The Habsburg Monarchy as a Customs Union: Economic Development in Austria-Hungary in the Nineteenth Century

The Habsburg Monarchy as a Customs Union: Economic Development in Austria-Hungary in the Nineteenth Century

by John Komlos

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This analysis of the economic development of the Habsburg Monarchy explores the economic impact of two major mid-nineteenth-century reforms: the formation of the customs union between Austria and Hungary and the emancipation of the peasantry.


This analysis of the economic development of the Habsburg Monarchy explores the economic impact of two major mid-nineteenth-century reforms: the formation of the customs union between Austria and Hungary and the emancipation of the peasantry.

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Princeton University Press
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Princeton Legacy Library Series
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The Habsburg Monarchy as a Customs Union

Economic Development in Austria-Hungary in the Nineteenth Century

By John Komlos


Copyright © 1983 Princeton University Press
All rights reserved.
ISBN: 978-0-691-04239-8


The Mid-Century Reforms

During and after the revolutions of l848/49 in the Habsburg Monarchy many of the institutional structures that characterized the socio-economic environment either crumbled or were modernized by a reform-minded parliament or bureaucracy. Two major economic reforms are worthy of careful scrutiny: the emancipation of the peasantry and the elimination of the internal customs boundary between Austria and Hungary. In Hungary the April laws of l848 and their implementing directives, which survived, though not fully intact, the demise of the revolution, freed the market in land and labor. But not until 1853 did the Austrian "neo-absolutist" government actually acknowledge legally the emancipation acts in both halves of the Monarchy, and in a number of other ways economic reform was forestalled. The guild system was not abolished until the end of the decade. The protectionist tariff policy vis-à-vis the outside world was kept largely intact in spite of the adoption of new tariffs in 1851 and l853, the latter in anticipation of moving closer to the tariffs of the Zollverein. A number of other institutional changes came into force, for instance in the realm of tax policy, but one expects that the two reforms with the largest economic impact were the two mentioned above. Hence they are analyzed here from the point of view of the economic gains that were obtained in consequence of their adoption.

Historians of East-Central Europe invariably stress some version of the idea that these reforms were in fact preconditions to capitalist development. I found this notion to be an exaggeration: the calculations show that the impact of these reforms was not on the order of magnitude to have spurred development and growth considerably. In fact, in the subsequent two chapters I take on this contention with even greater determination and show that the performance of the economy prior to the mid-century reforms is indistinguishable from the performance that obtained thereafter. In any event, since capitalist economic development preceded the reforms it is difficult to see in what sense the reforms can be conceived as preconditions to capitalist development. After all, even prior to 1850 there was already considerable mobility of labor, and the evidence seems to indicate that the market was able to adjust to the system of property rights that prevailed.

Hence I believe that the economy would have performed only marginally worse had the reforms not been enacted at mid-century. Of course the inefficiencies that would have prevailed would have been irritants, but the capitalist economy, as has been demonstrated by the events of the last two centuries, is quite flexible in adjusting to imperfections and frictions in the marketplace. To be convinced of this all one has to do is consider the number of nonmarket elements that have been introduced into our own economic life: the rise of giant unions that have put perhaps greater impositions on the labor market than the feudal labor obligations of the first half of the nineteenth century, the oligopolistic market structures that have evolved, and even the social legislation that has been enacted in this century.

Of course, this is not to say that the old system would have necessarily continued intact into the twentieth century had the peasant emanicipation laws not been enacted. With the spread of commercialized agriculture the labor obligations would probably have been changed into money payments eventually. The point that should be stressed is that rather than seeing the emancipation as a precondition to capitalist development I would argue that capitalist development itself sooner or later would have rendered the institution of robot as a means of payment of rent for land a cumbersome mechanism, and, as with any other barter transaction rendered obsolete, would have superseded it with a more efficient form of payment. That this change happened to have occurred in Austria-Hungary in the wake of a violent upheaval, which cost perhaps 100,000 lives as part of the first major land reform in the Monarchy, is in my opinion a historical happenstance rather than an outcome of historical necessity.

