The Online Library of Liberty

A project of Liberty Fund, Inc.

• Titles In the Liberty Fund Library of the Works of Ludwig Von Mises
• Acknowledgments
• Preface
• Introduction
• Monetary and Economic Policy Problems Before, During, and After the Great War
• Part 1: Austro-hungarian Monetary and Fiscal Policy Issues Before the First World War
• Chapter 1: The Political-economic Motives of the Austrian Currency Reform 1
• Chapter 2: The Problem of Legal Resumption of Specie Payments In Austria-hungary 1
• Chapter 3: The Foreign Exchange Policy of the Austro-hungarian Bank 1
• Chapter 4: On the Problem of Legal Resumption of Specie Payments In Austria-hungary
• Chapter 5: The Fourth Issuing Right of the Austro-hungarian Bank 1
• Chapter 6: Financial Reform In Austria 1
• Chapter 7: The General Rise In Prices In the Light of Economic Theory 1
• Chapter 8: On Rising Prices and Purchasing Power Policies 1
• Chapter 9: Disturbances In the Economic Life of the Austro-hungarian Monarchy During the Years 1912-1913 1
• Part 2: Economic Policy Issues In the Midst of the Great War
• Chapter 10: On the Goals of Trade Policy 1
• Chapter 11: Inflation 1
• Chapter 12: On Paying For the Costs of War and War Loans 1
• Chapter 13: Remarks Concerning the Problem of Emigration 1
• Part 3: Austrian Fiscal and Monetary Problems In the Postwar Period
• Chapter 14: Monetary Devaluation and the National Budget 1
• Chapter 15: For the Reintroduction of Normal Stock Market Practices In Foreign Exchange Dealings 1
• Chapter 16: On Carl Menger’s Eightieth Birthday 1
• Chapter 17: How Can Austria Be Saved?
• Chapter 18: The Claims of Note Holders Upon Liquidation of the Bank 1
• Chapter 19: The Austrian Currency Problem Thirty Years Ago and Today 1
• Chapter 20: The Restoration of Austria’s Economic Situation 1
• Chapter 21: The Austrian Problem 1
• Chapter 22: The Gold-exchange Standard 1
• Chapter 23: The Social Democratic Agrarian Program 1
• Chapter 24: America and the Reconstruction of the European Economy 1
• Chapter 25: The Currency and Finances of the Federal State of Austria 1
• Chapter 26: The Economic Crisis and Lessons For Banking Policy 1
• Part 4: Interventionism, Collectivism, and Their Ideological Roots
• Chapter 27: The Economic System of Interventionism 1
• Chapter 28: Economic Order and the Political System 1
• Chapter 29: Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923 1
• Appendixes
• Appendix A: Maxims For the Discussion of Methodological Problems In the Social Sciences: Paper Delivered At the Private Seminar 1
• Appendix B: Short Curriculum Vitae of Mayer Rachmiel Mises of Lemberg 1

PART 1

Austro-Hungarian Monetary and Fiscal Policy Issues Before the First World War

CHAPTER 1

The Political-Economic Motives of the Austrian Currency Reform1

I

The fact that from the middle of 1888, changes in the value of the Austrian currency had taken on a pattern disadvantageous to domestic production gave a direct impetus for the reform of the Austro-Hungarian monetary system, a reform that had been dragging on for decades before this.

The price of 100 florins in gold (250 francs) amounted, on average for the year 1872, to 110.37 Austrian paper florins and increased, beginning with this year (with a small interruption), up to 125.23 Austrian paper florins as the average for 1887. From then on, it began to decline. It amounted to:

A widely held view, which met with little opposition, held that these increases in value of the Austrian currency were neither incidental nor temporary phenomena; in fact, they could be traced back to serious, economic causes. There was a perceived agreement that the fall in the agio2 would not come to an end by itself: indeed, it would continue at an increased rate in future years if a change in the currency did not occur at the appropriate time. This view found its most ardent supporter in Hertzka,3 who articulated that opinion in the investigations of the currency commission. If the monarchy persisted with a nonconvertible currency, the florin would continue to increase in value until finally it would equal the gold value of the pound sterling by the end of the nineteenth century.4 Most of the individuals who had their say during the proceedings of the currency commission shared this view; Minister of Finance Steinbach5 repeatedly expressed a similar opinion, for example, in the session of the House of Representatives on July 14, 1892. The generally widespread belief in the continuing “improvement” in the value of the Austrian currency was one of the most effective motives for the accelerated initiation of a reform of the currency.6

The majority saw the most important reason behind the increase in the value of the currency in the fact that there was a legal limit on the maximum quantity of state notes in circulation and a suspension of silver coinage for private uses. This meant that within the monarchy increases in the quantity of the currency could no longer match increases in the demand for currency. This argument, which was an application of the quantity theory to Austrian circumstances, primarily relied upon the fact that the quantity of currency in circulation within the monarchy remained considerably below the quantity in circulation in other countries.

According to O. Haupt, the currency in circulation within the Austro-Hungarian Monarchy amounted to 779 million florins at the end of 1885, which represented a per capita circulation of 20.10 fl. In the most important countries, the per capita money in circulation at the end of 1885, in francs, was [25 shown opposite—Ed.].

Austria was ranked twelfth place with respect to the relative size of the monetary system. However, this factor alone does not absolutely

justify the conclusion that Austro-Hungary’s money in circulation failed to correspond to the demand for it. It is obvious that those Western countries where capitalistic development had advanced far ahead of the Danube Empire had a larger demand for money. In addition, it is not surprising that Italy had a larger quantity of money in circulation than was in the Austro-Hungarian Monarchy, considering that in 1885 Italy was experiencing a period of growing paper money inflation and an increasing agio. It is equally inappropriate to compare the monarchy’s circumstances with those in Spain and Portugal.

The proponents of the quantity theory laid the primary responsibility on the fact that the Austro-Hungarian monetary system lacked the possibility for a currency expansion starting in 1879, and in a certain sense already beginning in 1867.

