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Bethlen had also succeeded in establishing a large degree of social and political harmony between these classes and in finding solutions for many of the problems. The skilled industrial workers lived in relatively good conditions. The average standard of living of a worker in factory industries was up to the general Central European level and above that prevailing in much of Eastern Europe.(21)

Of all the financially reconstructed countries Hungary was the most interesting and attractive to the financial world. When the League of Nations Reconstruction Loan was being negotiated in 1923 and 1924, international bankers were unanimous in expressing apprehensions as to Hungary's political stability. After two revolutions, two Habsburg "putsches", and the occupation of the country by a foreign army, it was scarcely surprising that foreign financiers were nervous when asked to loan money. Yet of all the countries of Europe, Hungary had proved herself one of the most politically stable. Count Bethlen had been in power far longer than any other Eastern European Premier and social order had been maintained during the whole reconstruction period. Count Bethlen's prestige was so strong that people spoke of him as the


Permanent Premier. The London Times(22) compared him to Montague Norman, who was at that time, the permanent Governor of the Bank of England. This continuity of policy and its guidance by a statesman of real ability were probably responsible as much as anything for the success of the reconstruction plan. Bethlen's respect for a Parliamentary form of government and his desire to guide rather than dictate, combined with an undisputed sway over the mass of the people, constituted excellent assurance against rash political ventures on the part of Hungary. Agitation at home or abroad was not in the least likely to influence him in the direction of a policy that could endanger the prospects of improving his country for the sake of uncertain political advantages in the future. For proper understanding of the financial and economic position of Hungary, it is essential that this phase of Hungarian politics be studied.

Since the year of the Reconstruction Loan, 1924, Hungary had more than fulfilled what was expected of her by those who had formulated the League of Nations plan. Her budget had not only been in equilibrium but there had been relatively large surpluses. These had been employed for useful capital investment. All foreign obligations had been fulfilled. Hungary was paying England 1,500,000 dollars every year for the liquidation of the pre-war debts. In 1928, from the purely economic point of view, Hungary was somewhat in the position of the "Good Boy" waiting to have her merits recognized. All agreements had dutifully been made in accordance with the highest principles of the Geneva Economic Conference. In 1928, the metal reserve of the National Bank was more than four times larger than in 1924.(23)

When Bethlen applied for the League of Nations loan, it was clear that such a loan would bring with it political obligations. He wanted the minimum obligations and therefore he, by no means, wanted continental money. Instead, he borrowed from American


and English banks because this would mean no political obligations other than those cited in the Protocol of the League of Nations. Although the loan was under the auspices of the League of Nations and issued in England, the United States, Italy, Switzerland, Holland, and Sweden, it was in reality financed by the House of Morgan.(24) Unlike the Austrian Reconstruction Loan, it was not guaranteed by foreign states. Being so, it was proposed that a General Commissioner of the League of Nations be named to Hungary and, furthermore, that an American fill this post. The New York Times reported on February 9, 1924, that the post had been offered to and accepted by an American and mentioned two names: Charles G. Dawes and P. G. Harding, the Governor of the Federal Reserve Bank of Boston. In fact, the Secretariat of the League of Nations had proposed Harding. Harding was unable to go to Hungary and suggested the name of Jeremiah Smith, who accepted the invitation.

Jeremiah Smith was a Boston banker and an expert on the American peace delegation in Versailles. He had been one of Thomas W. Lamont's assistants in recent financial negotiations with China and Mexico. Royall Tyler, Representative of the Trustees of the Reconstruction Loan, also an American, was principal assis tant to Jeremiah Smith. Certainly there were other circumstances which helped Hungary's economic recovery, but the fact remains that Jeremiah Smith rendered great service in a work considered difficult and unpleasant by all right-thinking Hungarians.

It is believed that, after General Bandholtz, it was Jeremiah Smith who gave the greatest aid to Hungary. When he ended his work in Hungary on June 25, 1926, Dorsey Richardson, Acting Chief, Division of European Affairs of the State Department, sent the following telegram to the American Minister at Budapest:

I understand that a dinner is to be given by the Hungarian Government on June 26, in honor of Jeremiah Smith. I hope you will express the satisfaction of the Government of the


United States and of the people of this country at the successful termination of Mr. Smith's work. Americans who have followed it are glad that it should have been an American citizen who has been able to give this important aid to the Hungarian Government and people.(25)

Smith was possibly no more successful than Zimmerman was in Austria, but he did his work modestly and unobtrusively and in such a way that, instead of being detested as Zimmerman was in Austria, he was really loved. Jeremiah Smith won the esteem of the Hungarian people by his simple mode of life. He lived without extravagance or ostentation and steadily declined any kind of re ward. His virtuous and upright character raised the credit of America among Hungarians of all classes. Of his ability as an economist, nothing but praise can be said. Colijn, ex-Prime Minister and Minister of Finance of the Netherlands, paid a warm tribute to the ability and to the character of Smith when he visited Hungary in 1926. He said to the American Minister at Budapest: "Zimmerman undoubtedly accomplished very useful work as financial adviser to the Austrian Government. But your compatriot has made his name even more illustrous than my countryman".(26)

