Did monetary forces cause the Hungarian crises of 1931?

The purpose of this paper is to analyze the causes of the Hungarian financial crisis of 1931. The prevailing view is that the episode was caused by monetary forces. After the October 1929 Wall Street crash, the already indebted country with high government deficits was unfavorably impacted by the reduced availability of foreign capital and deteriorating terms of trade. These factors together depleted the foreign currency reserves of the country and culminated in a currency crisis in 1931. Using a large macroeconomic dataset and relying on a database for the banking sector, both manually built from contemporary statistical publications and archival records, this paper develops a new interpretation to the Hungarian crisis of 1931 and shows that the financial system had a central role in this episode and it was, in fact, in the banking system where the origins of the crisis can be located. The causes behind banksÕ distress were a restrictive monetary policy in the aftermath of an early currency crisis in October 1928, an agricultural crisis in 1930, and an unorthodox fiscal policy which offered state-guarantees to banks and thereby further increased their exposure to the crisis-ridden agriculture.