Admittedly, an increase in the monarchy’s monetary gold reserves was practically excluded. Because gold was not a part of the Austrian currency system, it could only be employed (aside from its use for the payment of customs duties and in some business transactions) as a backing for the notes issued by the Austrian-Hungarian National Bank. However, due to the decline in the price of silver, the Austro-Hungarian Bank could not increase its gold reserves without incurring a loss; in the period from December 31, 1877, to August 10, 1892, these reserves grew by a mere 401.65 kg.8

Since the abolishment of silver coinage for private uses in the spring of 1879, silver face-value coins were minted only for government uses. In the years 1884-91, silver face-value coins were minted at an average annual value of 7 million florins. The entire amount of silver face-value coins minted between 1876 and 1891 amounted to 226.6 million florins. The Austro-Hungarian Bank’s silver holdings increased from 66.6 million florins at the end of 1875 to up to 166.7 million florins at the end of 1891.

The legal limitation on state notes in circulation to 312 million florins was a particular characteristic of the Austrian monetary constitution, under which the quantity of short-term, interest-bearing treasury bills in circulation, and the sum of state notes and interest-bearing treasury bills was prohibited from exceeding a combined amount of 412 million florins. Within this limit, however, the decrease in the quantity of Saltworks notes9 was replaced with an increase in the circulation of state notes. The possibility always existed for satisfying the increasing demand for currency in circulation within this limit through an expansion of state notes in circulation. And beginning in 1888 we see a constant increase in the quantity of these notes in circulation. The entire state note circulation amounted to:

Although until the fourth privilege of the Austro-Hungarian Bank went into effect the quantity of notes in circulation not backed by precious metals was strictly limited to 200 million, the number of bank-notes in circulation increased from 247 million florins at the end of 1867 to 391 million florins at the end of 1887. The system adopted in the Austro-Hungarian Bank’s fourth privilege of an indirect limitation offered a freer scope to the expansion of notes in circulation. It amounted to:10

The entire paper money in circulation (state- and banknotes) amounted to:

This corresponded to a total increase of 71.5 million and an average annual increase of 23.8 million florins. That this increase in the quantity of paper money in circulation did not lag behind the increasing demand for it, or at least not far behind, is shown by a comparison of the numbers from the period after the inauguration of the currency reform. Since then, it is generally accepted that the increase in currency in circulation completely satisfied the needs of business. The monarchy’s money in circulation amounted to:

This represents a total increase of 551 million and an average annual increase of 45.9 million crowns. The average annual increase of money in circulation was thus not larger in the period after 1892 than it was in the years immediately preceding that year.

In light of these facts, the claim that Austrian currency in circulation lacked the possibility for expansion cannot be maintained. However, to conclude that the increase in the currency in circulation satisfied the developing and increasing demand for it would be equally invalid. Such a conclusion would be prohibited because the statistical evidence is completely lacking for determining what were the required amounts of currency in circulation. Irrespective of this, however, even with the presumption of a domestic contraction, a direct causal relationship between such a contraction and an increase in the international value of the currency could not be determined.

It must be acknowledged that as the domestic currency in circulation becomes scarcer, this initially leads to a contraction of credit and an increase in the cost of borrowing, and has the further result of bringing about a fall in the prices of goods. It is obvious, however, that such a drop in prices can be only for those goods that cannot be exported. A decline in the prices of these goods in terms of the domestic currency will not result in foreigners offering higher prices for bonds on the Viennese market. This could be brought about only by a reduction in the prices of exported goods. This could occur only if as a result of the fall in other domestic prices the production of exported goods increased to such an extent that their prices fell due to their increase in supply. The increase in the rate of exchange that would result, however, as a consequence of this increased supply of exportable goods could be neither considerable nor of significant duration, because the decline in their prices would be transferred to the global market within a short period of time. Then any motive that foreigners would have to offer higher prices for Austrian bonds would slip away.11

It is not possible, given the current underdeveloped state of monetary theory and the lack of statistical data, to arrive at any certain conclusions about what influence the limit on increases in currency in circulation may have had on the value of money through its impact on the prices of goods. In other respects, the impact on the foreign exchange rate due to the limit on the maximum quantity of state notes in circulation and the administrative suspension of silver coinage can be determined with certainty: in fact, it was a means of securing the credit of the monarchy. The strictness with which the two governments of Austria-Hungary followed the conservative rules of its currency policy reestablished trust in the two financial administrations’ fulfillment of its monetary obligations, especially after this had been severely shaken both domestically and abroad by the events of 1797-1866. The danger of an inflationary increase in the supply of paper money, much like the danger of a return to a silver-backed currency, retreated into the distance.

The improvement in the creditworthiness of the currency went hand in hand with the strengthened creditworthiness of the government bonds. This was considerably influenced by the gradual disappearance of the threat of war, which had risked the peaceful development of our fatherland since the Congress of Berlin.12

Without a doubt, a war with one of the Great Powers would have forced Austria to resort to a new issue of paper money emissions, to renewed borrowing through the issuing of premium bonds, and perhaps also to a reduction in bond coupon payments, which would have destroyed the national credit for a long time.

The average annual rate of Austrian 4 percent gold bonds on the Berlin exchange rose from 61.05 percent in 1877 to 93.50 percent in 1886. Following a downturn in 1877 to 89.67 percent (during the Bulgarian Question),13 the upward movement continued. The annual average amounted to:

The rate for Hungarian gold bonds was increasing as well. The rate of return on the 6 percent gold bond amounted to (calculated according to the average annual rate) 7.9 percent in 1877, and that of the 4 percent gold bond amounted to 4.4 percent in 1891.14

As long as the concern continued regarding peace in Europe, speculation countered an increase in the note value. Out of fear of a decline in the Austrian currency, investors avoided accumulating large amounts in Austrian cash assets and preferred to deposit their liquid assets in gold bills of exchange. The disappearance of the risk of war allowed such a speculative collecting of gold exchanges to appear superfluous, and the pressure that the domestic speculative demand for gold had exerted on the currency market dropped off.15

If one item in the monarchy’s balance of payments improved in this way, other entries show a favorable pattern as well.

