The League of Nations Loan for Austria

International organizations like the United Nations, and the League of Nations before it, have been referred to as ‘trustees for peace’, an appropriate title addressing some part of their role in the world. The premise is that these organizations can take charge of resolving an international problem where mutual suspicions or inadequate capacity or attention make direct coordination by national governments impossible, where a third-party must be appointed. This role was taken up by the League of Nations in relation to a large international loan for Austria arranged in the aftermath of the First World War.

After the War

Austria was on the losing side of the First World War and found itself in a financial mess when the fighting ended. After its empire in Central Europe was broken up and trading relationships were severed, the country was ravaged by scarcity of goods, which continued well after the war ended, and hyperinflation. Austria even became reliant on donations of food from abroad. Its currency depreciated quickly, losing 99% of its value between the summers of 1921 and 1922. In fact, a paper Austrian crown came to be worth just 1/15,000ths of the value of a gold crown coin. During the early 1920s, the Austrian Foreign Ministry raised the issue of the country’s plight at various international conferences, attempting to receive assistance that would end the country’s economic disaster and eliminate the country’s dependence on charity.

Like Germany, Austria was responsible for paying reparations to the victorious countries in the war. As such, various governments held claims on Austria, which were secured by Austrian assets. Partly because of this, but to a larger extent because of the broken capital markets in Europe after the war and the country’s severe problems, Austrian attempts to raise loans, both domestically and abroad, had failed.

Austria was in need of financing, and this became more critical over the course of 1921 and early 1922. In unsuccessful attempts to restore its finances, the government was cutting expenses, like food subsidies, and reducing the number of civil servants. Still, the new Austrian republic had more state employees than the old Austro-Hungarian Empire which governed a population six times larger. Amidst the budget cuts, strikes and riots became more common, only relieved momentarily from time to time by concessions enabled by printing more money. A small emergency loan made in February 1922 by Britain, Czechoslovakia, France, and Italy provided only temporary relief.

An Austrian minister pressing for foreign assistance explained in August 1922 that “the foreign bankers who, a year ago, were still willing to grant such a loan, today declare that it is impossible to do so, because to them and to the general public the continued existence of Austria has become doubtful”. He noted that bankers were demanding that Austria secure a guarantee of the hoped-for loan from a larger power. To obtain this, the Austrian government was prepared to give up some control over its public finances to foreign governments, an idea proposed back in 1920 by Sir William Goode, a British member of the Reparations Commission’s Austrian Sub-Committee. Similar arrangements were made with respect to other financially strained countries in the late 19th century.

Fiscal Reform

The governments of the allied countries in the First World War refused to offer more assistance to Austria in August 1922. They were themselves financially pressed. The governments of Britain, France, and Italy had to bear their own large debts with high tax burdens so that, whatever the sympathies for Austria’s still-worse situation, there was limited willingness to act charitably on its behalf. No one country was able to bail it out on its own and even if one did step up, there was nervousness among the others that this assistance would come at a price to their own interests in Austria. So, the allies referred Austria to the League of Nations, the newly formed international organization dedicated to the peaceful coexistence of countries.

Crucially, back in March 1921, Britain, France, Italy, and Japan agreed that they would give up their liens on Austrian assets, at least for a few years, provided other governments did the same and the assets were placed under League of Nations administration to secure a new loan. This project had progressed over 1921 and early 1922 but had not yet come to fruition. The delay is understandable; the League of Nations was only very recently launched.

Now the project was kickstarted again. The League of Nations established a Financial Committee with representatives of Britain, France, Italy, Czechoslovakia, and Austria present. The committee’s report made several recommendations, encompassing minute details like the fares on state-run railways.

Perhaps optimistically considering the country’s condition at the time, the committee believed that the Austrian state budget could be balanced within two years. This would be achieved primarily through a combination of reduced losses at state-owned enterprises, a shrunk public sector workforce, and higher taxes. However, until the deficit was closed, the financing need would amount to 520 million Austrian gold crowns, or £24,000,000. Another 130 million crowns would be needed to repay the principal of debts coming due in the meantime.

