grounds Hungary stood to benefit more than Austria. Hence our contention is not particularly baffling. Yet the result may still be surprising to those who have become accustomed to the acerbic rhetoric of the "strong" Austria exploiting the economically weaker Hungary. The precarious economic predicament of the successor states after World War I should be a good indicator of the propitious effects of the Central European common market. Finally, one might state explicitly the obvious fact that no single study can at one sweep encompass all the multitudi­ nous facets of such a complex problem. Many important questions remain to be explored. Only those aspects of agri­ cultural and industrial development are treated that are per­ tinent to the question of the interrelationship between the Austrian and Hungarian economies. Several mechanisms of mutual influence in both the real and monetary sectors are posited, but many legitimate questions related to economic development remain untouched as a matter of course. The formation and composition of the industrial labor force, the acquisition of skill by the workers and the influx of skilled personnel, the problem of entrepreneurship, the geographic dispersion of the industrial sector, the problem of industrial concentration, the distribution of national income, and the 39 Mordechai E. Kreinin, "On the Dynamic Effect of a Customs Union,"Journal of Political Economy 72 (Apr. 1962):195. 40 R. G. Lipsey, "The Theory of Customs Unions: A General Sur­ vey," Economic Journal 70 (Sept. 1960):496-513. In 1845 78 percent of Hungary's foreign trade was with Austria while only 48 percent of Aus­ tria's foreign trade was with Hungary. On only one theoretical consideration does the Austro-Hungarian marriage appear less than desirable. The two economies were comple­ mentary rather than competitive, and according to Viner a customs union formed by competitive economies is more desirable since the gains are likely to be larger. Jacob Viner, The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950), p. 51. Bela Balassa, The Theory of Economic Integration 3rd ed. (London: Allen and Unwin, 1969), p. 32.

22 : Introduction

questions of tariff policy are only a few of the innumerable topics which await future researchers of the Habsburg econ­ omy. A similar list might be compiled for the agricultural sector. The service sector is largely outside the purview of the present study. The political and legal superstructure is men­ tioned only in passing. Their neglect was conscious, though the relationship between the polity and the economy is con­ tinually kept in mind. My conviction emerged, rightly or wrongly, that political events ultimately did not matter to long-run growth. This might be a bit of an exaggeration. Although I believe that the economic consequences of the tariff and of other gov­ ernment policies were, on the whole, less than profound, surely their marginal effects might be discernible. Of course, political events could easily have had short-run implications for the cyclical behavior of the economy; however, I believe that the overall pattern of evolution of the economy cannot possibly be explained in terms of government policy. The reign of Francis I, for example, is usually depicted as a conservative one. He is said to have been rather adverse to economic development; yet the transformation of Austria's industrial structure began in earnest during his lifetime. He is alleged to have opposed vociferously the introduction of railroads; yet the first railroad (horsedrawn) was built during his reign and the first steam railroad was sanctioned just at the end of it. One does not gain the impression from studying the period that he held back single-handedly the march of progress in the Habsburg economy. In other words, one does not find businessmen clamoring to build railroads and being denied by the government the chance to do so. Rather, one should presume that these investments were made approxi­ mately when their undertaking began to make economic sense. In a different vein, a casual glance at the economic consequences of the various tariff policies that were adopted in the late nineteenth and early twentieth centuries does not leave the impression of an unambiguous correlation between them and the dynamics of economic development.

Introduction : 23

My studies have led me to conceptualize the performance of the economy in terms of the mechanisms of the impersonal market; indeed, the market seems to have had a logic and momentum of its own, one that warrants careful considera­ tion rather than wanton caricature. I therefore focused on market processes, in which millions of nameless autonomous agents interacted in such a way as to determine the most im­ portant parameters of development, i.e., the accumulation of human and physical capital, the fertility rate, the savings rate, and so forth. In short, I sought the driving forces of the economy, the so-called "engines of growth," not in govern­ ment policies but in the interaction of market forces. This notion is not really as counterintuitive as it seems at first glance. Although the governments in power were clearly authoritarian regimes they were not totalitarian, and they could not have been, given their limited tax base and the size of the bureaucracy capable of being sustained by that tax base. Given the relatively small bureaucratic apparatus at their disposal, they could not have manipulated the economy effectively. Most importantly, as long as domestic prices and wages were not dictated, the size of the distortions in the market, in spite of the remnants of feudal laws and customs, did not become debilitating. In other words, even though the market might not have been particularly well developed, it adjusted to relative prices of goods and factors sufficiently to leave few opportunities for the government to act on the economy's behalf. Of course, all of these issues need to be explored further. We surely need to know much more about the economy of the Habsburg Monarchy, even though that state ultimately proved not to be politically viable. The people of the succes­ sor states, who have inherited its legacy and who still, in so many subtle ways, institutional and cultural, bear the im­ print of the ancien regime, need to know that, economically, that amorphous conglomerate of nationalities was viable in­ deed. No evidence seems to exist for an economic basis to the nationality conflicts that engulfed the common market in the

24 : Introduction

early twentieth century. To the scholarly community, the unfolding of economic development in the unique setting of the Habsburg common market is as legitimate a case study as any other; what happened after the First World War hardly matters to it. Hence I am convinced that the years of effort embodied in this manuscript of rather modest size could not have been better spent. That another decade could easily be expended in order to enlarge its scope goes without saying. Having it published now may be useful in order to inform those who may be interested in the current state of knowledge in this field and perhaps even to embolden others to join our ranks. For it is hoped that the limited scope of the present text will encourage rather than repel potential entrants into this area of scholarship. 4 ' 41 Note that in a multinational empire the choice of place names is by no means easy. I find designations in several languages tedious. Hence I used that name with which I happen to be most familiar. These are usually those that were used most frequently in the contemporary com­ mercial world. This is my way of saying that protocol does not really matter.

CHAPTER I

The Mid-Century Reforms

During and after the revolutions of 1848/49 in the Habsburg Monarchy many of the institutional structures that charac­ terized the socio-economic environment either crumbled or were modernized by a reform-minded parliament or bureau­ cracy. Two major economic reforms are worthy of careful scrutiny: the emancipation of the peasantry and the elimina­ tion of the internal customs boundary between Austria and Hungary. In Hungary the April laws of 1848 and their im­ plementing directives, which survived, though not fully in­ tact, the demise of the revolution, freed the market in land and labor. But not until 1853 did the Austrian "neo-absolutist" government actually acknowledge legally the emanci­ pation acts in both halves of the Monarchy, and in a number of other ways economic reform was forestalled. The guild system was not abolished until the end of the decade. The protectionist tariff policy vis-a-vis the outside world was kept largely intact in spite of the adoption of new tariffs in 1851 and 1853, the latter in anticipation of moving closer to the tariffs of the Zollverein. A number of other institutional changes came into force, for instance in the realm of tax pol­ icy, but one expects that the two reforms with the largest eco­ nomic impact were the two mentioned above. Hence they are analyzed here from the point of view of the economic gains that were obtained in consequence of their adoption. Historians of East-Central Europe invariably stress some version of the idea that these reforms were in fact precondi­ tions to capitalist development. I found this notion to be an exaggeration: the calculations show that the impact of these reforms was not on the order of magnitude to have spurred