The Austro-Hungarian trade balance for imports and exports amounted to:

The excess exports in the import-export trade amounted to:

Starting in 1889, Austro-Hungarian investments began to immigrate back from abroad. The unfavorable effect that a capital migration of this type is able to exert on the balance of payments, and through this on the bond rate, was alleviated by the fact that new government borrowing by both governments had practically come to a halt in 1889. The domestic demands for investment were extensive enough to take up the funds flowing back into the country without disturbing the currency or bond markets.16

According to Sax,17 the positive balance in the balance of payments amounted to:

The favorable pattern of the balance of payments explains the general improvement in the Austrian currency in the four-year period that began in the summer of 1888. The exceptionally low rate for foreign bonds in the third quarter of 1890 can be traced back to a particular cause: the Sherman Act of July 14, 1890.18

Since the Bland-Allison Act (February 28, 1878),19 agitation by silver proponents in the United States had decreased and, following a break of several years, only resumed in 1889 with new vigor. The movement’s goal was the freeing of silver coinage; however, all that the silver proponents were able to achieve was the Sherman Act of July 14, 1890. An unparalleled bull market speculation was linked to the American agitation. The silver price in London was quoted at:

These bull market movements influenced the Viennese foreign exchange and currency markets. The German Reichsmark was quoted on the Vienna exchange at:

As an aside, it should be noted that circumstances similar to these, which had caused the improvement in the Austrian currency, also drove up the price of the ruble. In this case as well, favorable balance of payments, political quiet both domestically and abroad, and the silver bull market of 1890 were of primary importance. The quote for 100 credit rubles on the Berlin exchange was:

II

The decrease in the agio placed the currency question, which had been dealt with only tepidly for years, back on the agenda.

It is true that, following the unfavorable events of 1848/49 and 1859, the financial administration immediately and energetically tackled the organization of the subverted monetary system; it aimed with vigor and skill at eliminating the forced exchange after the Prussian War, which wrecked the large-scale plans of the elder Plener20 in the same fashion that the French War a few years previously had destroyed similar endeavors by Bruck.21 No serious steps for reforming the currency were undertaken for a long time. The cause for this conspicuous inactivity in the area of currency policy, which contrasted so sharply with the bustling activity of the previous epoch, was not simply the difficulty and complexity that the international currency problem had developed into since the continuous drop in the price of silver. It was, rather, that the project for reforming the currency was absolutely unpopular in Austria, and even more so in Hungary. One could only imagine an implementation of currency reform by means of depressing the so-called agio22 until it disappeared completely. The fast drop of the agio, which had occurred in the first half of the 1860s as a result of the currency reform endeavors, was still an uncomfortable memory for all manufacturers. The fact that the situation had changed essentially since 1879, and that a return of the so-called gold agio at parity to the customary exchange rate for Austria was not possible, was not easy to recognize at the beginning, especially because the designation of the twenty-franc coin as an eight-florin coin gave ample cause for errors.

With the depreciation of the currency in the period 1872-87, the agrarian and industrial manufacturers both capitalized in the same manner. The increasing agio functioned like a protective tariff against the import of foreign manufactured goods, and assisted the export of domestic products like an export premium, and also benefited the debtors. Under such circumstances, support for currency reform plans could not be counted on from the industrial or agricultural circles.

The falling agio affected primarily those who had taken advantage of the previous increases. While the prices on the global market remained unchanged, the foreign exchange rate on the Viennese market dropped, and the exporter who had received 50 fl., 63/4 krona (crowns) for 100 francs in February 1887 received only 44 fl., 541/2 krona in September 1890. The farmer received 10 percent less for his produce than two years previously, but taxes and mortgage interest had to be paid at the old levels.

Up until spring 1890, hope had been placed on an early backlash. The summer of the same year brought such expectations to an end. As soon as the recognition began to spread that the increase in the value of the currency was not based on temporary circumstances, and when it would stop could not be predicted, the demand for currency reform became general. In the first half of September 1890, the Austro-Hungarian Export Association dispatched a call to its members, in which it advocated for action in favor of currency reform. Rallies in favor occurred in all corners of the empire.23 In the general media, propaganda for reform was heard.

Particularly characteristic was the reversal of opinion in Hungary. Hungary had raised constant, fervent resistance to the Austrian currency reform plans, and delivered a decisive veto in November 1884 to the proposals by Austrian Finance Minister Dunajewski.24 Now, however, Hungary ardently advocated for reform. Of primary importance in this decision were the agricultural interests, particularly those of the wheat exporters; a further drop in the foreign exchange should be prevented at all costs. Therefore, the Hungarian Finance Ministry began to buy gold foreign exchange in November 1890, in order to exert pressure on the rate of the paper florin. Over the course of a few months, the Hungarian treasury had acquired about 45 million florins in gold exchange, and the desired result had not failed to occur.25

Along with the agrarian motives, however, which allowed Hungary to call for currency reform as a method to stop the “improvement” of the currency, other motives were also present. For forty years, Hungary’s politics had only one goal: the achievement of economic independence as a precursor to political independence. In the introduction of the gold currency and the implementation of specie payments, those in Budapest saw their most secure means of financially freeing themselves from the Viennese banks, increasing the prestige of Hungarian national credit abroad, and acquiring the means from international capital that were necessary for economic war with Austria.

Since 1890, hardly a single voice has been raised in Hungary against currency reform. With unique unity, the entire nation followed the political rallying cry pronounced by Alexander Wekerle,26 the most knowledgeable Magyar in monetary-related areas: truly an example of political discipline worthy of awe.27

With the reversal of opinion in Hungary, the fate of currency reform was decided. Since October 1890, no one doubted any longer that the currency reform would be tackled as soon as possible, and it was just as certain that the currency’s rate of exchange would be higher than the exchange rate prevailing on the market at that time. The following comparison shows how quickly and correctly the Viennese banking circles grasped the new situation.

On October 2, 1890, Wekerle announced in his exposé the early realization of the currency draft (which was, however, delayed as a result of the Baring Crisis).28 On October 6, he met in Vienna in order to confer with Dunajewski about currency reform. Under the influence of this news, the currency rate soared. German Reichsmarks were quoted on the Viennese market at:

III

The question has to be asked, whether the belief in the continuing improvement of the Austrian currency, and in the general pervasiveness of which belief we detect the main reason for the swift tackling of currency reform, was not based on an error.

