Single-tier banking system – economic history part. Hungarian economy after World War II
The collapse and reconstruction that followed World War II also had a horrendous impact on the financial system of Hungary. Act XXX of 1947 provided for the nationalisation of the shares of Magyar Nemzeti Bank and major commercial banks owned by Hungarian individuals and companies, which was followed by the liquidation of commercial banks. The deposit, current and loan accounts of corporate clients were transferred to Magyar Nemzeti Bank, while the finances of private individuals continued to be managed by the National Savings Bank Corporation, which was granted limited financial institution rights. The two-tier banking system was eliminated, and a single-tier system was introduced. Why was it necessary?
The competitive market model of commercial banks did not fit into the excessively centralised economic governance based on central plans, controlled by the Hungarian Workers’ Party. The MNB was no longer independent, so the central bank, which was manually controlled by the Ministry of Finance, could be deployed in the service of the gigantic industrialisation laid down in the five-year plans. The plan-based system was by its very nature served by a centralised, one-tier banking system, that controlled and managed the financial processes of the economy from a single location. Companies, which executed central plans, kept their accounts at the central bank, as a result, all transactions could be precisely monitored. The central bank controlled the use of funds and decided whether loans were provided. Under the control and supervision of the MNB, financial processes related to foreign trade transactions were performed by the Hungarian Foreign Trade Bank, while investment loans were managed by the Hungarian Investment Bank (as of 1972 by the State Development Bank) with no competition.
A one-tier banking system, where the central bank has been deprived of its independence, is inherently inflexible and responds to the needs of the economy slowly and sluggishly. The economic reform of 1968 had already implemented market influences in the economic policy and moved from a direct plan-based system to management through regulators, while it also contemplated a two-tier banking system. Therefore, Magyar Nemzeti Bank handed over the management of the accounts of the councils and their institutions to the National Savings Bank in 1971, in addition to that of retail clients, however, the MNB continued to manage the accounts of the majority of companies.
However, the reform of the New Economic Mechanism and the banking system came to a halt in the first half of the 1970s, as the retrograde Brezhnev turn in the Soviet Union and the inflation pressure of the oil price crisis reinforced the national hardline conservative political forces that worked on the reversal of market opening.
Source: Ludas Matyi, Pesti Izé