The Online Library of Liberty

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• Preface.
• Chapter I.: History of American Currency.
• Chapter II.: The English Bank Restriction.
• Chapter III.: Austrian Paper Money. *
• Appendix.: Report From the Select Committee On the High Price of Gold Bullion.

CHAPTER III.

austrian paper money.*

The First Austrian National Bank was founded about the year 1700, but was transferred to the authorities of the city of Vienna very soon after. This bank issued notes in moderate amounts, which bore interest and commanded a premium. In 1762, this apparently rich source of wealth was seized upon as a resource for the distress of the government, and from that time to this Austria has been under the dominion of paper; from that time on, for more than a century, every year has seen a deficit in the Austrian finances.

The new notes bore no interest, and were for sums from five to one hundred gulden. They “were to be taken everywhere in payment.” It was forbidden to export coin, and base coins of small denominations were issued. The latter nevertheless, went to a premium in paper as the notes increased. This increase was at the same time persistently represented by the government as a temporary necessity, the Bank having been allowed to issue notes in return for its advances to the government. “In 1802, the country was flooded with counterfeit seven-kreutzer pieces.” They nevertheless were at a premium in paper. In 1807, copper coins were issued so base as to be on a level with the paper. Meanwhile the issues had been increasing; the government had found that there was no returning on the course on which it had entered. The wars with Napoleon demanded supplies, and there were no resources. The prohibitive system had crushed the indigenous industry of the country, made smuggling the most profitable of all forms of business, and created a few weak, exotic industries. Prices had risen so high that the nominal sums required for army supplies, etc., were enormous. The note issue in 1796 was 47,000,000; in 1800, it was 200,000,000; in 1806, it was 449,000,000. There were, besides, counterfeits in immense quantities. The laws against counterfeiting or being possessed of counterfeits were so severe, and the difficulty of detecting them so great, that people feared to take notes at all, and this of course enhanced the premium.

The succeeding years saw new “patents” in regard to the finances issued every few months; each project was more desperate or more tyrannical than the last. Trust funds were required to be invested in public securities or bank-notes, and deposited with the Bank; then these were taken by the State, which became responsible to the owners. All silver plate was ordered to be brought to the public offices to be assayed at a heavy charge. It would be tedious to enumerate these desperate and revolting financial measures; each was brought forward with pleas of necessity, loud protestations of desire for the national welfare, confessions of past faults, and promises that each measure should be final. All of them, however, proved unavailing.

In 1810, the next stage was reached, a stage which the student of paper money meets so regularly in its history, that he anticipates it sooner or later, in one form or another, in every new instance. A new class of notes was issued called “redemption-notes,” to represent coin, and to exchange for paper at the rate of one for three. By using these, the government prevented its expenditures from running up such enormous figures. This plan, and others intended to support it, failed to attract even the popular attention; all confidence in the promises of the government was lost. The misery was wide and deep, reaching even the well-to-do classes. Persons on salaries found themselves in the pecuniary position of day laborers; the peasants and country people who tilled the soil had its products for food, but trade was brought to a stand-still. Says Springer, whose history we follow and quote here and below:

The pecuniary corruptibility of the Austrian civil officers, and the opinion cherished by all classes, even by the Emperor, that the civil servants did not serve the state honestly, but would at any time sacrifice its interests to their own, took its origin in this period. The civil officers carried on afterwards as a habit what they had learned in a period of necessity.

The wretchedly paid custom officers connived at and shared in the smuggling. In 1810 the bank-notes fell to 500 for 100, then to 800, and finally to 1,095.

This state of things came to a crisis in 1811. On the 20th of February of that year a patent was issued, whose appearance and character the historian thus describes:

The bank-notes, of which there were over a thousand million gulden in circulation, were reduced by the proclamation to one-fifth of their nominal value, and were to be exchanged for redemption-notes, called the Viennese legal-tender. These latter became, and remain, the Austrian legal-tender currency. The government promised to issue of these only enough to convert the outstanding bank-notes, viz.: 212 million gulden. Taxes were to be paid in the new currency; government pensions and salaries in the same. The debased 30 and 15 kreutzer coins were to be rated at 6 and 3 kreutzers, and the interest on the national debt was to be reduced one-half. The smallest redemption notes were for 25 gulden, so that the poorest people who held 1, 2 and 5 gulden notes could not exchange them. On the other hand, it was believed that certain persons, who hastily adjusted their affairs just before the patent was issued, in a manner to avoid loss, had received secret information of its contents.