26 : Establishment of the Customs Union development and growth considerably. In fact, in the subse­ quent two chapters I take on this contention with even greater determination and show that the performance of the economy prior to the mid-century reforms is indistinguish­ able from the performance that obtained thereafter. In any event, since capitalist economic development preceded the reforms it is difficult to see in what sense the reforms can be conceived as preconditions to capitalist development. After all, even prior to 1850 there was already considerable mobil­ ity of labor, and the evidence seems to indicate that the mar­ ket was able to adjust to the system of property rights that prevailed. Hence I believe that the economy would have performed only marginally worse had the reforms not been enacted at mid-century. Of course the inefficiencies that would have prevailed would have been irritants, but the capitalist econ­ omy, as has been demonstrated by the events of the last two centuries, is quite flexible in adjusting to imperfections and frictions in the marketplace. To be convinced of this all one has to do is consider the number of nonmarket elements that have been introduced into our own economic life: the rise of giant unions that have put perhaps greater impositions on the labor market than the feudal labor obligations of the first half of the nineteenth century, the oligopolistic market struc­ tures that have evolved, and even the social legislation that has been enacted in this century. Of course, this is not to say that the old system would have necessarily continued intact into the twentieth century had the peasant emanicipation laws not been enacted. With the spread of commercialized agriculture the labor obligations would probably have been changed into money payments eventually. The point that should be stressed is that rather than seeing the emancipation as a precondition to capitalist development I would argue that capitalist development itself sooner or later would have rendered the institution of robot as a means of payment of rent for land a cumbersome mecha­ nism, and, as with any other barter transaction rendered ob-

Establishment of the Customs Union : 27

solete, would have superseded it with a more efficient form of payment. That this change happened to have occurred in Austria-Hungary in the wake of a violent upheaval, which cost perhaps 100,000 lives as part of the first major land re­ form in the Monarchy, is in my opinion a historical happen­ stance rather than an outcome of historical necessity. ESTABLISHMENT OF THE CUSTOMS UNION BETWEEN AUSTRIAAND HUNGARYIN 1850

When, on the morning of the 26th of July 1839, Georg Lukavics began the journey from Rindlingsdorf, in Western Hun­ gary, into Styria with 840 kilograms of old iron, he surely did not suspect that his journey would become a historical exam­ ple of the consequences of barriers to free trade. Upon reach­ ing the border, the forty-year-old tenant on land that be­ longed to a blacksmith declared that his goods, valued at about six florins, were being taken into Styria only for resmelting into iron bars and hence would legally be exempt from paying tax upon entering or leaving the province. In the afternoon of the same day, however, when he attempted to cross back into Hungary with 670 kilograms of iron bars, he was detained for having given false information to the in­ spectors. His old-iron shipment had not been in fact trans­ formed, but had been exchanged for some iron bars! Unless he had paid a tax of about 0.8 florins "His Majesty's treasury would be defrauded." Lukavics argued that the chief inspec­ tor had told him that the length of time required to resmelt the old iron was immaterial as long as it was returned to Hungary within a month. However, the conversion of the old iron into iron bars was not synonymous with the exchange of the former for some other finished iron bars. Six months later Lukavics was found guilty and was fined about eight times the value of the tax he had perhaps inadvertently attempted to evade. With an additional florin to cover the legal ex­ penses his fine totaled 7.25 florins, which was at least a month's wage. The iron bars remained in the custody of the

28 : Establishment of the Customs Union

state until the fine was paid. Lukavics did not believe that justice had been served and appealed to Emperor Ferdinand. The Emperor reviewed appeals regularly and usually lowered the fine, but by the time he came to Lukavics's case nine years later the revolution was in progress and it was set aside, never to be resolved, in April 1848.1 Whether Lukavics made similar trips in the 1840s is questionable. Presumably the legal framework was detrimental to him, his two chil­ dren, and to a small extent, even the economic development of the region. In essence, the main question posed in this chapter is how many Georg Lukavicses there were in the Habsburg Monarchy of the Vormarz, and how they were likely to have responded to the elimination of the tax on trade across the Leitha River. In existence since the Middle Ages, the tariff wall separat­ ing the lands of the Hungarian crown from those of Austria had been a center of controversy for decades prior to its aboli­ tion on October 1, 1850. The mercantilistic policy of using tariffs as instruments to regulate commerce was adopted by Karl VI in the early part of the eighteenth century.2 Before him tariffs had been perceived primarily as a means of pro­ ducing income for the treasury. He divided the Monarchy into zones of trade, which made it easier to trade within any one province and between Lower and Upper Austria. In Hungary he created autonomous trade zones within the Kingdom such as the Banat, Croatia-Slavonia, and Serbia (between 1719 and 1739) in addition to Transylvania. In the 1750s his daughter, Maria Theresa, began to rationalize the customs legislation by codifying it.3 She allowed Austrian manufacturers easier access to the Hungarian market while making it more difficult for Hungarian raw materials and cattle to cross the frontiers of the Monarchy to the world at ' Hofkammer Archiv, Vienna, Bancale Acten (hereafter referred to as H.A.B.) 11/4-573 ex April 1848. 2 Karl Hudaczek, Osterreichische Handelspolitik in Vormarz 1813-1848 (Vienna: Carl Konegen 1918), p. 1. 3

Vectigal des Konigreiches Hungarn und der dazu angehorigen Lander.

(Vienna, 1754)

Establishment of the Customs Union : 2g

large.4 By this codification the structure of the trade relation­ ship between Austria and Hungary was pretty much deter­ mined for the century to come. Some have referred to the relationship pejoratively as the means by which the Austrian court reduced Hungary to colo­ nial status.5 Such critics fail to remember an important his­ torical lesson: some colonies have fared well under the pro­ tective wing of another country.6 One ought also not disregard the sensitivity of the Austrian court to the needs of Hungarian agriculture.7 By such acts as the importation of merino sheep from Spain, Maria Theresa did much to ad­ vance the agricultural sector. Yet a modern account and as­ sessment of the development of the Hungarian economy in that period is yet to be written. In 1775, in Colbertian fashion, Maria Theresa created the Cisleithanian common market, leaving only some port cities, the mountainous province of Tirol, the Italian Kingdoms, and various other regions, such as Eger and Pilsen in Bohe­ mia, temporarily outside of it. In Hungary, too, the internal custom tolls were eliminated during the reign of her son, Joseph II (1780-1790), a practitioner par excellence of a central European version of enlightened despotism. In the Zollpatent of 1784, he declared foreign manufacturers to be prohibited from entering the Monarchy in the course of regu­ lar trade. In 1786 he took his commercial policy to its logical conclusion by eliminating all tariffs on Austrian exports to Hungary. Hungarian exports to Austria were still taxed, though the structure of the 1754 code was modified in this 4 Rudolf Sieghart, Zolltrennung und Zolleinheit (Vienna: Manz'sche k u.k. Hofverlag, 1915), p. 233. 5 Jan Novotny, "Zur Problematic des Beginns der Industriellen Rev­ olution in der Slowakei," Historica 4 (1962) :133. 6 Lance E. Davis and Robert A. Huttenback, "In Search of the His­ torical Imperialisl "Journal of Economic History 42 (June 1982):2. Warner Baer, "Puerto Rico: An Evaluation of a Successful Development Pro­ gram," Quarterly Journal of Economics (Nov. 1959):645-71. 7 Sieghart, Zolltrennung, p. 233.