It must be noted in advance, however, that even if this question were to be answered affirmatively, one would not be justified thereby in accusing the initiators of currency reform of lacking foresight. Ignoring the fact that a continuation had been presumed to be highly probable of all of those circumstances that had affected the favorable pattern of the balance of payments since 1888, no one in Europe could predict around 1892 which direction the silver question would take in the United States. The majority by which the House of Representatives had voted against the freeing of silver coinage numbered:

One had to come to terms, therefore, with the fact that soon the silver proponents would achieve their goal, which they had pursued for years with an enormous energy. What result this would have for the foreign exchange rate was learned in the summer of 1890.

An examination of the exchange rates shows that the favorable pattern of the monarchy’s balance of payments has been maintained in the fifteen years that have elapsed since the beginning of the currency reform. In 1893-96, however, the exchange rate showed an unfavorable character: in fall 1893, the agio temporarily reached a level of more than 6.5 percent compared with the “relation” established in the Act of ’92. This formation of the agio was traced back to the chance coincidence of a series of unfavorable circumstances.30 Since 1896, the agio has indeed disappeared and, since this time, the exchange rates have maintained parity on average with limited fluctuations. For more than a decade, the monarchy has enjoyed, in this manner, a currency that is stable in value compared with foreign countries.

The means by which this goal was achieved, the well-known foreign exchange policy of the Austro-Hungarian Bank, was made feasible only by the favorable pattern of the balance of payments. Lotz remarked quite correctly, “the Bank can issue exchange only for as long as they can buy foreign exchange, even at a sacrifice. Foreign exchange, however, can only be obtained as long as the Austrian economy possesses foreign receivables or can acquire them through the sales of goods or securities. As long as a country can do this, then gold impoverishment due to an actual specie system absolutely need not be feared again.”31

The well-known appraisals by the Austrian Finance Ministry about the monarchy’s balance of payments yield the statistical proof for the correctness of this statement.

The great advantages that the Bank’s (justifiably praised) foreign exchange policy brought to the economy do not lie, as the naïve layman’s view perceives whenever he hears talk of suspended specie payments, in the fact that it frees Austria from the actual fulfillment of its international obligations, but rather in the fact that it gives the Bank the possibility of separating so-called legitimate requests for gold from illegitimate ones. In this fashion, it was possible to keep the bank rate in Vienna lower than that in Berlin and London; what this means, however, does not require any further explanation. It should be noted in passing that the necessity of dealing differently with speculative demand for gold to exploit the difference in the discount rates than with demand by importers has demonstrated itself elsewhere. The Bank of France does not require a gold premium if it is brought proof that the bearer of the notes presented for redemption requires the gold for the import of foreign raw materials. The German Reichsbank and the Bank of England also only hand over gold coins for export at a weight 2-3 per mill lighter than the newly minted coins.

Just like the German and English gold currency policy and the French gold premium, the Austrian foreign exchange policy is possible only through the monarchy’s favorable balance of payments. That the favorable balance of payments can be established only by increasing external debt through the export of investments is not relevant. The only deciding circumstance, above all, is that the balance of payments is positive. If this were not the case, then the Bank could not sell enough foreign exchange and would have to introduce an agio immediately.

In the past decade, there have been repeated periods in which the foreign exchange rate has been below parity. Gold imports into Austria then took place, and the Bank accepted the gold. In 1901, for example, gold stockpiles of approximately 153 million crowns flowed into the Bank in this manner. The import of gold from abroad continued each time until the foreign exchange rate again had approximated parity as closely as possible, so that additional gold imports were no longer profitable. Under the hegemony of the old Austrian currency system, such gold imports would not have occurred, and this impossibility would have led to an increase in the value of the currency.

If the country had adhered to the nonconvertible currency, then a lack in circulating media of exchange in domestic commerce would have made itself felt soon as well. Even if it is not possible to say something specific about the increase in demand for circulating media of exchange, it remains that the swift (at least for Austrian circumstances) economic development of recent years has broadened this demand to a considerable degree. If this demand for circulating media of exchange were not being correspondingly satisfied (and that that satisfaction was realized was only made possible by the new currency acts), then without doubt, credit reductions and, as a result of them, critical occurrences would have arisen.

The experiences of the last fifteen years confirm the correctness of that theory that a continuing “improvement” awaited the Austrian paper currency.

IV

The increase in the value of the Austrian currency reduced agricultural and manufacturers’ income, and increased the capitalists’ income. The owners of bonds payable in paper or silver saw the value of the debt owed to them constantly increase, and it was understood that they could not be enthusiastic about a currency reform that cut off their hope of additional increases in the value of money.

Nevertheless, the opposition that currency reform found in these circles was powerless, primarily because it lacked even the appearance of a legal foundation. The owners of paper and silver bonds, even of state bonds, had no claim that the country should allow the favorable situation of the monetary system to continue unchanged for their interests alone. The country would have committed no breach of law with regard to them, even if it had freed silver minting again.

The sharp protests that some foreign news media raised against the planned currency stabilization were accorded little importance, because foreign ownership in Austrian investments included only the smallest portions in securities paying interest in silver or in notes, the vast majority of which, however, were paid interest in gold. However, even on the part of the majority of domestic owners of bonds payable in silver or notes, a boisterous opposition was not to be expected. Their standpoint was represented in the currency inquiry commission solely by the secretary general of the First Austrian Savings Bank, Mr. Nava. In the course of parliamentary discussions, hardly any voice had been raised on the part of these doubtless affected interests.

It is surprising, but not inexplicable, that the markets and the banks were not only not opponents of currency reform, but, on the contrary, they exerted so much effort for this cause that those not involved would have acquired the impression that the currency change was primarily in the interests of this circle. The Christian Social Party repeatedly pointed out that high finance decisively advocated for reform.