As we have seen, under the direction of Jeremiah Smith, rapid progress was made in the fiscal reconstruction of Hungary. In summary, the budget was balanced in less than one year, leaving the greater part of the proceeds of the Reconstruction Loan unused; in the year ending June 30, 1925, there was a surplus over expenses; the currency had been stabilized and a new monetary unit, the "pengo", was established. The reserves of the National Bank of Hungary in gold and foreign exchanges were equal to about 55 percent of the circulation. All obligations of Hungary towards the United States had been paid or funded. Though Hungary was principally an agricultural nation, large amounts of capital were invested in Hungary by American


bankers and corporations. In June, 1925, the Bauer, Pogue, Pond and Vivian Company, New York, invested $3,400,000 into the Hungarian Discount and Exchange Bank of Budapest. On January 23, 1925, Hornblower, Miller and Garrison of New York invested $3,000,000 into the Rima Steel Corporation of Budapest. On May 20, 1926, the International Acceptance Bank, New York, loaned $2,000,000 to the City of Budapest. On April 29, 1926, the Guaranty Company of New York loaned $3,000,000 to the Hungarian Land Mortgage Institute. On July 20, 1926, Speyer and Company gave a $10,000,000 loan to the Hungarian Counties. On September 17, 1927, a deposit of $1,500,000 was made to the British-Hungarian Bank, Limited, of Budapest. On March 3, 1927, Hornblower, Miller and Garrison of New York made a deposit of $1,000,000 to the Hungarian-Italian Bank of Budapest. Some months earlier, Olehn and Ganter of New York made a $2,700,000 deposit in the same Budapest Bank. On April 27, 1927, the Hines, Rearick, Dorr, Travis and Marshall Company of New York gave a loan of $2,000,000 to the National Central Savings Bank of Hungary. Besides these there were many other business activities. Far more important was the Budapest City Loan on May 10, an issue of $20,000,000 of Thirty Five Year 6.5 percent Gold Bonds, of which $10,000,000 were intended to be sold in American Market. The loan was concluded between the City of Budapest and the Bankers' Trust Company of New York. The proceeds of the loan were to be used for a variety of productive works, including extension of electric power, water works, central and other markets, slaughter-houses, the development of bus transportation, and the construction of public buildings and dwelling houses (27) As a result of these business matters it became necessary to initiate direct telephone communication between Hungary and the United States on November 12, 1928.


Another factor of importance was the agreement with the Swedish-American Match Trust, on July 6, 1928. This agreement provided that, in return for concessions to be granted for match production in Hungary, the Trust granted a loan of $36,000,000 at 92 percent, bearing 5.5 percent interest. The Trust agreed that not more than twenty foreign workmen would be employed by it in Hungary. (28)

American small business was also involved in Hungarian economic activity. On August 24, 1927, the Joint Security Corporation of New York offered for public subscription 100,000 American shares of the United Metropolitan Savings Bank of Budapest. Each share had a value of $7.00, and the stock was paid in dollars. The Joint Security Corporation gave the following survey of Hungary on that occasion:

Hungary is the most fertile land in Central Europe, producing wheat, rye, corn, flour, sugar, beef, cattle, swine, fowl and game, all kinds of vegetables, wine and mineral waters The production of sugar-beets and of potatoes is also considerable. For generations Hungary has been known universally as the granary of Europe, or at least Central Europe, which it still is and will remain for the time being, particularly as Russia has to be practically counted out as a wheat and grain exporting country. (29)

Up to 1929 everything went well with the reconstruction, Hungary's prosperity increased year by year and, with its increase, Bethlen's prestige rose to extraordinary heights. It must also be admitted, however, that the Reconstruction Era failed to carry out many political and social reforms. Bethlen was not totalitarian, nor tyrannical. Personal and political freedoms in Bethlen's Hungary were far more restricted than in the real democracies of the day, but generous compared with conditions prevailing in Yugoslavia, Rumania, and Poland, or even in Italy.


Nevertheless, Bethlen's Hungary was emphatically a class state in a Europe which then believed itself to be advancing towards democracy. In spite of prosperity, Bethlen's Hungary included grievous unsolved social problems. First of all it failed to carry out land reform. The census of 1935 showed that nearly three million people - 60 percent of those employed in agriculture - were either totally landless or occupying holdings insufficient to support life in decency. The condition of the rural poor was bad. Although industrialization was proceeding, it could not absorb all of the unemployed rural workers and, unfortunately for them, the American legislation had closed the main outlet of emigration. Moreover, the universities were beginning to produce a large new intellectual proletariat.