jo : Establishment of the Customs Union

respect as well. Yet, Joseph's commercial policy, like many of his other attempts at reform, proved to be short-lived. In 1793, only three years after his death, the Hungarian Diet prevailed on the court, and from 1795 onwards the Austrian exports to Hungary were once again subjected to tariffs.8 The system would remain in force, with minor modifications, until 1850. Each partner levied an export as well as an import tax on goods exchanged with the other. These were preferential tar­ iffs, to be sure. Goods of Hungarian origin paid half of the amount levied on foreign goods. Some goods were entirely prohibited from entering the Monarchy from outside except by license, and not for resale. If such goods were of Hungar­ ian origin, they paid a 1 ο percent tariff. The Austrian export tax to Hungary was the same as its export tax to foreign parts, which in turn was equal to the Hungarian export tax to Austria. Live animals were an exception to this, since Hungarian exports to Austria were taxed (according to the tariff of 1788) at a higher price than Austrian exports to the outside world. As a result of this rather complicated system, Hungary received most-favored-nation treatment even be­ fore 1850; this paved the way for the eventual formation of the common market. To be sure, for the most important Hungarian products this advantage does not appear to have been particularly important. Hungarian oxen paid a total of 3.5 fl. tax on crossing the Austro-Hungarian border, whereas Bavarian oxen paid 4 fl. upon entering the Monarchy. Hun­ garian wheat in the 1830s and 1840s paid 7.5 percent tax as compared with 10 percent for foreign wheat at official prices. This was not an exceptionally great advantage, and earlier even such a small privilege as this had not been reserved for 8 Imre Sule, "Die Zwischenzollinie in der Wirtschaftspolitischen Vorstellungswelt der Wiener Hofstellan und in der offentlichen Meinung Ungarns" (Ph.D. diss., Leopold-Franzens- Universitat, Innsbruck, 1966). Sieghart, Zolltrennung, pp. 8, 27, 173. Hofkammer Archiv, Vienna, Hofrechenkammer Aeten Hofrechenkammer C38-1112.

Establishment of the Customs Union : 31

Hungary.9 All wool was allowed to enter Austria practically duty free; hence Hungarian wool producers, like Hungarian grain growers, were left without any real protection against foreign competition. Of course, the wool producers did enjoy a more advantagous position than Hungarian grain growers, since they could enter the Austrian market freely.10 Needless to say, a price had to be paid for even the small degree of preferential treatment enjoyed by Hungarian pro­ ducers. The quid pro quo was that Austrian manufactured goods paid only 3.5 percent upon entering Hungary. This was not much of a protection, although Austrian producers often argued the opposite. Wholesaler Joseph Boscovitz, for instance, complained to the Hofkammer that some cotton textile goods paid as much as 20 percent tariff upon entering Hungary.11 Such instances seem, however, to have been the exception rather than the rule. In assessing the relatively unprotected nature of the Hun­ garian industrial sector vis-a-vis Austria, one ought also to notice that Austrian products were often more expensive than their foreign counterparts; so the absence of a formida­ ble tariff wall was less ruinous to Hungarian industry than it might have been, had Hungary had to face foreign competi9 Allgemeine Zollordnung nebst den Zolltariffen fir die bohmische, galizische, u. osterreichischen Erblander vom Jahre 1788 (Vienna, 1788). Allgemeine Ein und Ausfuhr Zoll-Tarifffiir die k.k. osterreichischen Staaten (Vienna, 1829). Janos Belitzky, A Magyar gabonakivitel tortenete 1860-ig (Budapest: n.p. 1932), p. 137. Sieghart, Zolltrennung, p. 36. 10 As far as the economy was concerned this could have been a mixed blessing if the tax policy had induced wool production at the expense of grain output. R. G. Lipsey and Kelvin Lancaster, "The General Theory of Second Best," Review of Economic Studies 24 (1956/57): 13, The fact, however, that wool production continued unabated in the 1850s after the disappearance of this advantage meant that this effect was probably insignificant. '' Finanz Archiv, Vienna, Prasidial Acten (hereafter referred to as FA/PP) i486 ex 1845. For three anonymous letters addressed to Kiibeck, the president of the Hofkammer, stating the same case, see FA/PP 399 ex 1845. The response was terse: "Keine gebrauch geignet," that is, "useless."

J2 : Establishment of the Customs Union

tion under the same conditions. This was particularly true for cotton textiles, Hungary's most significant import from Aus­ tria. In the mid-1840s three-fifths of Hungary's total imports were textiles. Of these more than half, or 19 million florins worth, were cottons. In contrast, Austria exported only one million florins worth of cotton textiles (1.2 percent of its total exports) outside of the Monarchy. This indicates that the prices that prevailed in Austria for most types of cottons were above the level of world prices. Supporting this notion is the relatively large quantity of cotton textiles shipped through the Monarchy (16 million florins), which paid not only higher transportation costs but also a transit duty. Had Aus­ trian producers been competitive in the world market, it seems that they would have been able to satisfy demand in places where they enjoyed a locational advantage. Since the price at which Austrians were able to sell cotton textiles to Hungary was well above world price and an indus­ try could still not develop in Hungary, there does not seem to have been much potential for the development of a cotton textile industry in early nineteenth-century Hungary. Cotton yarns and dyed woolen yarns could be exported tax free from Hungary to Austria; yet no activity developed in these goods, even though the tax on foreign yarn was huge and hand spinning of wool was able to compete with the more ad­ vanced technology well into the nineteenth century. In a similar vein, pig iron and wrought iron were prohib­ ited from being imported into the Monarchy, so that Hun­ garian goods falling into this category paid only 10 percent tax upon entering Austria. Yet Slovakian producers did not exploit this advantage until the demand for railroad rails in­ creased in Moravia and the tariff on pig iron was completely abolished in the early 1840s. That trade blossomed thereafter is an indication either that the potential for it had been la­ tent, or that upon evidence of this potential the executive branch decided to foster its development by eliminating the tariff. In the absence of a full-scale study on early nine­ teenth-century tariff structure in the Monarchy, no definitive

Establishment of the Customs Union : JJ

conclusions can be arrived at here. The point to stress is that Hungary enjoyed some privileges that paved the way for the eventual formation of the customs union in mid-century. Contemporaries often expressed concern that the tariff wall was restraining economic development, although opin­ ion tended to fluctuate widely through time. Agricultural in­ terests in Austria perceived the less taxed, hence less expen­ sive, Hungarian products as somewhat of a threat, while industrial interests were not yet sufficiently vocal to influence policy. The Hungarian Diet had been in favor of establishing free trade with Austria in the first decades of the nineteenth century; but by the 1840s, the increased nationalistic preoc­ cupations of the leadership, along with a concern for devel­ oping a national industry, induced them to make a volte-face on this subject. The tariff barrier came to be perceived as a means of defending national identity if not national survival itself. The pattern of political consolidation in Germany in the wake of the formation of the Zollverein was inimical to a rapprochement between Austria and Hungary at the time. The Diet actually agitated to reestablish its long-lost prerog­ ative of setting trade policy for the Kingdom.12 Early in the nineteenth century the court in Vienna had opposed a freer exchange of goods because the tariff revenue was the most important reliable source of income from the Hungarian provinces. In addition, the tax-exempt status of the nobility accounted partly for the lower price of Hungar­ ian agricultural products, and some accommodation was needed in this regard before the tolls could be dismantled on the Leitha River. The introduction in 1829 of a consumption tax on many food items imported into Austria further com­ plicated the situation, since these taxes would have had to have been levied in Hungary as well before a customs union could have even been contemplated. By the 1830s and 1840s, however, the Hofkammer had evinced an increased willingness to modernize the commer12 Mihaly Horvath, Huszonot Ev Magfarorszag Tortenelmebol 1823-tol 1848-ig (Pest, 1868), 2:453-56. Sieghart, Zolltrenung, p. 2.