This opinion of the monetary institutions cannot be traced directly back to the interest that they had in the development of industry and agriculture. Such considerations may well have played a role; however, they were not pivotal by any means. Much more decisive was the fact that, since the Crash of 1873, the banking business in Austria had not really prospered.32 Issuance of securities practically slumbered. In Cisleithanien [Austria], it amounted to:

From 1883 to 1892, only one joint-stock bank was established in the kingdoms and states represented in the state council: the exchange society “Merkur” opened in Vienna in 1887 with capital of 1.2 million florins, which had increased to 1.8 million in 1891. Even two decades after the great speculative crisis, the entire practice of founding institutions still stood under the shadow of a critical breakdown.

Even the bond business had lost its importance since equilibrium had been restored in the state budget. Beginning in 1889, the issuing of new state securities had come to a stop in both halves of the kingdom. The continuing nationalization of the railways withdrew a broad field of activity from private capital.33 The connection between the banks and industry was quite weak, the proceeds from running a business had not assumed the position in the banks’ balance sheets that they enjoy today, and deposit banking was still in its infancy. It was therefore only natural for the banks to link large expectations to currency reform. In spite of this, it could be predicted that this would impact the foreign exchange business, because they promised substantial profits from the issuing of currency certificates and from the acquisition of gold for both governments, and hoped that the simultaneously enacted conversion of the 5 percent bond securities would enliven interest in dividend stocks.

The prospect for large profits that could be made here appeared more appealing to the financial circles than the always doubtful increase in capital bonds. Contributing to this position may have been the fact that the assets of the large capitalists, the bankers and those personalities who directed the policy of the large banking institutions, were predominantly invested in dividend securities and less so in fixed-income-bearing bonds, so that their interests were more closely related to those of the manufacturers than those of the capitalists. The medium and smaller capitalists, mostly owners of public bonds, mortgage creditors, and investors in savings banks, did not have the possibility of effectively representing their endangered interests, because they did not have friends in the media nor in the parliament.

Among the opponents of currency reform that arose in parliament and in the media, the supporters of bimetallism earn a certain respect because two of the most distinguished leaders of the international bimetallism party, Eduard Sueß and Josef Neuwirt, appeared at their head. However, their efforts had to be limited to preventing the implementation of a gold currency in such a way that it would not prevent a possible future transition to a double currency. One could not speak about an implementation of bimetallism in Austria-Hungary alone; it was predictable that the monarchy by itself would not be able to establish a legal exchange rate between the two currency metals and that, under such circumstances, the transition to a double currency would be tantamount to a return to a pure silver currency.34

The primary argument of the bimetallists—the increase in the value of gold since 1873 and its counterpart, the general depression in the price of goods—was completely without effect in Austria, because the value of Austrian paper money experienced greater increases than that of international gold money. The political-economic interests demanded that a currency comparable to that in the Western European nations be established as soon as possible; this pushed into the background for the foreseeable future the demand for a money possessing an invariant purchasing power.

It can only be ascribed to the lack of clarity dominating the problem of the currency system that very few supporters of the international double currency were to be found among the Austrian agriculturists and their close circles. The farmers in countries that had gold currencies were supporters of bimetallism, whose introduction would have meant a decrease in the purchasing power of money. For the monarchy, however, affiliation with an international bimetallism system, which was conceivable only because of the traditional exchange ratio of 1:15.5, would have increased the value of money. “For a country with a gold currency, the transition to bimetallism means a price increase, for Austria, on the other hand, a direct and initial drop in prices,” explained the expert Benedikt in the currency inquiry, because the Austrian seller would initially receive the old amount for his export articles abroad, while those same articles would have a lower value domestically.35

With growing enlightenment about questions of currency policy, the number of bimetallists melted down. There were no supporters of a pure silver currency; this was understandable, since the fluctuations in the price of silver and the fear of a fast rise in value of the white metal if the silver proponents were victorious in North America had given the direct impulse for tackling currency reform in the first place.

One cannot gain a true picture of the position on the currency question held by the individual classes of citizens and interested groups from the reports of the parliamentary sessions or from the news media. Purely political considerations stepped into the foreground and pushed economic opinions into the background. The Croatian and the Young Czech representatives raised fervid opposition to the draft of the reform, because the motto and crest on the coins of the crown currency did not accommodate their constitutional claims. Otherwise, the Czech representatives declared themselves to be completely and fundamentally in agreement with a transition to a gold currency. It is significant for this type of opposition that a few years later their leader, Kaizl,36 when finance minister, cooperated in the continuation of the reform efforts in a distinguished manner.

V

The currency reform met a truly serious and boisterous opposition in the then small, but active, Christian Social Party.

The gold currency was generally viewed with mistrust in the camp of the conservative parties. “The currency reform,” opined Wilhelm Freiherr von Berger, was designed “in the interests of international commerce and international competition, that is, the global economy.”37 He continues, “our limited standpoint allows us to observe humanity in regard to its economic interests as members of naturally and historically determined economic areas; we see grave dangers for these economic interests from a gold currency that appears suitable for assisting the global economy; this is even ignoring for the moment that our monetary system will be abandoned to international gold speculation and exposed to all of the disadvantages associated with the circulation of an international currency.” The advantage from the introduction of a gold currency was “mostly for those elements that believe they have an interest in the development and construction of the global economy, and these are big industry and the large mobile funds.” These two are, by their nature, “cosmopolitan and international.” On the other hand, “the rightly understood interests of all working classes of the truly producing people” depend “on the development of the fatherland as an autonomous national economic state, as an autonomous national customs and commercial area.”38

The uncertain stance of the conservative parties regarding the currency question can be traced partially back to the fact that there were only a few men in their ranks who were capable of making an independent judgment about the difficult and complex problems of the monetary system. They included among their supporters many distinguished agriculturists, several merchants and industrial magnates, but hardly any banking experts, and their scientific party members had consistently dealt more with questions about agricultural and social policy than with policies about the monetary and credit systems. Even a man like Rudolf Meyer39 considered the usual arguments of the bimetallists from gold currency countries to be applicable to the Austrian circumstances, and had nothing to say about the difficulties that arose for Austrian manufacturing from the sinking of the agio.40

Only the events on the foreign exchange market since 1888 and their consequences for agriculture have convinced the conservatives, little by little, that maintaining their opposition to the gold currency was out of place. Finance Minister Steinbach sought out the individual party clubs from the House of Representatives in May and June 1892 and issued explanations to the representatives about all of the important points of the currency question. Indeed, he succeeded in dispelling the misgivings of the agrarian supportive parties, and in winning the Polish Club and the Hohenwart Club, the two most powerful conservative, religious groups in the House, for the draft.

