Much has been written on the history of the Habsburg Military Frontier; much less on its legacies. Chapter 4 presents evidence for the key institutional properties of military colonialism. The two striking socioeconomic insights that emerge from the data reported in the censuses of Imperial Hungary are that land equality and communal property rights remained much more prevalent in the borderlands even decades after the abrogation of the military colony. The absence of large consolidated land holdings and of a landless rural working class, held back the modernization of agriculture and the growth of farm productivity, as well as the spread of manufacturing. Similarly, historical and modern data on access to public goods suggest that the asymmetry between regions formerly under civilian and military administrations persisted over time to the present day. We cannot attribute these results to (1) temporal intermediary treatment factors that could have affected the treatment and the control group differentially, (2) structural treatment factors that could have influenced the treatment group simply by being located in a border area, and (3) alternative mechanisms by which military colonialism affected the way the state behaved in the former military colony.

Chapter 5 adds a new empirical dimension to the quantitative findings on the historical persistence of underdevelopment and underprovision of public goods. The military family clan was the key demographic unit and it defined its relationship with the imperial state. By collaborating with local clan heads in the military frontier, the Habsburg state achieved increased social control, blurring the line between the local rules of social organization and the formal rules of the state. Family clans were highly effective in recruiting and managing men for defending the border. However, as in many other contexts of imperialism, indirect rule through the clans together with communal property and weak state presence stifled personal initiative and investment in individual property. I provide evidence by analyzing social dynamics within a family clan that still existed in 1930s using historical anthropological accounts. I explain how belonging to military family clans molded clan members’ attitudes toward inner and outer groups in a way that prevented them from overcoming collective action problems.

In the introductory chapter, I develop the question that inspired my research: Why certain manifestations of historical imperialism are associated with positive developmental outcomes while others are blamed for persistent underdevelopment. I introduce the concepts of extractive institutions and military colonialism: the forceful recruitment in the military of borderland peoples to defend the territorial integrity of the state. Chapter 1 also presents the empirical puzzle that motivates the focus of the three main empirical chapters (4–6). It reveals that modern-day access to public goods changes precisely at the line of demarcation between the formerly civilian and military administered areas along the southern borders of the Habsburg Empire, a line that stretched for over three centuries through the territory of modern-day Croatia, Serbia, and Romania.

Building on the introduction, Chapter 2 goes back to the more general notion of extractive institutions and proposes a theoretical framework that helps explain a conundrum in the literature according to which extractive institutions are sometimes beneficial and sometimes detrimental for economic development. I contend that the persistent effect of extractive colonial institutions depended on the extent of imperial infrastructural investment, the treatment of property rights, and the use of violence. The worst scenarios for long-run development demonstrate little public investment, the removal or weakening of individual property rights, and high levels of coercion through violence. In the second part of this chapter, I discuss the role of elites in the creation and perpetuation of such institutions. I argue that colonial subjects who had been deprived of public goods (because of underinvestment from the center), had not enjoyed individual property rights for centuries, and had been exposed to imperial violence, were likely to become alienated from the state. Such alienation persists over generations, outliving the formal institutions that created it.

This final chapter concludes the book with a discussion of the theory’s significance for broader scholarly and policy implications that result from the central argument. Uneven access to public goods throughout a state’s territory can be reflective of historical exposure to institutions that alienated people from central state authority. Importantly, the argument and evidence presented in this book suggest that extractive institutions can affect modern access to public goods through both institutions and attitudes that get transmitted over generations. It also raises the point that while military colonialism is yet another example of the deleterious consequences of extractive institutions for development, it shows that what matters are the specific instruments of colonial extraction, including violence, the removal of private property, as well as underinvestment in public infrastructure and underprovision of public goods.

Chapter 7 discusses the scope conditions of the theory proposed in Chapter 2. It describes the specific characteristics of the Habsburg military frontier that make it a unique case. To illustrate the ways in which other states managed their peripheries, I examine the contemporaneous case of the Russian colonies which were created to defend the Russian empire against attacks by Poland-Lithuania and the Ottoman Empires. The oldest colonies are the Cossacks who lived in their self-governing lands. They had well-defined rights and duties and were known for their loyalty to the tsar and their brutality in battle. The Habsburgs and the Russians constituted a model that the French Empire tried to emulate in their territories in Africa in the early nineteenth century. Similar to the European colonies, the French also forced military colonists to live in designated areas, recruited additional indigenous forces, and created specific laws defining their obligations, their property, and the types of activities they could be involved in. The French military colonies consisted of both French and indigenous people and represented the main way of ensuring the security of their civilian settlements.

The creation of the Bank for International Settlements (BIS) in 1929 to deal with the settlement of First World War reparations payments was seen by central banks as an opportunity to put international cooperation on an institutional footing. Their initial vision of what the BIS might achieve in support of the gold exchange standard was ambitious. In the view of Montagu Norman and Hjalmar Schacht, the BIS needed to become a forum not merely for information exchange and for refining the techniques of managing the gold exchange standard, but a truly cooperative organisation capable of providing support to central banks in emergencies and for developing new financial arrangements. This chapter investigates the scope of the Norman-Schacht vision, as well as attempts to put this vision into practice (e.g. through the BIS study committee on medium-term credits, or through the BIS-coordinated interventions in the Austrian banking and financial crisis of May-June 1931). Based on research in the historical archives of the BIS, this chapter assesses whether the Norman-Schacht vision for the BIS failed because of differences in policies and goals among the central banks, or rather because of the disruptive effects of the Great Depression.

This chapter is an overview of central banking developments between 1919 and 1939, highlighting the establishment and operation of 28 new central banks, most in what are now called emerging markets and developing countries. Inspired by expert advice and underpinned by foreign lending, the new banks were designed to function independently from political interference, and to defend the gold standard as part an international, rules-based network of cooperating institutions. The Great Depression revealed the flaws in this setup. As capital flows dried up and international cooperation faltered, the gold standard disintegrated, and central banks were unable to head off macroeconomic and financial collapse. Designed to fight inflation, they were ill-prepared to address financial fragility. In the wake of their failure, a two-pronged reaction set in. Central bank autonomy was curtailed, while monetary policy was subordinated to new policy objectives, including the support of import substitution in Latin America and central planning in Eastern Europe. At the same time, central banks’ powers expanded, as they were transformed into agents of state-led development policy. Thus, the new central banks of the 1920s and 1930s were integrally involved not just in post-First World War reconstruction and the Great Depression, but also in the key economic developments of the mid-20th century.