34 ·' Establishment of the Customs Union

rial regime. Trade regulations were codified and the tariffs streamlined. The policy of liberalization also meant that many external tariffs were lowered and some prohibitive ones eliminated. The comprehensive tariff reforms of 1851 and 1853 were logical continuations of the development during the preceding two decades. After all, trade, intra-Empire as well as external, was increasing greatly in the 1830s and 1840s, and the hindrances to trade appeared more of a nui­ sance than they had previously. Besides, Austrian industry had already developed sufficiently to be able to withstand some foreign competition.13 After the privileges of the nobil­ ity had been abolished during the revolution of 1848, after the Hungarian political influence on Imperial decision­ making had been eliminated, and after the inauguration of the Austrian system of taxation into Hungary had become imminent, the internal customs tolls proved quite easy for the Austrian bureaucracy to dismantle. In the reformist atmo­ sphere of the early 1850s one can in retrospect surmise that there was hardly any alternative. Prior to 1850, the tax on goods crossing the frontier (pri­ marily agricultural products moving west and manufactured goods moving east) altered relative prices, thereby affecting consumer and producer decisions. Presumably, therefore, some people could have been made better off without making anyone else worse off by the lifting of the trade barrier. In order to assess the probable forgone income of the citizenry of the Austro-Hungarian Monarchy due to the misallocation of factors of production prior to 1850 caused by the legal con­ straints on trade, the height of the tariff barrier on the Leitha River has to be calculated first. Measuring the height of the tariff is problematical because the prices of goods in the statistics were officially determined, and in many instances diverged from market prices. The prices used in Austro-Hungarian trade with the world, pub13

Adolf Beer, Die osterreichische Handelspolitik im neunzehnten Jahrhundert

(Vienna, 1891),

pp.

5, 47, 196.

Establishment of the Customs Union : 35 lished annually in the Tafeln zur Statistik der osterreichischen Monarchie, were 1829 prices until 1839.14 Thereafter, with the beginning of the new publication, Ausweise uber den Handel von Osterreich,15 Hofsekretar Zellner and two assistants provision­ ally estimated new prices for foreign trade. These estimates, they themselves admitted, "left much to be desired,"16 al­ though they had brought about significant improvements in Austrian trade statistics.17 However, prices of manufactured goods continued to fall, and the prices of agricultural commodities, of course, fluc­ tuated from year to year. Since no effective adjustments were undertaken in the 1840s, the task devolves on the present au­ thor.18 Table A.l presents estimates of market prices of a rep14 Siegfried Becher, Statistische Uebersicht des Handels der osterreichischen Monarchic mit dem Auslande wahrend der Jahre i82g bis 1838 (Stuttgart and Tiibingen, 1841), p. 82. 15 Austria, k.k. Direction der administrativen Statistik, Ausweise uber den Handel von Oesterreich im Verkehr mil dem Ausland und Uber Zwischenverkehr von Ungam etc. (Vienna, 1840), p. vi. (Hereafter referred to as Ausweise iiber den Handel von Osterreich.) 16 FA/PP 5819 ex 1841. To be sure, the Austrian official prices were not as arbitrary as the ones used in Britain's trade statistics at the time, which were based on seventeenth-century prices. 17 Zellner calculated the prices by taking weighted averages of do­ mestic and foreign market prices in that year as well as in previous years for the most important goods. The result, therefore, left some 1829 prices intact, while the others were an unwieldy concoction of past and present prices in different markets of Europe, in which Zellner himself had limited faith. Zellner suggested that prices in the future ought to be differentiated according to the commodities' origin or destination, and that a perma­ nent price commission ought to be created similar to the ones that had existed in the 1780s and between 1808 and 1820 (it came into existence finally in 1877). He was optimistic that such a commission, with ade­ quate resources, would rectify the shortcomings of Austrian trade sta­ tistics. 18 When the statistics began to imply a trade deficit for the Mon­ archy's trade with the world (between 1842 and 1847 and in 1850), the statisticians reaffirmed that the prices were fictitious and suggested moreover that a small change of the price of only a number of items would bring the foreign trade almost into balance. Thus in 1847 they

j6 : Establishment of the Customs Union resentative sample of Hungarian exports to Austria. The in­ dication is that official prices were approximately 38 percent higher than actual market prices in Hungary. This is not sur­ prising, since no effort was expended to ascertain Hungarian prices separately from Austrian ones. 19 Agricultural exports from Hungary, excluding wool, which entered Austria practically duty free, were subjected to an average tax of 10.3 percent. 20 To this must be added another 0.3 percent due to the so-called nebengeHuhren: payments for customs handling such as sealing the shipments, weighing, and warehousing the goods destined for the other side of the border. Thus the cost of exporting agricultural products from Hungary to Austria was 10.6 percent. In addition, a wide array of transaction costs increased the cost of doing business across the customs boundary and, in effect, increased the tariff above its ad valorem rate. 21 There was a fee of about 2 kreuzer/centner, 22 for instance, for loadwould have decreased import prices by 3 percent and increased export prices by 9 percent as a closer aproximation of reality. Ausweise iiber den Handel von Osterreich, 1847, p. v. 19 The market prices of Hungary's most important commodities, sta­ ples such as grain, wool, and wine, have been meticulously recorded and are available on a weekly basis. The prices of other, more heteroge­ neous trade categories can be obtained to some extent from contempo­ rary reports. These prices are generally of lower quality than the prices of the staples, but nevertheless an improvement on the official price es­ timates. 20 This average is weighted by the value of commodities entering trade. This can lead to biased estimates of the level of protection, be­ cause the level of the tariff usually varies inversely with the quantities entering trade. However, the unweighted averages of tariffs in this in­ stance are practically identical. It is 10.4 percent. On related problems see Bela Balassa, The Theory of Economic Integration, 3rd ed. (London: Allen & Unwin, 1969), p. 45. 21 "These costs are often, in fact, more important than the duties themselves as hindrances to trade," according to Jacob Viner, The Cus­ toms Union Issue (New York: Carnegie Endowment for International Peace, 1950), p. 59. Balassa, Theory of Economic Integration, p. 66. 22 Finanz Archiv, Vienna, Commerz Acten 1831-1835, Fascicle 5, 1 7 1 4/45 ex i8 32·

Establishment of the Customs Union : 27

ing and unloading the wagons at the customs house. Knowl­ edge of the laws had to be acquired, and complicated cus­ toms procedures followed.23 Moreover, only main roads could be used to cross the border during the day,24 and only certain customs offices, ranked in four classifications, were authorized to receive specific goods, although the weights in question sometimes also made a difference.25 Lack of data prevents the calculation of the transaction costs, which would have been absent without the tariff wall, but contemporary reports suggest strongly that they were an important element restraining trade.26 Even without considering the incremen23 This was an incentive for the smuggler, as noted in Austria, April 22, 1850, p. 380. It also kept people out of the market. As early as the 1830s merchants were complaining that the complicated procedures were a restraint on trade and were calling for a simplification of these "time robbing procedures." Erhard Wisshaupt, "Die wirtschaftliche und sociale Lage in Osterreich von 1830-1930" (Ph.D. dissertation, University of Vienna, 1952), p. 157. 24 Zotl und Staats-Monopol Ordnung (Vienna, 1835), pp. 21, 32. 25 Carl Zeller, Allgemeiner Zolltanf fir die Ein- und Ausfuhr der Waaren in dem osterreichischen Kaiserstaate (Vienna, 1845), p. 13. 26 A representative of the Donau Dampfshiffahrt GeselIschaft com­ plained that it was not the "... small customs tax that hindered trade [between Austria and Hungary] but the hated customs procedures." FA/PP 14188 ex 1850. Procedures similar to the customs laws had to be observed when transporting textiles even within Austria. As late as 1857 the control (Commerzialwaren Stempels Ordnung) was still in effect on cotton textiles, which prompted the Silesian Chamber of Commerce to complain that complicated procedures cost a merchant going to Vienna or Briinn an extra day or two. The report continued: On the first day he must weigh the goods he intends to take to market, fill out the declarations, and by five o'clock in the after­ noon take them to the customs house in his own town where it must be unloaded, weighed again, and the necessary papers filled out. . . . The next day he goes to the market early, and arriving by nine or ten o'clock he must go to the authorities in question where his goods are again unloaded, weighed, and officially acknowledged. Then the market opens . . . when it ends in the evening it is already too late to return to the office of jurisdiction to have the goods weighed, which therefore has to wait till the third day, when the