Only the Christian Social Party fought the draft reform proposal with great energy. They were not open even to the necessity of currency reform, and with good reason, as they primarily represented small manufacturing interests. The small manufacturer indeed had less to suffer under a decline in the foreign exchange rate, because he generally did not export anything; he was squeezed by a lack of capital and a lack of credit. The friends of “the little guy” opined that both could be traced back to the lack of circulating media of exchange and considered the most certain assistance to lie in the increase of the nation’s money supply, best achieved through a “moderate” increase in state notes, and eventually through increasing the annual silver minting also, which, however, would be undertaken only for the state budget. The strongest attacks from this side targeted the government’s intention of initiating the currency reform by borrowing a large amount of gold, the proceeds from which the state notes would be redeemed. At least it had to admit, it was claimed, that as a result the tax burdens would be increased and any possible tax reductions would be postponed.

All of these arguments, which had been brought forward by inflationists from all countries and at all times, were accepted by the friends of “our fathers’ paper florin” to defend their standpoint.41 The weapons with which these battles were fought were not always genteel; opponents did not lack for suspicions of and insults toward the “liberal, usurious, capitalistic, national economy.” The objective accomplishments, in contrast, could hardly assert a claim for a serious respect; because even if one accepted all of the inflationist arguments and wanted to admit that “increasing the media of exchange in circulation means welfare and earthly happiness, decreasing misery by the same amount,”42 a series of important considerations remain against the practical implementation of these plans.

When Prince Alois Liechtenstein43 recommended “a rational, moderate inflation accommodating the needs of production but not anticipating them by too much,”44 or Schober desired that the nation might equip the economy “with a sufficiently large amount of non-dwindling money,”45 there was still nothing that could be learned about the goals and methods of a future monetary system policy.

Only Josef Ritter von Neupauer formulated a certain suggestion. Based on chartalist theory,46 he supported maintaining the paper currency; he even wanted to replace the silver florin with notes. Money is, namely, “that which the state declares it to be.” The purchasing power of money is dependent upon its quantity, its velocity of circulation, and the monetary requirements within its geographical area of use. The currency reform, with its transition to specie circulation, was not only squandering the people’s capital, but also was fraught with disadvantages, since it would deprive the government of its ability to influence the value of money by increasing or decreasing the amount of media of exchange in circulation. Indeed, money must not be capriciously increasable. “The natural obstacle to the increase in hard currency,” however, can “be substituted by legal obstacles to the increase in state paper money under public control.” One merely had to detect “an ideal measure of value” that would underlie economic policy. For this ideal measure, however, Neupauer proposed the relative market price of gold for Austrian currency notes. The legislature would have to ascertain a standard price for the yellow metal and decree “by how much the state administration would have to approximate this standard price and counterbalance fluctuations above or below a certain point by regulating the amount of money in circulation.”47

It should be noted that if Neupauer’s proposal had been adopted, which boils down to a type of calculation in terms of gold, the monarchy would have been unable to avoid the effects from a change in the price of gold, whether it were a devaluation due to production exceeding demand, or a rise in its price due to insufficient production. It is inconceivable why Neupauer did not want to endorse the free minting of gold coins according to parity at the standard price. This would offer a secure means against all increases in the international price of gold for the currency, and would place only low costs on the economy, if the circulation of state notes were retained at its entire amount. The primary failure in the Neupauer project, which it shares with all other inflationist proposals, by the way, is the lack of any clear observable indicator for measuring increases in the value of gold. Neupauer carefully skirts another obstacle with which similar proposals usually collide: we mean the difficulty of detecting a reliable criterion for an insufficiently supported demand for currency. Because he starts with the tacit understanding that all other states will retain specie in circulation, a benchmark for the value of the paper currency results directly from its international appraisal. The goal of monetary policy for maintaining the value of money becomes maintaining its parity with a foreign currency; however, the methods that lead to this goal will remain obscure for now. No one can say what effect an increase in the media of exchange by a certain amount is capable of generating. Even Neupauer had to concede this, since he says there might be “by way of a test, a successive increase in media of exchange to be placed in circulation.” The economy, however, is not a suitable object for tests.

It should be assumed with all probability that even the news that a potential increase in the state note circulation was impending (albeit only under legally determined preconditions) would have forced down the price for Austrian money further than would have appeared healthy even to many of the friends of “cheap money.” To what steps would the moderate inflationists then turn? It could have easily come about that the increasing agio would have gone hand in hand with insufficient supply of money in circulation.

The mistrust within market circles and among the broadest classes of the population against any new issuance of notes would have been completely justified. Once such a basis for influencing the value of the currency had been accepted, who could have assured that the agricultural and bourgeois interests (that have prevailed for a quarter century in our politics) would not have soon been pushing for an endless progression on the way to inflation. Where would this have led, if Josef Schlesinger’s48 People’s Money fantasy had become law?

A rational and feasible monetary policy can only make preservation of the stability of the currency’s exchange rate its goal; in the first place, the only means to adhere to this is to maintain specie in circulation, and under the current circumstances this means keeping gold in circulation. Every attempt to promote a single interest group through selective changes in the value of money must inherently fail, ignoring all other reasons, because the economic effects of this kind of measure are only temporary; in order to maintain those effects there would have to be a continuing increase of the notes. This could, however, end in no other way than with a complete devaluation of the money in circulation.49

VI

The power relationships between the parties concerned with monetary policy at the time of tackling currency reform were generally in favor of the introduction of a gold currency. Unimportant in number and influence were those who advocated the maintenance of the current monetary system, because they expected a continuing increase in the value of money. To wit, these were solely the possessors of monetary claims. All other interest groups desired a change in the currency that would offer, at a minimum, a halt to the continuing “improvements” of the value of the currency; all manufacturers belonged to this group, and also the workers and employees, whose interests here went hand in hand with those of their employers. Even high finance, which had substantial words to say about currency questions, was found to be on this side. Admittedly, the opponents of the current currency system were not united in their views about the structure of a future system. However, the efforts to create a “national,” inflationist monetary system were completely futile.