League of Nations Loan

The Financial Committee of the League of Nations determined that Austria could offer sufficient security for a private loan. The customs duties and tobacco monopoly alone were reckoned to be worth 80 million gold crowns a year; this sum should cover interest and principal amortization of a loan sufficient to fund Austria’s return to a stable footing. On October 4, 1922, an agreement was reached between Great Britain, France, Italy, Czechoslovakia and Austria whereby the first four countries would guarantee a loan to the fifth.

However, as a condition, a Commissioner General was to be appointed in charge of assisting Austria in undertaking fiscal reforms designed to balance the budget by the end of 1924. The commissioner’s powers included control over the tobacco and customs revenues. During this time, the country’s ability to issue paper money and contract other loans was severely restricted. The entirety of the loan’s proceeds also had to be overseen by the commissioner, who would be an officer of the League of Nations. Control by the League of Nations, rather than an individual or council representing individual governments, was thought more palatable to the Austrian population.

Each of the four governments already mentioned guaranteed 20% of the loan including its interest payments; the remaining fifth would be guaranteed by other participating governments. The Commissioner General would be appointed by the whole League of Nations together and act in its name, but guarantors alone would receive exclusive representation on a separate committee overseeing the work of the Commissioner General and the Austrian government.

The Austrian parliament ratified the protocols for the loan in December 1922. A separate short-term loan was successfully raised in February 1923 while the League of Nations-facilitated loan was being finalized. The guarantors backed their guarantee by depositing their own state bonds with a Swiss bank. The League of Nations appointed two trustees to represent the investors. Time was also spent raising the loan. The League loan was syndicated to private investors across several tranches funded in different countries and at rates ranging between 6.5% and 7%. Bank syndicates were organized in several countries to place the loan. For example, J. P. Morgan led a syndicate in the United States and Banque de Paris et des Pays-Bas led the French syndicate. Syndicates for the international loan were also formed in London, Stockholm, Amsterdam, Vienna, Brussels, Switzerland, and Rome.

1920s

As required under the loan’s protocols, Austrian public finances were under partial foreign control from 1922 to 1926. Compared to earlier examples of foreign control over the public finances of bankrupt states, the extent of this control in Austria was rather limited. The Austrian government was left to handle the vast majority of the details by itself. Still, the program was subject to political abuse in Austria where the left denounced foreign control over the country’s finances, however limited.

There were remarkable signs of progress though. By March 1923, the government had stopped borrowing money from the central bank, allowing the latter to stop printing money. The Austrian currency was linked first to the Swiss franc and then to the U.S. dollar. Reserves of gold and foreign currency assets backing the Austrian crown grew from 20% to 50% before the end of 1923. In 1924, the crown was replaced by the Austrian schilling linked to gold.

The Commissioner General was pleased by the progress made. The period brought about an economic revival. Foreign capital was being invested in Austria once more and local bank deposits grew.

Near-Default

Not all was well though. A sticky problem remained. Trade was not revived, hampering the prosperity of small Central European countries. Efforts to build a customs union with Germany in 1931 were met with protests by other countries and the World Court of the League of Nations found the union to violate the protocols that enabled the League loan. During the 1920s and early 1930s, Austria was running trade deficits. This made it difficult for the country to secure the foreign currency needed to make debt payments in mid-1932.

The trustees for the loan had enough reserves in foreign currency to make one more payment on the bonds in December 1932. Then, in 1933, the foreign exchange situation improved, and Austria was able to make payments once more in the correct currencies. Despite the near default on the bonds in 1932, the League loan was successfully refinanced in 1935. A new loan, still guaranteed by foreign governments, secured a lower interest rate for Austria of between 4.5% and 5%, reflecting the fall in interest rates globally after the onset of the Great Depression.

Lesson

The construction of the League of Nations loan to Austria was not as straightforward as a typical sovereign loan. It was backed by the governments of several countries and came with conditionality imposed by an international organization. This is not that uncommon today, but the League loan was raised at a time when these organizations were in their infancy. Yet, like many such loans today, it did not solve all problems. There existed enough international collaboration to solve Austria’s immediate fiscal difficulties. Yet, the broken system of world trade was not resolved. Austria, like Germany, was charged with paying large amounts of money in foreign currency but was deprived of a means of earning foreign currency by trade. Thus, the example of Austria, illustrates the mixed successes and failures of international economic cooperation in the 1920s.

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