j 8 : Establishment of the Customs Union

tal transaction costs due to the tariff barrier, Hungary's terms of trade were exacerbated further by an additional tax on imports from Austria. The tax on imports into Hungary raised the price of manufactured goods, driving a further wedge between the relative prices prevalent in Hungary and those prevalent in the rest of the world. As shown in Table A. 2, the average tax on Hungary's imports from Austria was 3.1 percent (2.8 + 0.3). Thus with free trade the relative prices of Hungarian agricultural exports would have been J 5-3 percent higher than the actual relative prices.27 Once the actual tariff is estimated the economic benefits that accrued to Hungary and to Austria can be estimated by the use of economic formulae given in Appendix A. The gist of the equations is that with the elimination of the trade bargoods are again taken to the authorities, unloaded, weighed, and finally expedited. When the businessman arrives in his home town in the afternoon he has to return to the customs office again in order to have his goods weighed before he can go home. Bencht der Handels und Gewerbe Kammerfur das Herzogthum Schlesien (Troppau, 1857), pp. 10, 11. A similar complaint was voiced by an iron pro­ ducers' guild in Styria in 1831. Exporting goods to Hungary, they had to unload their wares from their boat at the Austrian customs house. The office was supposed to be open until 4:30 in the afternoon but often closed earlier. Thus boats arriving at three or four o'clock had to wait till the next day to continue, only to be rechecked at the Hungarian station. The latter customs house was at a distance of half an hour from the Mur River. Thus the procedure required at least four hours at a considerable expense. The petition requested that the customs houses be opened till six o'clock, that the goods be weighed but once, that the Hungarian customs house be moved closer to the river, and that they be allowed to use their own helpers in loading and unloading at the station instead of having to pay "monopoly prices." Hofkammer Archiv, Vienna F.A. Commerz, Fascicle 5 (1831-1835) 1714/45 ex 1832. For complaints of the Bohemian and Galician guberniums see H.A.B. 3/1-6 ex May 1841. 27 Let P and P be the prices of agricultural and manufactured goods a b without and P' a , P' b with the tariff. Let PJP b = 1. Then P'JP' b = P a ( 1 — .106)//4(1 + .031) = .867 and the increase in the relative prices of agricultural goods after the elimination of the tariff barrier, that is, the actual tariff is given by·. 1 — .867/.867 = 153. Note that the tariff was low compared with the protectionist tariffs adopted later in the century.

Establishment of the Customs Union : 39

rier the price of agricultural goods should rise in Hungary and fall in Austria while the prices of industrial goods should fall in Hungary and rise in Austria. This should have reper­ cussions on both the decisions of consumers and those of pro­ ducers. Hungarian consumers should be better off because they had been forced by relative prices to consume more agricultural goods relative to industrial goods than would have been optimal for them given the prices that prevailed outside of the Monarchy. Austrian consumers should also have gained from the reform because they had been forced to deviate away from their optimal expenditures by having to consume more industrial goods relative to agricultural goods than they would otherwise have chosen. The gains that ac­ crued due to the reallocation of consumption toward the good that became relatively cheaper depends in part on the height of the tariffs, since that determined how much prices change after the formation of the customs union, the respon­ siveness of consumers to price changes, since that will deter­ mine what effect the price changes are likely to bring with themselves, and the size of the consumption expenditure on that good in the economy. At the same time there should be gains on the production side as well. These are obtained on account of the fact that the trading partners benefit by re­ allocating production to that sector in which they have com­ parative advantage. The extent of the gains depend again on the size of the tariff, the size of the market, and the elasticity of factors of production in responding to the new opportuni­ ties. Not only does one expect to find a migration of factors into the industry with the most comparative advantage, but presumably the total amount of factors offered to the econ­ omy should also increase on account of the fact that the re­ wards to these factors increased. In other words, workers will consume less leisure and households will save more than be­ fore because they have an added incentive to do so. On this basis the calculations in Appendix A show that the elimination of the customs barrier enabled the Hungarian economy to produce at most seven million florins more worth of goods and services than it did before 1850. Compared with

^ο : Establishment of the Customs Union

a gross national product at mid-century of perhaps 460 mil­ lion florins, this would have meant a net addition of 1V2 per­ cent to aggregate output, a rather minuscule amount. Aus­ tria's social savings was 8.1 million florins approximately, compared with a gross national product of about a billion florins: that is, less than 1 percent of aggregate output. One might note that the above mental experiment incor­ porates only the static effects of the creation of the customs union. In other words, the gains were calculated at the in­ stant of the elimination of the tariff barrier. For a full assess­ ment of the impact of the customs union on the respective economies the dynamic effects would also need to be consid­ ered. These include the lowering of average costs of produc­ tion, since the enlarged market intensified the division of labor and made economics of scale possible. The increased competition could have led to the adoption of more efficient technologies. Elimination of uncertainties associated with foreign trade and various externalities also must have con­ tributed, with some lapse of time, to material gains. 28 Because of the intractable nature of these economic phe­ nomena, it is all the more fortunate that the above estimates were upper bound ones. The calculations assume a perfectly elastic supply curve, of the customs union partner which overstates the true change in the nominal price as a conse­ quence of the removal of the tariff. With an upward sloping supply curve, the actual change in price depended on the re­ spective elasticities of supply and demand. 29 28 Mordachei E. Kreinin, "On the Dynamic Effects of a Customs Union ,"Journal of Political Economy 72 (Apr. 1962):193. R. G. Lipsey, "The Theory of Customs Unions: A General Survey," The Economic Journal 70 (Sept., 1960):496. 29 Although one would obviously expect the price of grain to increase in Hungary immediately after the announcement on September 19, 1850 that the internal tariffs would be abolished, this failed to material­ ize even at Moson, the large granary close to the Austrian border. Could merchants have anticipated that the tariff wall would crumble with sufficient certainty that they had adjusted their prices accordingly prior to the announcement, and long before the law actually came into effect on October 1st?

Establishment of the Customs Union : 41

Furthermore, the calculations disregard the possibility of trade diversion. Although it was probably not very impor­ tant, at least at mid-century, the possibility exists that some prices were not affected at all. Some imports previously ob­ tained from foreign parts could, after 1850, have been ob­ tained from Hungary at world prices. In that event there would have been no increase in consumer surplus, since con­ sumption would not have been affected.30 A final caveat is in order. The social savings accrued an­ nually but the gains had a single, once and for all impact on the rate of growth. Had the gains accrued to a specific group in society, or if they had all been diverted to capital forma­ tion, their significance would have increased. However, the social savings were distributed broadly and some of the gains might not have shown up in the GNP accounts at all, since they were nonpecuniary. Furthermore, the increases in real income would surely have been treated as any other rise in permanent income, that is, most of it would have been con­ sumed. Hence the rate of capital accumulation is not likely to have been affected, and on this account our approximations are reasonable. Yet the disregard of dynamic processes and the tentative nature of the static calculations themselves should caution the reader to accept the above estimates for illustrative purposes only. The conclusions of the subsequent chapters, however, increase our confidence in the results ex­ pounded above. For they demonstrate that the 1850s did not inaugurate a new era in the economic development of this region. Perhaps the least ambiguous indication that the above the­ sis is acceptable is that the tax on interregional trade was a fairly small percentage of the value of the commodities cross­ ing the Leitha River. Yet even this contention is subjective in a sense, because the tax appears small only relative to the tar30 For variations on this theme see D. D. Humphrey and C. E. Fer­ guson, "The Domestic and World Benefits of a Customs Union," Economia Internazionale 13 (Mar. i960): 2058". B. L. Bentick, "Estimating Trade Creation and Trade Diversion," The Economic Journal 73 (June