Many of these problems might ultimately have vanished if prosperity had continued, but the whole structure of Bethlen's system rested on two pillars: the maintenance of international credit, until such time as Hungary no longer needed to borrow, and the continuance of high prices on the world market for her exports, particularly wheat. In 1929 both of these were shaken by the collapse of world wheat prices, started by overproduction in Canada. and by the Stock Exchange crash on Wall Street. In 1930 the government had already supported the price of wheat, but the consequences for Hungary did not become really serious until the collapse of the Austrian Creditanstalt in May, 1931. Even this did not shake Bethlen's position, a month after it, he held elections which returned the Government Party to power with the usual large majority. But in the next weeks the full impact of the financial crisis hit the country. Unable to meet the demands of her foreign creditors, who were trying hurriedly to withdraw their funds, she had to appeal to the League of Nations. American capital, which had sustained the Hungarian economy in the 1920's, was no longer available. Hungary then, through the channels of the League, turned to the one large country in Europe which was still financially stable, France. On August 13, 1931, after feverish negotiations, a contract was signed for a new international loan of


$20,000,000 mainly subscribed in France. With this the worst of the immediate financial crisis seemed to be over. The League of Nations, however, prescribed a policy of ruthless financial orthodoxy, including the balancing of Hungary's budget by increasing revenue by heavier taxation and reducing expenditure by salary cuts and dismissals in the public services, and balancing of Hungary's balance of payments by the throttling of imports. The Financial Committee of the League of Nations appointed Royal Tyler, formerly the Assistant League Commissioner General for Hungary, to carry out this financial policy, and Henry J. Bruce, a London banker, was nominated to be the adviser of the Hungarian National Bank (30) The fantastic severity of the depression not only wiped out the economic gains of the previous decade but also threatened the political and social consolidation. The opposition accused the regime in general of following a policy beneficial to a few individuals but not in the wide national interest. Bethlen was held responsible for the system. His political opponents accused him of having betrayed the nation's cause for gold. Count Stephen Bethlen resigned in August, 1931. This was, however, an unexpected event, considering the absolute majority of the Government Party in the Parliament. Rumors were that France had made the dismissal of Bethlen a condition for the granting of the loan of the League.(31)


Bethlen's successor, Count Julius Karolyi,(32) set himself with determination to carry out the League's recommendations. But as one severe measure followed another, unrest grew. There were strikes and demonstrations among the workers, but more dangerous to the system was the revolt of the medium and small farmers, crushed under the weight of their indebtedness to the banks, the fired civil servants and the officers, and the jobless young university graduates. These events caused a new revival of Right Radicalism.

In September 1932 Count Julius Karolyi declared himself unable to solve Hungary's social and financial problems and resigned. Regent Horthy had to yield to the demand of the Right and appointed to the Minister Presidency, General Julius Gombos, the leader of the Right Radicals. With this, a new era began in Hungary's history.


21 A formal written agreement was concluded with the Social Democrats on December 22, 1921. This agreement enabled the workers to retain a complete system of vocational representation and a modicum of political representation. For the text of the agreement, see C. A. Macartney, October Fitteenth, I. 43-44. Furthermore, probably because of the work of the political refugees, the leaders of counter-revolution were anxious to demonstrate to the Hungarian workers and to the outer world that their hostility to Marxism did not imply hostility to the workers. As proof of this, they kept in being the Ministry of Social Welfare, first established towards the close of World war I, which by convention was allocated to a member of the Christian Party. Msgr. Joseph Wass, who held this ministerial post for nearly a decade, exercised a considerable influence on the government, and considerable improvements in working conditions were made when state finances were available. The most important advance was the introduction in 1927 of an excellent social insurance system both for workers and for salaried employees. In addition, the average working day and week were shortened substantially, while many other less important reforms were introduced.

22 May 5, 1928.

23 U. S., Nat. Arch., Micr. No. 708, Roll No. 30.

24 For further details, see ibid., Micr. No. 708, Roll No. 30.

25 U. S., National Archives, Micr. No. 708, Roll. No. 30.

26 Ibid.

27 For city-owned tenement houses and public medical facilities, $9,000,000; for completlon of electric works, $5,500,000; for reconstruction or water works, $2,500,000; for development of bus transportation, $700,000; for slaughter-houses $l,000,000; for enlargement of market halls, $800,000; for building new market halls and open markets, $1,200.000. U.S. Nat. Arch. 708-30.

28 U. S., Nat. Arch., Micr. No. 708, Roll No. 30.

29 Ibid.

30 For full details on Hungary's financial situation, see League of Nations (the official journal of the League of Nations, Geneva), October 22, 1931, Report 10.

31 See the report of the American Minister at Prague to the State Department on September 1, 1931: "The consensus of opinion seems to be that Bethlen resigned in order to placate the French Government and make possible the conclusion of the French loan to Hungary. It is felt that France demanded greater securities before granting the loan, particularly in the line of Hungarian foreign policy and that Bethlen, unable to Secure the loan elsewhere, and confronted with a severe economic crisis, resigned rather than face the alternative disaster for his country. It is also stated that the particular demand of the French is the cessation of Hungary's revisionist policy and the maintenance of more friendly relations with the countries of the Little Entente." U. S., For. Rel., Department of State, 864.00/9

32 Count Julius Karolyi was a cousin of Michael Karolyi, but a very different man. He was a member of one of Hungary's wealthiest and most famous families. He was a man of the most rigid honor, and an ascetic person. In character, he was a "Puritan". He also had a strong social sense toward the employees of his own big estates. He was a model landlord, having exacted low rents, paying high wages, and spending not only money but time and conscious thought on providing them with good welfare institutions. He advocated the same course to others. In politics, he was conservative.

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