In the following May the redemption-issues were at 216, and in June at 338; the banknotes were at 1,690 to the 100 silver. The only recourse, in the midst of new necessities, seemed to be to issue more paper. The solemn promise of the Emperor in the patent from whose effects the country was still smarting, and on which the virulence of popular hate and the sharpness of popular wit had been expended, stood in the way of any such issue. The difficulty was obviated by giving the new notes a new name— “anticipation-notes.” In the decree for issuing them it was anxiously explained that they were only exchequer bills for anticipating the revenue. At first, 45 millions were issued, but the issues were secretly increased to 426 millions. In 1816, the amount of paper money was over 638 millions, and, says the historian:

In 1816, the Austrian National Bank was founded. It was intended to draw in the paper money, both as subscription to capital, and through the agency of the Bank in the conversion of treasury notes. Its relation to the government, which deposited 50 millions in silver to begin the operation, robbed it of confidence at the outset. It bought the notes at more than the current rate, so that there was a profit in buying them on the Bourse and taking them to the Bank. A run ensued which forced almost immediate suspension. Loans were then raised for redeeming the notes, and the mass of them was reduced to 181 millions.

In 1817, the Bank shares were once more offered, and with better success. The Bank went into operation and still remains, but government guarantees were given which were burdensome to the Treasury and robbed the Bank of independence. Its operations were mainly transactions with the government; its means could not be employed in furthering the industry of the country; and to this day a large part of its assets consist of government obligations, and until these are paid its usefulness is crippled. The “anticipation-notes” were reduced in number; their value improved, and their fluctuations were narrower. In 1827, these notes were reduced to ninety-nine millions, and in 1840 to ten millions. The period of peace was employed in this effort, and with a sound industrial system and no deficit, an equal amount of energy might have conquered the evil. As it was, however, the notes were redeemed by loans, the deficit was met by loans, and after 1830 Austria entered on a ruinous policy of armed peace. The relations with Hungary were bitterly hostile, and the policy of repression proved exceedingly expensive. New loans were continually required; the energy of reform died out; the power to decide on a policy was wanting; the dread of confession and of self-denial was deep-seated; the habit of putting off and of seeking temporary makeshifts was established.

In 1848, a run on the Bank, at the outbreak of the revolution, reduced the coin reserve from eighty-five to thirty-five millions. Forced circulation was given to the bank notes, and the events of that and the following years had the good result of rousing the nation. from its stupor. Baron Von Czoernig, chief of bureau in the department of commerce and industry, details fully the measures taken to regenerate the nation. Austria was in the position in 1850 in which Colbert found France. Efforts were made to reform the tax system, and important changes were made in the right direction, The currency also received attention, but the history consists of little more than a record of changes from one form of paper to another. The deficit still continued; the expensive repression in Hungary seemed more necessary than ever, and the Crimean war forced Austria once more to heavy military expenses. The war of 1859 in Italy, and of 1866 with Prussia, produced new emissions of paper, and Professor Bergius, of Berlin, quotes the Austrian finance minister as saying, in 1868, that if new complications should arise in Europe it would be necessary to issue more paper.

After 1866, however, the repressive policy in Hungary was abandoned, and a freer industrial system was adopted. The panic of the summer of 1873 is the latest incident in this miserable story. The Journal des Economistes for June last gave the following account and explanation of it:

The financial crisis at Vienna was not simply a stock exchange crisis, but a general one, an effect of extravagance in new undertakings, and of a fever of speculation which took possession of all classes of the population.

After the war of 1866, a large emission of paper money took place, both on the part of the State and on the part of the Bank, all legal tender. The abundance of paper led to a belief in the abundance of capital, and prompted to undertakings of all kinds. These influences were assisted by the abundance of the harvests of 1867 and 1868. Urged on by the opposition, the State encouraged by guarantees of dividends the construction of railroads which had been neglected during the war. Speculation also seized upon credit institutions of various kinds, which were multiplied in all the great centres, on industrial establishments, on constructions in the cities, and on land. Hence ensued a great quantity of bonds and securities, good and bad, which there was not time to classify, and which produced a glut. They led to all the financial expedients usual in such cases, advertisements, reports, emissions of paper, loans of all forms, tempting the prudence of buyers and provoking the distrust of the Bank of Vienna and of other credit establishments. The great speculators, finding their means surpassed, suspended. The smaller ones imitated them. Strong houses were shaken, and the panic followed. It was necessary to close the Bourse for a day to prevent violence amongst the speculators. There were great calamities and some suicides.