'963). PP- 219-25-

42 : Establishment of the Customs Union

iff structures that evolved in more modern times. Yet it still

might have been consequential relative to the productive forces of the economy. If the tariffs were such a small percentage of the value of traded goods, why did contemporaries invariably character­ ize them as a great burden and a formidable obstacle to trade and economic growth?31 No definitive answer to this puzzle can be provided now. The exaggeratedly jubilant reports im­ mediately after the establishment of free trade are less puz­ zling because of the effects of the press censorship in force at the time. The contrast between the exaggerated expectations of contemporaries and the far less spectacular picture re­ vealed by the above estimates as well as by the data to be presented below, is, nonetheless, a remarkable one. Shortly after the tariff on cattle was lifted, one newspaper asserted that the number of heads driven to Vienna had in­ creased overnight.32 If correct, this must have been a shortrun phenomenon, since the exports of livestock from Hun­ gary remained constant between the 1840s and the 1870s (Figure 2.6) Expectations were also high that grain exports from Hungary to Austria would increase. Farmers through­ out Austria, except those living in grain deficit areas, were concerned about a possible fall in agricultural prices.33 In Laibach, prices were reported to have fallen 20 percent after news of the reform had been received.34 The expected fall in grain prices was reported to have been realized after the trade barrier was lifted,35 although no quantitative evidence 31 This impression is gleaned even from accounts of travelers who must have formed their opinion through conversations during the course of their journeys. Miss Pardoe, Ungarn und seine Bewohner und Einrichtungen in dem Jahre 1839 and 1840 (Leipzig, 1842), 1:96. Hans Normann, Ungam das Reich, Land, und Volk; wie es ist (Leipzig, 1833) 2:197, as cited by Janos Belitzky, A Magyar gabonakivitel tortenete 1860-ig (Buda­ pest: n.p., 1932), p. 146. 32 Gazdasagi Lapok, July 3, 1850, p. 843. 33 Austria, October 2, 1850, p. 942. 34 Gazdasdgi Lapok, June 27, 1850, p. 815. 35Ibid., November 23, 1851, p. 1118, and January 4, 1852, p. 942.

Establishment of the Customs Union : 4.3

could be found to substantiate this view. The price of grain in the market of Pest simply did not respond.36 Austrian producers were also afraid of a fall in the price of wine.37 Wine truly was the highest taxed good Hungary had to offer, and its export was stagnating in the 1830s and 1840s. With the abolition of the tariff its export did begin to rise,38 although the effect was by no means immediate. Initially some disappointment was voiced in the newspapers due to the lack of response in the wine trade.39 Industrial interests in Austria initially voiced their ap­ proval of the lifting of the trade barrier.40 Within a few days after the commencement of free trade their members sug­ gested that an "astonishing quantity" of manufactured goods, primarily cotton textiles, were being expedited to Hungary.41 These accounts must have been due to deliveries having been held back in anticipation of free trade, because Austrian industry was not prospering in the fourth quarter of 1850; in fact, a mild recession was evident. The woolen tex­ tile manufacturers of Briinn and Vienna were complaining about the lack of buyers from both Italy and Hungary.4 Consequently, in Vienna alone 1,000 workers were allegedly idle.43 Even cotton textile inventories remained unaffected despite reports that trade across the Leitha remained "lively."44 Trade along the northeast border of Hungary with Galicia was quantitatively much smaller than the trade with the western provinces. Qualitatively the pattern also diverged somewhat from the general one: there, Hungarian wine and 36 The

average price in 1850 was not significantly different from the average prices of 1849 or 1851. Beitrdge zur geschichte der Preise. 37 Austria, October 2, 1850, p. 942. 38 Beitrage zur Geschichte der Preise, 1873, p. Ixx. 39 Austria, October 19, 1850, p. 1003. 40 Ibid., October i, 2, 1850, pp. 938, 942. 41 Ibid., October 4, 1850, p. 951. 42 Ibid., November 6, 10, 26, 1850, pp. 1063, 1108, 1131. 43 Ibid., November 5, 1850, p. 1059. 44Ibid., October 18, 1850, p. 999, November 6, 1850, p. 1063.

44 ·' Establishment of the Customs Union

iron products were exchanged for Galician linen. The amount of pig iron exported to Galicia increased subsequent to the elimination of the Austrian duty on that particular product in 1843. After 1850 exports of iron products were said to have grown even more. Reportedly almost all of East­ ern Galicia's iron needs were supplied from Hungary,45 and linen imports from Galicia increased proportionately.46 The linen looms in the villages of the Carpathian Mountains were said to have been fully occupied.47 Besides iron and linen, the trade with wine was also supposed to have increased, espe­ cially through Dukla.48 Thus along the northeast border the immediate response to the lifting of the trade barrier was de­ scribed even more favorably than the trade with Austria proper. Soon the newspaper reports dwindled. Occasionally, however, mention was made that the linen trade was not performing up to expectations.49 After the early 1850s the question of free trade between Austria and Hungary disappeared from the pages of the press. The absence of further newspaper reports might be construed to suggest that the feeling had emerged that the prospects of free trade had not been fully realized. Negative reports, after all, would probably not have found their way into the official press. The above calculations suggest that the economic relation­ ship between Austria and Hungary in the period after 1850 benefited both partners in the customs union. The net gains 45

Ibid., November 4, 1850, p. 1055. Galician linen was well known: even Russian soldiers, returning to their homeland after their foray into Hungary, stocked up on better quality Galician linen and table cloth. "Jahresbericht der Handelskammer zu Wien iiber den Zustand und den Gang der Industrie und des Handels im Jahre 1849," In Mittheilungen iiber Handel, Gewerbe und Verkehrsmittel so wie aus den Gebiete der Statistik uberhaupt nach Berichten an das k.k. Handels-Ministenum, 1850, p. 181. 47 Austria, November 22, 1850, pp. 119, 120. 48 Gazdasdgi Lapok, December 21, 1851, p. 1212, December 22, 1850, p. 1476. 49 Ibid., April n, 1852, p. 362. 46

Establishment of the Customs Union : 45 were too small to have been a determining factor in their long-run economic growth. Still, the reform should have been carried out, since its implementation did not require an ex­ cessive amount of resources. Particularly if one does not debit the lives lost during the revolution as a cost expended for the attainment of this reform, one can conclude that the eco­ nomic benefits gained in consequence of the reform out­ weighed the effort involved in carrying it out. The fear that the close economic union would eventually lead to the political demise of the Hungarian nation did not materialize. A period of absolutist rule followed the revolu­ tion, to be sure; however, by 1867 the political leadership of the country was once again in Hungarian hands. Through a series of compromises and maneuvers the influence of Vienna in Budapest was thereafter minimized. Some even go as far as to assert that the influence of Budapest in Vienna was even more strongly felt than the reverse. The rather inconsequential effect of the internal tariff re­ form induces one to consider other possible causes for the al­ leged economic advances of the 1850s. Even more sweeping than the elimination of the tariff barrier, the emancipation of the peasantry had potentially an even larger impact on the economy and the lives of its participants than all other re­ forms of the mid-century combined.50 Yet, as we are about to show, that reform too was not of sufficient consequence to unleash an "economic miracle" in the 1850s.

