The Compromise of 1867, which established the rule of law in both the Austrian Empire and the Kingdom of Hungary, brought to an end more than two centuries of conflict between the Habsburg dynasty and the Hungarian nation. The Austro-Hungarian Monarchy was created by a compromise between the two most powerful nations of the Habsburg Empire: the Austrian Germans and the Hungarians. The Austrian Empire and the Kingdom of Hungary each retained complete independence in domestic policy: legislative acts were adopted by their respective bicameral parliaments and executive power was exercised by their respective governments.
By accepting the dualist framework, both countries resigned from state sovereignty in the areas of foreign and military policy. The three joint ministers did not constitute an imperial government, but sessions of the Joint Council of Ministers were held with the participation of the Austrian and Hungarian prime ministers. The foreign minister presided at its sessions, but sometimes the Emperor had to fulfil that task. The Council of Ministers took the most important decisions concerning the Monarchy as a whole, such as war and peace or military procurement. Another key novelty of the Compromise was the creation of delegations, which consisted of sixty members from each of the two Parliaments. They exercised some degree of control over the joint ministers and had the right to approve the budget. In addition to joint affairs (common foreign and military policy) that constituted the main element of the dualist system, there were other important common issues, such as the customs and commercial union, the common currency, and the central bank, which had to be concluded and renewed on every ten years. The contribution to the common budget used to be a separate deal between the Austrian Empire and the Kingdom of Hungary, which was also decided on every ten years. All other issues belonged to the legislative and executive powers of each constituent state of the Dual Monarchy.
The Compromise created a reliable and well-functioning institutional system, although the Emperor, Franz Joseph, retained significant rights in the law-making process provided by the December Constitution of 1867. For instance, at the First session of the Council of Ministers, the Emperor forced the government to accept his right of prior assent, which meant that ministers could only lay proposals before Parliament if the emperor had approved them in advance. He also exercised jurisdiction over the command, commanders, and internal organisation of the whole army. The Royal-Imperial Army served the preservation of the unity and integrity of the Empire, which was directed and controlled by Franz Joseph. Therefore, despite the re-establishment of the rule of law in both halves of the empire, the dualist system preserved some absolutistic elements.
The political and institutional stability created by the Compromise of 1867 contributed to the spectacular economic growth of Austro-Hungary. According to the calculations of Iván T. Berend and György Ránki, the annual rate of growth in national income was initially 3.7 and later 3.2 per cent. They point out that Hungary’s national income trebled in size by 1900 and more than quadrupled in 1914. László Katus states that gross domestic manufacturing product (GDMP), which includes GDP except for the value of services, was 2.4 per cent annually between 1867 and 1913, which exceeded average rates of growth across Europe as a whole. Faster rates were recorded only by the Danish, Swedish (3.0 per cent), and German (2.9 per cent) economies. Thus, GDMP trebled in the Dualist era. The performance of the Hungarian economy over the period in question was outstanding.
Both modern credit institutions and the country’s infrastructure contributed to Hungary’s dynamic economic development in the second half of the nineteenth century. After 1867, 548 financial institutions were set up in the Kingdom of Hungary, including the Hungarian General Credit Bank, which was part of Austrian Creditanstalt that belonged to the Rothschild Group. The latter was accompanied by the creation of the Anglo-Hungarian Bank and the Franco-Hungarian Bank in 1868 and 1869, respectively. Other important financial institutions, which were established after the Compromise, were the Hungarian Land Credit Institute and the General Savings Bank.
The stock market crash of 1873 coupled with the financial crisis led to the insolvency of the majority of banks, except for Creditbank. Speculation in the stock exchange and the real estate sector were the main reasons for the economic depression. Savings banks and credit cooperatives, which were adjusted to local demands, successfully overcame the difficulties and their stock capital did not diminish. While a series of banks closed during the crisis, only 14 savings institutions went bankrupt. The financial crisis was followed by stagnation for six years.
After 1880, a new period started in the history of credit institutions. The rise and the culmination of the development of the Hungarian banking sector took place from the 1890s to World War I. Within a decade, 172 banks and savings institutions and 336 credit cooperatives were established. An important feature of the Hungarian banking system was that the Austro Bank, created in 1816, transformed into the Austro-Hungarian Bank with principal offices both in Vienna and Budapest. As a result of this process, Creditbank became the biggest financial institution, led from 1878 by Zsigmond Kornfeld. He later became President of the stock exchange.
A szövegrészlet Endre Domonkos: An Economic History of Hungary from 1867 című könyvéből származik.
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