After the crisis measures were taken to find a remedy. The Chamber of Commerce, the directors of the great financial establishments, the municipality of Vienna, etc., called on the government, which, of course, could do nothing, By permitting the Bank to raise its emissions to 500 millions it put the same in a position to discount and to make advances on national securities. Fusions and combinations and guarantees are being planned. The most important relief, however, is given by the purchases of good securities, which the low prices induce. As for bad securities, they disappear in the general clearing up. Thus end all crises—offspring of delusion.

An able writer in the same journal for September gives as the circulation on the 30th of June, 1873, 380 millions of treasury notes and 340 millions of bank-notes. The Bank holds 144 millions in specie, “enough to bring its notes to par if it were not for the treasury notes and the debt of the State to the Bank, part of which cannot be realized.” In commenting on the character of the city of Vienna, outwardly grandiose and pretentious, but badly drained and otherwise provided, and upon the light and frivolous character of the people, the same writer refers these phenomena to the financial disorder and paper money as chief causes.

No one can deny that the above is a most instructive study in political and financial disease. The popular mind rests on instances like the French assignats, or our continental money, as showing the error of paper money where it absolutely perishes. It is thought that, short of this, only alarmists see danger. The story of Austria shows that an irredeemable paper currency is a national calamity of the first magnitude, of which one may indeed find greater or less examples, but of which the least is a peremptory warning to statesmen and financiers. It is like a disease in the blood, undermining the constitution and spreading decay through all the arteries of business. A young and vigorous nation, with a sound political system, may stand it far better than an old one, with feudal traditions; but in its measure and according to circumstances it is pernicious, if not fatal. It is not like an acute disease; It is like an invalid state with occasional fever.

We may also infer from Austrian experience what the “London Economist” recently inferred from ours, that the interference of government with banking is as mischievous as its interference with any other trade. The Emperor of Austria was not intentionally a liar. When he said he would issue so much and no more, he meant it. He only did not know that he was releasing a power which he could not curb again. He was promising to perform a financial miracle. His broken promises, however, cost him and his government all credit with his people, and it is now frequent subject of remark in Austria that the more solemn the asseverations of the government the more ludicrous they appear to the people. A government which interferes with banking exposes itself to great danger of error, and such errors cost it popular confidence sooner than any others.

CONCLUSION.

IF these chapters of history have been narrated with any success, they carry their own lesson with them. There are many who sneer at history and foreign experience as inapplicable to our circumstances, and toss off the lessons of history with impatient contempt, but these very persons never talk on financial topics for five minutes without referring to what “the Bank of England does,” or what “England did” during the Bank Restriction. The only remarkable fact about their references is that the facts are often incorrectly stated, and the inferences illogically and unscientifically drawn. From this it appears that they object, not to the force of historical arguments, but to the trouble of correctly informing themselves about historical facts.

There are very many, however, who are willing to learn from history and science, and are led astray by the sweeping assertions, incorrect references, and dogmatism of those they are obliged to trust. It is for these that these chapters have been written.

It will be observed, then, that there is nothing new to be discovered about the operation of paper money. There is no new invention possible for making it “as good as gold,” no new device conceivable for making it elastic, no difficulty connected with it which has not been experienced, no phenomenon of its development for which we have not abundant analogies. If any qualification of these assertions is necessary, it is only this, that no scheme of intro-convertible bonds for giving elasticity to a currency of fixed amount has ever been tried, or, so far as I know, proposed. This scheme is the only one which fully illustrates what is derisively called “theory,” for it stands on no facts, appeals to no experience, is deduced from no observation, but is purely imaginary and speculative. It has a certain plausibility, but all the observed phenomena of paper money go to show that it would make the paper elastic only in one direction.

For a nation which has fallen into this mistake, there are only three courses of action which are even logically conceivable: to go on, to turn back, to stand still. The last is the “growing up” idea, and may be ruled out at once as impracticable. To try to stand still will inevitably end in drifting onwards into inflation. It will be much gained, therefore, if we come to face the situation as a grim alternative, for such is its actual character.

To go on to further inflation, whether by free banking, intro-convertible bonds, or direct issues, means simply bankruptcy and repudiation. Each new issue will produce, only for a time, ease and apparent prosperity, to be followed in a few years by a new crisis and new distress, then a new issue, and so on over again. Reform will then be no longer possible, and we must run the course to its end, in which the paper disappears as ignominiously as the continental notes.

