'The Golden Age of Local Banking': The Hungarian Banking Network in the Early 20th Century (from Unit Banking to Branch Banking - A Financial Geographical View)

78 Pages Posted: 29 Jan 2009

See all articles by Zoltan Gal

Zoltan Gal

Hungarian Academy of Sciences (HAS) - Centre for Regional Studies

Date Written: January 28, 2008

Abstract

This paper examines the impact of the Hungarian banking system on regional and urban development in the early 20th century, when local banks were important territorial elements of the financial space developing close links to regional economic structures. The basic concept of the study is that there is closer connection between not only the banking sector and the economy as a whole, but between the banking sector and urban development as well. This is coincidental with the argument of the American Historical Geography School, which says that the features of the urban network are in strong correlation with the spatial structure of banking system (Conzen, 1977). We considered the spatial breakdown of capital flows as one of the most important indicators of regional and urban transformation (Gal, 2005).

The Hungarian banking system looks back to its legacy of more than 160 years. Examining the impact of the banking system on regional and urban development is reasonable in the context of the second half of the 19th century, since Hungary developed an extensive financial system with a well researchable statistical database (Vargha, 1913). The basic idea of our research is that the banking system had greater importance in (local) economic development, than in our time. This argument coincided with the argument of the American Historical Geographical School saying that the features of the urban network are in strong correlation with the spatial-regional structure of the banking system and the diffusion of financial innovations. There was also a similar situation in the mid-19th century Britain, when the earlier fragmented regional economies with their independent provincial banking centres were moving towards greater integration. During this market concentration the regionally fragmented economies bound together by metropolitan centres dominated the flows of financial capital and by the increasing centralization of the largest clearing banks having headquarters in London (Conzen, 1977; Black, 1989). On the one hand, the intermediate role of banks was more significant in economic modernization since the provision and reallocation of the necessary capital resources was channelled through the banking system. This also meant that the spread of financial innovations was quicker and more comprehensive than other economic innovations (Gerschenkron, 1966; Good, 1973). The paper examines the spatial breakdown of savings and loans and listing the various factors that play important role in the territorial configuration of bank centres. A special significance is attributed to the comparative analysis of the banking function of cities by the fact that in peripheral situation the characteristics of modernization and capitalist development are almost exclusively connected with the urban network. It is also argued that regional inequalities were very much determined by economic, especially banking functions of the urban-network.

The historical evolution of the Hungarian banking system, despite it has developed in a latecomer country concerning the phases of industrialisation, has gone through the similar development stages of the modern financial system than the more advanced economies (Martin, 1994). With the earliest stage of industrialisation the "regionally-locally based, bank-oriented system" operated in Hungary until the end of WWI, based on the extensive network of locally based banks using local sources of capital accumulation. During the interwar period it was replaced by the "national or capital market-oriented" stage, in which the banking system became more centralised into the capital city of Budapest and the national market incorporated the local, regional banks setting up the centralised national branch network. The paper verifies that predominance of Budapest is not only a direct consequence of the territorial and capital loss following the World War I, rather the market concentration processes evolving since the late 19th century onward determined it. The paper examines this process introducing the first phase of transition from the locally based unit bank system towards the branch banking which based on the expanding affiliates and branch networks of the largest country banks.

Besides studying the regional characteristics of local money-markets on the basis of the territorial breakdown of banking aggregates, the paper analyses the urban network of the early 20th century according to the cities' banking function in order to identify those groups of towns together with their hierarchical ranks, which became the driving force of modernization, as well as those that played a less determinant role in economic development (Gal, 2005). This paper uses the method of Christaller's central-place theory (1933) in order to define the central-place functions of Hungarian cities based on banking aggregates (deposits and assets).

Keywords: Hungarian banking system, local unit banks, bank affiliates, branch banking, banking stocks and flows, capital concentration, regional diffusion of banking innovations, central-place theory, provincial banking centres,

JEL Classification: G21, N23, N94

Suggested Citation

Gal, Zoltan, 'The Golden Age of Local Banking': The Hungarian Banking Network in the Early 20th Century (from Unit Banking to Branch Banking - A Financial Geographical View) (January 28, 2008). Available at SSRN: https://ssrn.com/abstract=1334081 or http://dx.doi.org/10.2139/ssrn.1334081

Zoltan Gal (Contact Author)

Hungarian Academy of Sciences (HAS) - Centre for Regional Studies ( email )

Papnovelde u. 22
Pecs, 7621
Hungary

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