Discrimination in the Austrian capital market?

Abstract

The thesis has been expounded recently that the financial institutions of the Austrian half of the Hapsburg Monarchy discriminated against the non-German nationalities living within its borders (Good, 1977). Good has presented evidence that the interest rates tended to be lower in areas of high concentration of German population. He regressed the interest rate (on loans collateralized by financial securities) on a nationality variable (the percentage of Germans living in a region), a risk variable, and proxies for the supply and demand for funds. Indeed, he found a negative partial correlation between the percentage of Germans living in a region and the interest rate, and concluded that a bias did exist in the Austrian capital market against the several Slavic minorities. This conclusion is disputed below by showing that a properly specified model does not support a systematic relationship of this sort. Good oversimplified reality by assuming that the percentage change in population in a particular area is a good proxy for the demand for funds in that ,region. Since the demand for funds presumably originated with the adult population a high correlation between the demand for funds and the increase in population could exist only if the contemporaneous birth rate did not diverge greatly from past experience. Moreover, had the per capita demand for loans been constant, a linear relationship would have existed between the percentage change in population and the percentage change in the demand for loans, rather than between the percentage change of population and the actual level of the demand for loans. Hence the modeling of the demand for funds is made on an ad hoc basis and is open to criticism. The same is true for the supply of funds. Good assumed that it was in part a function of transaction costs between Vienna and the particular