Voices that spoke for the adoption of a gold-backed currency included those speaking for trade and manufacturing interests, and also those voices supporting the gold currency doctrine, the tenet starting from Lord Liverpool’s theory,50 developed further by Bamberger51 and Soetbeer,52 and which remained unshakably standing despite all of the bimetallist attacks. They found solely in the yellow metal a suitable basis for the currency system of a cultured people.

Thus, the question of implementing a metallic currency was already decided before the actual discussions about the reform project had even begun, and general interest had already turned to the so-called relation. This was the point where the parties’ differences most vehemently collided. One ascribed the greatest economic importance to the gold content of the future monetary unit. All investigations about the economic goals and the results of the reform began with the question of the parity exchange relationship.

The importance of the question—whether the new florins would be minted lighter or heavier—was neither to be denied nor underestimated. If one had selected, instead of the parity set by law in August at a base of 2 francs, 10 centimes, a lighter florin of approximately 2 francs or a heavier florin of approximately 2 francs, 50 centimes (the known proposals that were made about the value of the florin fluctuated within these boundaries), this certainly would have exerted a deep and enduring effect on the entire economic system of the monarchy, and the results of such a revolutionary change to the value of money would only have been settled much later. However, there could be no discussion of such a drastic “reform” of the value of the Austrian currency.

The proposals receiving serious consideration for the future exchange value of the currency did not deviate more greatly from each other than the actual fluctuations of the exchange rate on the Viennese market during times of intense movement within a few months or even weeks. That the exchange rate resulting from the currency reform would not essentially depart from 119 was considered to be agreed upon by market circles already one and a half years prior to the introduction of the draft reform in the State Council; and, indeed, it was this fact that constantly pinched the currency rate beginning in fall 1890, far more so than the much discussed gold purchases by the Hungarian government. Also, the apparent difference between average market price and current price, which played a large role in the publicized debates about the draft, lost its importance upon closer examination, particularly if one took into consideration that the difference between these two prices became ever smaller and completely disappeared on the day of the introduction of the draft in the two parliaments, which can certainly be traced back to the activities of currency speculation.

The belief that lay behind the excessive emphasis on the importance of the “relation” in agricultural circles and among commercial manufacturers and the scientific discussions about the currency question (the suspense with which the market followed the battle between the light and heavy florins requires no further explanation) was that the value of money in domestic commerce would not, or would not immediately, change according to the change in the value of the currency on the global market. Or, in other words, it was considered possible, with the transfer to the new currency system, to “eternalize” the currency differential between the Austrian currency and those of the gold currency countries. This view is based, however, on an error. Sooner or later, the prices of all domestic goods and services will adjust to the change in value of money, and the advantages that a devalued currency offers to production, and the obstacles that an overvalued one sets against production, will disappear. This is because the agio as such does not function as an export premium or as a protective tariff; rather, it is merely the increasing agio, or inversely only the decreasing agio, not the low agio in itself, that is able to check exports and boost imports.

The importance of currency policy in relation to currency reform did not lie in the higher or lower “relation,” but rather in that the monarchy converted from a monetary system with a currency that was increasing in value compared with the currencies of the economic Great Powers, to a monetary system with a currency that was stable abroad.

The Act of August 2, 1892, admittedly only arrested the increase in the value of the Austrian currency. Since August 11, 1892, the day that it came into effect, the value of the Austrian florin (2 crowns) essentially cannot rise above the value of 2 francs, 10 centimes or 1 mark, 70.12 pfennig. In contrast, no legal barricade was placed against a decrease in the value of money. This should become impossible in the future due to the implementation of specie payments, which was considered by the creators of the reform act to be its conclusion.

It is certain that the implementation of specie payments was initially postponed only because for its assurance sufficient provisions, most notably the accumulation of a correspondingly large stockpile of precious metal in the bank’s vaults, were necessary, and a favorable configuration of circumstances on the international currency markets had to be awaited. However, it also appeared just as certain that, precisely due to the fact that only a further increase in the value of money had been made provisionally impossible by the adoption of the draft reform, the chance of a possible decrease in the value of money, if one might even discuss such a thing, by contrast remained open, and had assisted in the victory of the reform project. By agreeing to currency reform, the friends of “cheap money” sacrificed nothing and won a great deal: the establishment of an upper limit to the value of money.

The further fate of currency reform admittedly has turned out differently than even the most highly informed circles could have predicted in 1892. After the events on the international currency market in 1893 and 1896 had placed the success of currency reform in doubt, the foreign exchange policy of the Austro-Hungarian Bank, inaugurated in 1896, established the stability of the currency, including a lower limit. It should be noted, however, that this bank policy, initially suggested in 1894 by the then Austrian Finance Minister Ernst von Plener,53 resulted absolutely from the initiative of governmental agencies that were accommodating the desires of the business world. Up until now, it had undergone neither an exhaustive parliamentary criticism nor a corresponding appraisal from the political parties.

Only through the bank’s intervention on the foreign exchange market was the stabilization of the price of the Austrian currency achieved on both ends, and thereby the currency question was solved for the monarchy. Whether specie payments are to be implemented or not is a question of expediency and of the discount policy, in which currency policy considerations play only a limited role. No rational person on this or the other side of the Leitha54 would advocate today against the gold currency.

CHAPTER 2

The Problem of Legal Resumption of Specie Payments in Austria-Hungary1

I

Process of Currency Regulation Since 1892

The currency reform that began in Austria-Hungary in 1892, and for whose introduction great material sacrifices were required by the two halves of the empire, still awaits formal conclusion through the legal resumption of specie payments. At the present time, the lawful money of the monarchy remains a paper currency. The Austro-Hungarian Bank is still relieved of the obligation to redeem its notes in specie, a legal status that remains indefinitely in force.