Establishment of the Customs Union Between Austria and Hungary in 1850

When, on the morning of the 26th of July 1839, Georg Lukavics began the journey from Rindlingsdorf, in Western Hungary, into Styria with 840 kilograms of old iron, he surely did not suspect that his journey would become a historical example of the consequences of barriers to free trade. Upon reaching the border, the forty-year-old tenant on land that belonged to a blacksmith declared that his goods, valued at about six florins, were being taken into Styria only for resmelting into iron bars and hence would legally be exempt from paying tax upon entering or leaving the province. In the afternoon of the same day, however, when he attempted to cross back into Hungary with 670 kilograms of iron bars, he was detained for having given false information to the inspectors. His old-iron shipment had not been in fact transformed, but had been exchanged for some iron bars! Unless he had paid a tax of about 0.8 florins "His Majesty's treasury would be defrauded." Lukavics argued that the chief inspector had told him that the length of time required to resmelt the old iron was immaterial as long as it was returned to Hungary within a month. However, the conversion of the old iron into iron bars was not synonymous with the exchange of the former for some other finished iron bars. Six months later Lukavics was found guilty and was fined about eight times the value of the tax he had perhaps inadvertently attempted to evade. With an additional florin to cover the legal expenses his fine totaled 7.25 florins, which was at least a month's wage. The iron bars remained in the custody of the state until the fine was paid. Lukavics did not believe that justice had been served and appealed to Emperor Ferdinand. The Emperor reviewed appeals regularly and usually lowered the fine, but by the time he came to Lukavics's case nine years later the revolution was in progress and it was set aside, never to be resolved, in April 1848. Whether Lukavics made similar trips in the l840s is questionable. Presumably the legal framework was detrimental to him, his two children, and to a small extent, even the economic development of the region. In essence, the main question posed in this chapter is how many Georg Lukavicses there were in the Habsburg Monarchy of the Vormärz, and how they were likely to have responded to the elimination of the tax on trade across the Leitha River.

In existence since the Middle Ages, the tariff wall separating the lands of the Hungarian crown from those of Austria had been a center of controversy for decades prior to its abolition on October 1, 1850. The mercantilistic policy of using tariffs as instruments to regulate commerce was adopted by Karl VI in the early part of the eighteenth century. Before him tariffs had been perceived primarily as a means of producing income for the treasury. He divided the Monarchy into zones of trade, which made it easier to trade within any one province and between Lower and Upper Austria. In Hungary he created autonomous trade zones within the Kingdom such as the Banat, Croatia-Slavonia, and Serbia (between 1719 and 1739) in addition to Transylvania. In the 1750s his daughter, Maria Theresa, began to rationalize the customs legislation by codifying it. She allowed Austrian manufacturers easier access to the Hungarian market while making it more difficult for Hungarian raw materials and cattle to cross the frontiers of the Monarchy to the world at large. By this codification the structure of the trade relationship between Austria and Hungary was pretty much determined for the century to come.

Some have referred to the relationship pejoratively as the means by which the Austrian court reduced Hungary to colonial status. Such critics fail to remember an important historical lesson: some colonies have fared well under the protective wing of another country. One ought also not disregard the sensitivity of the Austrian court to the needs of Hungarian agriculture. By such acts as the importation of merino sheep from Spain, Maria Theresa did much to advance the agricultural sector. Yet a modern account and assessment of the development of the Hungarian economy in that period is yet to be written.

In 1775, in Colbertian fashion, Maria Theresa created the Cisleithanian common market, leaving only some port cities, the mountainous province of Tirol, the Italian Kingdoms, and various other regions, such as Eger and Pilsen in Bohemia, temporarily outside of it. In Hungary, too, the internal custom tolls were eliminated during the reign of her son, Joseph II (1780–1790), a practitioner par excellence of a central European version of enlightened despotism. In the Zollpatent of 1784, he declared foreign manufacturers to be prohibited from entering the Monarchy in the course of regular trade. In 1786 he took his commercial policy to its logical conclusion by eliminating all tariffs on Austrian exports to Hungary. Hungarian exports to Austria were still taxed, though the structure of the 1754 code was modified in this respect as well. Yet, Joseph's commercial policy, like many of his other attempts at reform, proved to be short-lived. In 1793, only three years after his death, the Hungarian Diet prevailed on the court, and from 1795 onwards the Austrian exports to Hungary were once again subjected to tariffs. The system would remain in force, with minor modifications, until 1850.

Each partner levied an export as well as an import tax on goods exchanged with the other. These were preferential tariffs, to be sure. Goods of Hungarian origin paid half of the amount levied on foreign goods. Some goods were entirely prohibited from entering the Monarchy from outside except by license, and not for resale. If such goods were of Hungarian origin, they paid a 10 percent tariff. The Austrian export tax to Hungary was the same as its export tax to foreign parts, which in turn was equal to the Hungarian export tax to Austria. Live animals were an exception to this, since Hungarian exports to Austria were taxed (according to the tariff of 1788) at a higher price than Austrian exports to the outside world. As a result of this rather complicated system, Hungary received most-favored-nation treatment even before 1850; this paved the way for the eventual formation of the common market. To be sure, for the most important Hungarian products this advantage does not appear to have been particularly important. Hungarian oxen paid a total of 3.5 fl. tax on crossing the Austro-Hungarian border, whereas Bavarian oxen paid 4 fl. upon entering the Monarchy. Hungarian wheat in the 1830s and 1840s paid 7.5 percent tax as compared with 10 percent for foreign wheat at official prices. This was not an exceptionally great advantage, and earlier even such a small privilege as this had not been reserved for Hungary. All wool was allowed to enter Austria practically duty free; hence Hungarian wool producers, like Hungarian grain growers, were left without any real protection against foreign competition. Of course, the wool producers did enjoy a more advantagous position than Hungarian grain growers, since they could enter the Austrian market freely.