THE EMANCIPATION OF THE PEASANTRY The system of property rights in land which prevailed until 1848 in Austria-Hungary was abolished there centuries after its disappearance in Western Europe. In Hungary prior to 1848, the peasants had held about two-thirds of the lord's land in usufruct in exchange for their labor services (robot) on '° For a discussion of the reforms see: Andrew Brenman, "Economic Reform in Neuzeit Austria" (Ph.D. diss., Princeton University, 1966).

46 : Establishment of the Customs Union the demesne, the part of his land the lord worked on his own account. The land held in usufruct was inherited and was in­ alienable by the nineteenth century, but rent continued to be paid by the peasants at a rate fixed by Maria Theresa in 1767. For a full session of land (a "holding") the rent was fixed at 104 days of labor or 52 days with work animals. The size of a holding varied from seven to seventeen hectares de­ pending on the value of the land. Maria Theresa and her "cameralist" advisors also limited the frequency with which robot could be extracted from the peasants. This was particu­ larly important at times of peak demand for labor, i.e., at harvest time. The average family with about a quarter hold­ ing worked twenty-six days without or thirteen days with an­ imals per annum. This was far from excessive,51 especially since some of the services could be performed by the children of the household. Besides the plowland the peasant received land for gardening, the right to graze animals on the com­ mon pasture, and the right to collect firewood from the lord's forests. In addition to paying rent, the peasant paid taxes to the lord and to the church, the former taking one-tenth the latter one-ninth of his gross yield.52 In turn, the lord performed functions that we now associate with the state: he was judge, administrator, protector, and executor. In addition he was an insurance agent, in the sense that in times of dire need, such as a harvest failure or fire, he could be relied on, to the extent that resources permitted, to help his peasants through diffi­ cult times. Occasionally he would even give medical advice. With the growth of state power, the central authorities began to encroach on the customary rights of the lords. In the 1780s Joseph II limited the jurisdiction of the lords, and al­ lowed the peasants to leave the estate without payment. Thereafter the peasant could marry at will, sell his products 51

Henrik Ditz, A Magyar Mezogazdasag (Pest, i86g), p. 95. A number of smaller payments, such as delivery of eggs and poul­ try or gifts at the time of the lord's wedding, were also exacted or were customary. 52

Establishment of the Customs Union : 47

unencumbered, and use a mill other than the lord's flour mill.53 The lot of the peasant varied considerably depending on the quality of the soil. John Paget, an English traveler, who spent a year and a half touring the Hungarian countryside, admitted that "Like most of my countrymen, I had some in­ distinct idea of a degrading serfage and of oppressing seigneurial rights. Thus I expected to find among the peasantry nothing but misery, attended by the most abject submission or stifled hate." Yet he concluded that "they are not serfs, nor their lords tyrants with unlimited power over their lives." In some of the villages he was surprised by the "comfortable ap­ pearance of everything." He added, "I was startled by the kindly feelings [the lord] was received by the peasants." En­ tering a number of cottages he remarked that "the storeroom in one cottage had such a quantity of cheese, lard, fruits, dried herbs, and pickles I never saw." It was crucial that the "soil they cultivate is good, a market and means of transport is near at hand. . . ." In contrast, in a village of northern Hungary where the land was poor, the "peasants love the brandy bottle . . . hate their [absentee] landlord," and their "dingy cottages" were built of unhewn firs plastered with mud inside.54 Thus the material lot of the peasantry varied, but by and large it was bearable.55 53 Martin Schwartner, Statistik des Konigreichs Ungern, 2nd ed. (Buda, 1811), pp. 202-208. Jerome Blum, Noble Landowners and Agriculture in Austria, 1815-1848: A Study in the Origins of the Peasant Emancipation of 1848 (Baltimore: Johns Hopkins University Press, 1948), pp. I97ff. One report noted that in the Bohemian county of Klattau the peasants re­ frained from buying their land from the lords outright because in case of a calamity they could then not rely on the lord's help. Franz Mayer, "Die volkwirtschaflichen Zustande Bohmens um den Jahren 1770," Mittheilunees des Vereins fur Geschuhte der Deutsehen in Bohmen 14 (1876):13454John Paget, Hungary and Transylvania; with Remarks on Their Condition, Social, Political, and Economical 2nd ed. (London, 1855), 1:282-93, 3°455 Ditz, A Magyar Mezogazdasdg, p. 95. For an elaboration and a slightly different approach to this problem see John Komlos, "The Emancipation of the Hungarian Peasantry and Agricultural Develop-

48 : Establishment of the Customs Union Yet their inferior social and political status rendered the legal system anachronistic and undesirable. It ran counter to the modern concept of citizenship. Not surprisingly, one of the first reforms adopted in 1848 was the emancipation of the peasantry. In order to estimate the increased production of the agri­ cultural sector as a consequence of the alleged increased effi­ ciency of peasant hired labor, one might assume that output can be characterized by a simple aggregate production func­ tion. The model is worked out in Appendix B. Suffice it to say here that increased efficiency can be conceptualized as though the labor force and capital stock engaged in robot were increased overnight by a proportion equivalent to the effi­ ciency gain. If one substitutes this increased amount of factor of production into the input-output relationship one finds that the percentage gain in output was on the order of mag­ nitude of ι or 2 percent even though the most generous as­ sumptions were made in the calculations to bias the results against this outcome as much as possible. The result can be supported intuitively as well by considering that the "fet­ tered" part of the pre-1848 labor market was a very small share of the total annual workdays available to the agricul­ tural sector. In addition, as the number of laborers is in­ creased one encounters diminishing returns to their efforts, since the stock of land is held constant. Hence even if this part of the labor force had been quite inefficient prior to 1848, these two forces would have mitigated its impact on the total economy. One might emphasize furthermore that the calculated gains actually measure the increases in output only on the arable land; consequently, the impact on the agricultural sector as a whole, including animal products, gardens, and forestry had to be considerably smaller. The emancipation is not expected to have affected signifi­ cantly the accumulation of capital in either the industrial or ment," in The Peasantry of Eastern Europe, Vol. I, ed. Ivan Volgyes (New York: Pergamon Press, 1979), p. 110-17.

Establishment of the Customs Union : 4g

the agricultural sector. To be sure, Austrian landlords re­ ceived bonds worth 290 million gulden and Hungarian land­ lords received about 300 million gulden as indemnity for their lost lands; however, in order for this sum to have been converted into physical capital, it had to be first sold to other capitalists. In other words, whatever investments the bond­ holders would have undertaken would merely have crowded out investments of others. Of course, by creating financial assets the government actually fostered the incipient capital market, so that the creation of these bonds did have some beneficial side effects. Another aspect of this same problem is the apparent trans­ fer of wealth to the peasantry. In Austria they were obligated to pay for only one-third of the value of the land whose own­ ership was transferred to them. The obligation of the other third was taken over by the state, while the remainder was sacrificed by the lords in lieu of the administrative and judi­ cial services they no longer were to perform. In Hungary the peasants received title, without charge, to the land they had held in usufruct. The state in turn compensated the landlords fully (at least theoretically) for the capitalized value of the rent they had previously collected.56 The peasants no longer owed their taxes to the spiritual and temporal lords but to the state. Since the former were taxes on production while the latter was a lump-sum tax, this part of the reform also fa­ vored increased production. To the extent that the state thereafter accepted responsi­ bility for the services that until then were performed by the landlord, it had to increase taxes to a comparable extent, just as it had to increase taxes in order to cover the interest and principal payments on the "emancipation-bonds."57 In ef56 Gyula Bernat, Az Abszolutizmus Foldtehermentesitese (Budapest: Egyetemi Nyomda, 1935), pp. 128, 265. 57 The land tax (including the income surtax) increased from 37.5 to 58.5 million in the Monarchy between 1847 anc^ '852. Although in the meanwhile the state was burdened by other financial problems as well, this tax increase was on the order of magnitude of the increased obliga-

