Published by EH.NET (April 2004)

Gyorgy Peteri, Global Monetary Regime and National Central Banking: The Case of Hungary, 1921-1929. Wayne, NJ: Center for Hungarian Studies and Publications (Distributed by Columbia University Press), 2002. x +199 pp. $35 (cloth), ISBN: 0-88033 – 488-6.

Reviewed for EH.NET by Elmus Wicker, Department of Economics, Indiana University.

The idea of central bank cooperation as a supplementary mechanism for securing currency stabilization in Europe after World War I originated with Montagu Norman, the distinguished governor of the Bank of England. He thought central banks should act as a modus vivendi for promoting central bank cooperation preferably by means of a formal arrangement designated as a “club,” a “consortium,” or an “internationale” whose sole purpose was to make credit available to members experiencing temporary seasonal and liquidity difficulties. Although his efforts at creating a formal arrangement failed, he did succeed in establishing ad hoc relationships with a handful of central banks including the Bank of Hungary. Interbank lending by central banks was attractive as a means of avoiding restrictive measures that might be politically infeasible.

Currency stabilization was a top economic priority after World War l in the dismembered Austro-Hungarian Empire. Hyperinflation had disrupted all attempts at economic reconstruction and individual country initiatives were not sufficient to restore stability without outside international assistance. The task the author has set for himself is to examine the international dimensions of monetary policy in Hungary after World War I. The purely domestic effects of currency stabilization have been the subject of a lively debate centered on the output and employment effects, if any, of terminating hyperinflation in the newly created states in Eastern Europe (Sargent 1983; Wicker 1986 and Siklos 1994). But this issue is put to one side.

A fixed exchange rate regime, currency convertibility, and the free movement of capital was feasible in Norman’s view if and only if central banks agreed to cooperate in mobilizing and distributing their resources to meet short-term temporary shocks to the balance of payments. A key to the success of currency stabilization resided in the willingness of strong central banks to lend to the weaker. The normal adjustment process imposed too harsh a burden on the adjusting country.

Peteri’s essay is a critical indictment of Norman’s unsuccessful experiment in central bank cooperation as it applied to Hungary: “Both London and Budapest were chasing illusion by expecting to maintain the stability of the Hungarian currency with the help of international cooperation of central banks” (p. 193).

He faults Norman’s scheme of central bank cooperation because it simply ignored the structural problems endemic in the newly created states. For example, Hungary had lost two-thirds of its prewar territory and one-half of its population; a well-functioning common market had been destroyed. Trading arrangements had been disrupted with serious consequences to the balance of payments. Independent central banks were not designed to cope with problems whose origins were structural and not financial. The “right mechanism” according to Peteri was not as Norman contemplated it to be, that is the divorce of money and finance completely from politics, the very core of Norman’s conception of a central bank. Peteri argues that the cooperation of politicians, central bankers, business and government was required.

What is indeed startling is the conclusion the author draws from the breakdown of Norman’s scheme of central bank cooperation: “they compromised, for the life of an entire generation in Central Europe, institutions of the liberal individualistic economic order and the economic policies that had been the engine of modern development” (p.195). “What followed was the substitution of interventionist policies, protectionism, price and exchange controls which persisted for a generation.” The indictment is more sweeping than the evidence can support, however.

The strength of the essay resides in its careful scholarship, knowledge of the archival sources, and the contributions of individual Hungarian and English participants. No one has managed better to describe the Hungarian currency stabilization experience between 1920 and 1931.

The book is organized in only four chapters and a short conclusion. The first describes the Hungarian stabilization efforts in the early 1920s; the second, the role Norman played in the reconstruction of Europe. The third is devoted to the origins of the Bank of Hungary, and the fourth the weak link in the chain of central bank cooperation. It is a translation from the Hungarian.


Pierre Siklos, “Interpreting a Change in Monetary Policy Regimes: A Reappraisal of the First Hungarian Hyperinflation and Stabilization, 1921-1928.” In Michel Bordo and Forest Capie, editors, Monetary Regimes in Transition, Cambridge: Cambridge University Press, 1994

Thomas Sargent, “The Ends of Four Big Inflations.” In Robert Hall, editor, Inflation: Causes and Effects, Chicago: University of Chicago Press, 1983.

Elmus Wicker, “Terminating Hyperinflation in the Dismembered Hapsburg Monarchy,” American Economic Review, Vol. 16, no.3, July l986.

Elmus Wicker has a forthcoming book entitled: The Great Debate on Banking Reform: The Origins of the Fed.