Needless to say, a price had to be paid for even the small degree of preferential treatment enjoyed by Hungarian producers. The quid pro quo was that Austrian manufactured goods paid only 3.5 percent upon entering Hungary. This was not much of a protection, although Austrian producers often argued the opposite. Wholesaler Joseph Boscovitz, for instance, complained to the Hofkammer that some cotton textile goods paid as much as 20 percent tariff upon entering Hungary. Such instances seem, however, to have been the exception rather than the rule.

In assessing the relatively unprotected nature of the Hungarian industrial sector vis-à-vis Austria, one ought also to notice that Austrian products were often more expensive than their foreign counterparts; so the absence of a formidable tariff wall was less ruinous to Hungarian industry than it might have been, had Hungary had to face foreign competition under the same conditions. This was particularly true for cotton textiles, Hungary's most significant import from Austria. In the mid-1840s three-fifths of Hungary's total imports were textiles. Of these more than half, or 19 million florins worth, were cottons. In contrast, Austria exported only one million florins worth of cotton textiles (1.2 percent of its total exports) outside of the Monarchy. This indicates that the prices that prevailed in Austria for most types of cottons were above the level of world prices. Supporting this notion is the relatively large quantity of cotton textiles shipped through the Monarchy (16 million florins), which paid not only higher transportation costs but also a transit duty. Had Austrian producers been competitive in the world market, it seems that they would have been able to satisfy demand in places where they enjoyed a locational advantage.

Since the price at which Austrians were able to sell cotton textiles to Hungary was well above world price and an industry could still not develop in Hungary, there does not seem to have been much potential for the development of a cotton textile industry in early nineteenth-century Hungary. Cotton yarns and dyed woolen yarns could be exported tax free from Hungary to Austria; yet no activity developed in these goods, even though the tax on foreign yarn was huge and hand spinning of wool was able to compete with the more advanced technology well into the nineteenth century.

In a similar vein, pig iron and wrought iron were prohibited from being imported into the Monarchy, so that Hungarian goods falling into this category paid only 10 percent tax upon entering Austria. Yet Slovakian producers did not exploit this advantage until the demand for railroad rails increased in Moravia and the tariff on pig iron was completely abolished in the early 1840s. That trade blossomed thereafter is an indication either that the potential for it had been latent, or that upon evidence of this potential the executive branch decided to foster its development by eliminating the tariff. In the absence of a full-scale study on early nineteenth-century tariff structure in the Monarchy, no definitive conclusions can be arrived at here. The point to stress is that Hungary enjoyed some privileges that paved the way for the eventual formation of the customs union in mid-century.

Contemporaries often expressed concern that the tariff wall was restraining economic development, although opinion tended to fluctuate widely through time. Agricultural interests in Austria perceived the less taxed, hence less expensive, Hungarian products as somewhat of a threat, while industrial interests were not yet sufficiently vocal to influence policy. The Hungarian Diet had been in favor of establishing free trade with Austria in the first decades of the nineteenth century; but by the 1840s, the increased nationalistic preoccupations of the leadership, along with a concern for developing a national industry, induced them to make a volte-face on this subject. The tariff barrier came to be perceived as a means of defending national identity if not national survival itself. The pattern of political consolidation in Germany in the wake of the formation of the Zollverein was inimical to a rapprochement between Austria and Hungary at the time. The Diet actually agitated to reestablish its long-lost prerogative of setting trade policy for the Kingdom.

Early in the nineteenth century the court in Vienna had opposed a freer exchange of goods because the tariff revenue was the most important reliable source of income from the Hungarian provinces. In addition, the tax-exempt status of the nobility accounted partly for the lower price of Hungarian agricultural products, and some accommodation was needed in this regard before the tolls could be dismantled on the Leitha River. The introduction in 1829 of a consumption tax on many food items imported into Austria further complicated the situation, since these taxes would have had to have been levied in Hungary as well before a customs union could have even been contemplated.


Excerpted from The Habsburg Monarchy as a Customs Union by John Komlos. Copyright © 1983 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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