jo .· Establishment of the Customs Union

feet, two-thirds of the previous obligations of the peasantry were now assumed by Austrian society, the peasantry ob­ viously being a part thereof. In Hungary, the society assumed the full financial burden of the emancipation. Hence the peasantry would have bene­ fited from the rearrangement of obligations only to the extent that the discounted value of the share of their taxes accumu­ lated over their lifetime was smaller than the total land value they received.58 This could not have been significant, but even if it had been it is doubtful that the income transfer would have affected total demand, since as a first approxi­ mation the increased consumption of the beneficiaries of the transfer would have been compensated by the decreased con­ sumption of those whose wealth had decreased.59 In sum, it appears that the emancipation of the peasantry could not have had a profound immediate impact on the economy of the Austro-Hungarian Monarchy. The reform should be viewed as a purely formal act rather than a turning point in Austrian economic history.60 Only a mechanically tions assumed by the government in consequence of the emancipation. Heinrich Friedjung, Osteneich von 1848 bis i860 (Stuttgart and Berlin: Cottasche Buchhandlung, 1918), 1:245. 58 This is somewhat oversimplified: if their marginal rate of time pref­ erence exceeded 5 percent, the rate at which their annual obligations were capitalized, their evaluation of the sum of their discounted future tax obligations would have been smaller than the actual value for which they were obligated. The problem is further complicated by the fact that the transaction involved intergenerational transfers of the tax burden. It is unclear whether the contemporary generation would have thought of the tax burden of their descendants as though it was their own. 59 There may have been a shift in demand from luxuries to goods ca­ pable of being mass-produced, since some of the transfer would have been from the richer segments of society to the poorer. To this extent factory-based industry would have benefited at the expense of the handicraft sector. 60 Herbert Matis, "Proto-Industrialization, Industrialization, and Economic Development in the Habsburg Monarchy: A Commentary," East-Central Europe 7 (1980):275.

Establishment of the Customs Union : 5/ deterministic view of history would consider the legal reforms of 1848 as either an inevitable consequence of economic de­ velopment or alternatively, a necessary prerequisite to fur­ ther economic progress. It is ultimately more satisfying to view the events of 1848 as a political adjustment to a radi­ cally new conception of man's view of his place in society; one which necessitated abolishing noble privileges and rais­ ing the peasant to the status of a full citizen of the nation. This view was clearly incompatible with the servile position of the peasantry but the servility of the peasantry was not a major hindrance to the unfolding of economic forces. That is not to say that the socio-economic environment of the Vormarz was optimal for development. The legal con­ straints on trade and on the labor market were clearly hin­ drances, but they were not debilitating because the market adjusted by seeking "second-best" equilibrium solutions which minimized the impact of imperfections imposed upon it by the social and political order. Moreover, the market had been evolving for the century previous to 1848 and made the adjustment to a commercialized, capitalistic environment much more smoothly and less violently than the body politic did. In a sense, the remainder of this book is devoted to testing the cogency of the above arguments against the extant data by outlining the salient features of the economic develop­ ment of the Danubian Monarchy. It will in fact be shown that the rate and pattern of growth were quite independent of the reforms of 1848.

CHAPTER 2

Austro-Hungarian Agricultural Development until the 1870s

I have advanced the argument that the mid-century reforms did not have a major impact on the Monarchy's economic development. Since the quality of data in the last century is perforce somewhat suspect and since the analysis made sev­ eral assumptions such as those of full employment of re­ sources and the existence of competitive equilibrium, the above contention should be approached from as many view­ points as practical. In Chapter III we shall therefore confirm this opinion by examining the pattern of Austria's industrial­ ization. In this chapter the empirical evidence is extended to the agricultural sector by demonstrating that the Monarchy's agricultural development after 1850 did not differ quantita­ tively from that of the prerevolutionary epoch. The timing of Austrian industrialization, and not the enactment of the mid-century reforms, seems to have been the most impor­ tant determinant of the progress of Hungary's agricultural sector. The rate and pattern of Austro-Hungarian agricultural de­ velopment in the first two-thirds of the nineteenth century have not, until now, been controversial. Nonetheless, the hitherto accepted thesis that, in response to the mid-century reforms and the modernization of transportation, agricul­ tural development, that is, capitalist development, com­ menced in Hungary, is without foundation in fact. In spite of the reforms, the rate of growth of cereal production per cap­ ita in Hungary did not increase after 1850, and in Austria a slight decline is discernible. These calculations corroborate the thesis that the gains in efficiency due to the reforms could

Austro-Hungarian Agricultural Development : 53

not have been substantial, prevailing opinion in the litera­ ture notwithstanding.1 In order to assess the effects of the mid-century reforms on agricultural development in the Habsburg Monarchy, a comparison of the growth of production before and after 1850 is imperative. In the first period, production estimates exist for the major grains for 1789 and 1841. The cadaster of Joseph II in 1789 estimated average grain output in Hungary and Croatia (without Transylvania) at about 28 million hec­ toliters.2 Schwartner's and Liechtenstern's estimates substan­ tiate this figure, although they thought it was 10-15 percent too low.3 Therefore, we might increase the value of the 1789 estimate by 13 percent from 289 to 327 million kronen in 1913 prices in order to compensate amply for a possible downward bias of the census. By the 1850s the estimates ac­ cepted by the contemporary statisticians Fenyes and 1 Peter Hanak, "Economics, Society and Socio-political Thought in Hungary during the Age of Capitalism," Austrian History Yearbook 11 (1975):113. Ervin Pemlenyi, ed., A History of Hungary (Budapest: Corvina, 1973), p. 26. Oscar Jaszi, The Dissolution of the Habsburg Monarchy (Chicago: University of Chicago Press, 1929), p. 126. Karl Dinklage, "Die Landwirtschaftliche Entwicklung," in Die Habsburgermonarchie i848-igi8, ed. Adam Wandruszka and Peter Urbanitsch, Vol. I, Die Wirtschaftliche Entwicklung, ed. Alois Brusatti (Vienna: Osterreichischen Akademie der Wissenschaften, 1973), p. 403, 41 iff. Jerome Blum, Noble Landowners and Agriculture in Austria, 1815-1848: A Study in the Origins of the Peasant Emancipation of 1848 (Baltimore: Johns Hopkins University Press, 1948), p. 244. Katus, Economic Growth, p. 64. Gyorgy Szabad, "Az onkenyuralom kora (1849-1867)," in Magyarorszig Tortenete, Vol. VI, Pt. I. p. 557ff. (Budapest: Akademiai Kiado, 1979). There are, to be sure, some exceptions to this generalization: Harm-Hinrich Brandt, Der Osterreichische Neoabsolutismus: Staatsftnanzen und Pohtik, 1848-1860 (Gottingen: Vandenhoeck and Ruprecht, 1978), 1:34. 2 Gyula Benda, Statisztikai adatok a magyar mezogazdasag tortenetehez, IJ6J-I86J (Budapest: Kozponti Statisztikai Hivatal, 1973), p. 119· 3Joseph Liechtenstern, Handbuch der neuesten Geographie des osterreichischen Kaiserstaates (Vienna, 1817-1818), 3:1259. Another report stated that the ten-year average was 31 million hectoliters, although during the excellent harvest of 1798 it reached 39 million. Janos Belitzky, A Magyar gabonakivitel tortenete 1860-ig (Budapest: n.p., 1932), p. 47.

5