If we choose the other alternative, it is useless to try to deceive ourselves at all in regard to what it involves. To talk of resumption and of issuing the 44 millions, or of establishing free banking on 5–20's, in the same breath, is a contradiction. If we want specie payments, we must have specie, and, if we want specie, the entire history before us repeats to weariness that we must get the paper out of the way. This is the first condition, and, until we are willing to face it, it is useless to discuss resumption at all. The doctrines drawn from the previous chapters are not doctrines of financial science so much as stumbling-blocks which lie at the door of that science. We have seen by abundant evidence, that the movement of the precious metals from country to country is not governed by the balance of trade, as is assumed in nearly all discussions of this subject. An economist of to-day who makes an assault on the “balance of trade” feels as if he were taking a sledge-hammer to break through an open door; but this doctrine is made the starting-point of discussing our finances in public documents, in speeches in Congress, and in most of the pamphlets and newspaper articles one meets with. We have seen, however, that the transaction is not one to which the term balance properly applies. Whenever a nation has complained that an adverse balance of trade was drawing off its specie, we have seen that an inferior currency of some kind was displacing the better one, and that the increased imports of merchandise were only the return payments for the gold or silver which had been dispensed with by employing a cheaper medium. We have seen also that prices alone govern the flow of the precious metal, or, more strictly stated, that the movement of the metals and the prices of commodities in different countries act and react upon one another in such a way as to keep up the exact natural relation of prices between different countries, and give to each country in the world's market its full relative advantage in production. If, therefore, a nation had a specie currency, a drain upon it by an adverse balance of trade, a foreign payment, or any other similar cause, would immediately produce a lowering of prices and a return current of specie until the natural level was once more restored. We have also seen that it is an error to say that there is not enough gold and silver in the world to perform the exchanges. Whatever gold there is, is enough. The only difference would be whether one grain of gold would buy one thousand grains of wheat or one hundred thousand We have also seen that the metals will distribute themselves amongst the nations in exact proportion to their requirements, if there is no interference in the shape of inferior currency. If a vacuum is left by the destruction of paper, specie comes in to take its place, as occurred here after the revolutionary war and after the bank crash of 1839. It may have to be bought back, however, very dear; that is, by giving many goods for it, or what is the same thing, goods at low prices. If the requirement rises above the supply, specie flows in to fill the gap, as we see after every commercial crisis.

These principles govern the question of resumption. If we want the specie, we here see how we must go to work to get it. It is not possible, save by withdrawing a portion of the paper. When we suspended, we overissued. The consequence was a rise of prices, increase of speculation, and export of specie. Large importations of merchandise followed, and exportation was loaded with disadvantages. The course of resumption is the opposite in every particular. When the paper is withdrawn, prices fall, speculation is restrained, specie flows in. Importations are discouraged, exportations increase and go to pay for the gold. It may be added that, as the former process was smooth and agreeable, so the latter is hard and distressing. When the specie is given up, large quantities of it, comparatively, are given for little merchandise; when it is sought again, it must be bought at a disadvantage.

No nation has ever had the courage to pursue this course except England, and she only entered upon it after two or three commerical revulsions had destroyed a large part of the paper, never immoderately redundant; she entered upon the effort under the guidance of a high order of statesmanship; she took advantage of the fall in prices and business stagnation following a crisis; and her resumption was not complete until after the withdrawal of the small notes in 1829. Other nations, like Austria and Russia, have gone on for generations, sinking deeper and deeper, crippled in their military and industrial strength by this inheritance, not knowing how to endure it or how to get rid of it, or, like France and our own colonies, have gone through bankruptcy and repudiation. These are the alternatives, and it has been well likened to the choice of a man in a house on fire who jumps out of the second story rather than wait to be driven up to the third or fourth or the roof.

If the withdrawal of the paper should be resolved upon, the best way to accomplish it is the one which is simplest and most straightforward; that is, to raise a surplus revenue and with it cancel the government issues, It is not consistent with the present purpose to criticise the various schemes which have been proposed. They all involve some kind of conversion of one sort of paper into another, and every such change complicates a system already far too intricate, and every such change involves chances of unforeseen events, or of unexpected effects, for they consist of experiments on totally untried ground. Some of these schemes involve no actual reduction of the outstanding paper, and can lead to nothing but expense and injury to the public credit. Others do involve a diminution of the paper and seek to accomplish it without the distress which it must occasion. It is certainly most desirable that any possible application of science to this end should be invented, but all such plans involve the danger of political events during the next five or six years, which cannot now be foreseen, and they assume also that the scheme will be faithfully carried out whenever it begins to press hard, as at some time it certainly must. Past experience leads us to doubt whether this latter assumption would be justified by the event. Our object here, however, is simply to establish by history and science, what are the indispensable conditions of resumption, and to place the problem in such light that it may be perceived how it must be attacked, if it is to be solved at all.

[*]Republished from the “Financier” of October 25th, 1873.