Admittedly, the experts believe that Austria-Hungary would be quite capable of completing the transition to a gold currency, and that the Austro-Hungarian Bank would be able to comply with all of the obligations that would arise from the legal resumption of specie payments.

Nevertheless, the desire to complete this great reform is small in both Austria and Hungary (as can be seen in the most recently concluded Bank inquiry), and there is no lack of voices that speak out against the legal resumption of specie payments. The present monetary regime, which might be described as a paper currency with gold reserves for foreign exchange transactions, or as a Bank-supported paper currency, would have its “temporary” character transformed into the permanent monetary system of the monarchy. The establishment of this fundamentally different monetary system is claimed to have its rationale in the monetary systems existing in other European countries. The arguments for this system are important enough that they deserve a detailed analysis.

Up until the second half of the 1880s, manufacturers in Austria-Hungary had adjusted themselves to a paper currency, following the ending of a silver-backed currency for private transactions. The value of the Austrian currency was accepted to be in continuous decline in relation to the currencies of other countries on a gold standard. The price of 100 florins in gold (250 francs) in 1872 was, on average, 110.37 Austrian paper florins; beginning that year (with a small interruption), it continued to go up to 125.23 Austrian paper florins in 1887. Both agricultural and industrial producers benefited from this deterioration in the exchange rate. The increase in the foreign exchange rate at the Viennese bourse functioned like a protective tariff on the import of foreign manufactured items and served as an export premium for domestic products sold abroad; it also benefited borrowers at the expense of creditors. Under these circumstances, plans for monetary reform could not depend on much support from either the industrial or agricultural sectors.

The situation reversed itself beginning in 1888, and the value of the Austrian currency began to increase (the price for 100 florins in gold amounted to an average of only 115.48 Austrian paper florins in 1890). Suddenly the manufacturers and exporters who were harmed by the higher valuation of the currency understandably became supporters of the monetary reform that they had fought for years. In general, the belief was widely held that the increase in the exchange rate that began in 1888 was most likely neither a coincidental nor temporary event; instead, it could be traced back to deeper economic causes. There was considerable agreement that the fall in the agio would not stop of its own accord; indeed, it would continue at an increasing rate in the years ahead if a change in the currency was not introduced in a timely manner.

This view was completely justified. The general economic and political situation produced a continuous improvement in the monarchy’s balance of payments, and as a result the foreign demand for Austrian exchange was increasing and the Austrian demand for foreign exchange was decreasing. At the time, there was absolutely no indication that this relationship would change in the years ahead.

The adoption of gold as a basis for the Austro-Hungarian monetary system appeared to be the most suitable way to prevent any further increase in the exchange rate, even though up to that time gold had never been used in the Austrian monetary system. To completely stop any further declines in the foreign exchange rate on the Viennese bourse, the answer was to legally bring the paper florin into a fixed relationship with gold and to obligate the Austro-Hungarian Bank to exchange all amounts of gold offered for banknotes at that rate. This was the approach taken by the legislature. Beginning on August 11, 1892, the effective date of the new exchange rate law, the value of one Austrian florin (2 crowns expressed in the new denomination) essentially could not increase above the value of 2 francs, 10 centimes or 1 mark, 70.1 pfennig.

It was, however, just as important to limit any fluctuation in the value of the Austrian currency at the lower range of the exchange rate. Even if the Christian Social Party (which at that time was rather small and not strong enough to push through all of their demands) had vigorously resisted every step taken to prevent an inflationary bias, the two governments and the majorities of both parliaments were in agreement: the fixing of the international value of the Austro-Hungarian exchange rate was necessary to completely eliminate the speculative activities that had come about as a result of the continuing fluctuations in the exchange rate. The most effective method for achieving this goal would be an immediate transition to a gold standard. Moreover, another positive factor behind the currency reform was the opportunity to improve the international creditworthiness of both halves of the monarchy; Western foreign countries had complete confidence only in nations that were on a gold standard.

There was no clear provision in the Monetary Reform Act of August 2, 1892, detailing the transition to a gold-backed currency. Such a provision would have had little meaning, since the transition to a gold-backed currency required extensive and costly preparations, and could be completed only at a later date. The task had to be approached, therefore, with the greatest caution in order to prevent a disaster similar to the one that occurred a little earlier in Italy, which had delayed the establishment of a fixed exchange rate. Thus the final transition to a gold currency was, in fact, put off; however, continuous efforts were being applied in preparation for it.

Initially, the state notes were taken out of circulation at a fixed rate of exchange. This happened in the following manner: gold proceeds from a large government bond issue were transferred to the Austro-Hungarian Bank, so the Bank could redeem the notes on behalf of the state. However, the redemption of the state notes did not initially take place in exchange for gold; they were redeemed through the issuing of banknotes, of silver florins that up until then had been held as reserves in the vaults of the Bank, and of five-crown and one-crown coins. Even today, the silver florins are face-value coins, just like the earlier German Taler; in contrast, the five-crown and one-crown coins are token coins, and no one is obligated in private transactions to accept in payment more than 250 crowns of the first type or 50 crowns of the second type. Provisionally, the gold remained in the Bank as backing for the notes, with the proviso, however, that at a later point in time the gold would enter into circulation in place of a large portion of the banknotes.

Banknotes took the place of the irredeemable state notes at a fixed rate of exchange. From then and up to the present the Bank’s notes are irredeemable at a fixed rate of exchange. The great progress lay in the fact, however, that under the provisions of the statutes of the Bank, the banknotes were backed by gold and were negotiable, while the state notes had no backing. In addition, it should be mentioned that the gold reserves of the Bank were considerably increased through purchases from private importers as well. The reserves amounted to 1,099.3 million crowns on December 31, 1907, and were at that time exceeded in size only by the gold reserves held by the Bank of France and by the Russian State Bank.2

The only type of currency that currently stands in the way of the introduction of the pure, gold-backed currency, as it would be represented in Bamberger’s ideal,3 is the silver florin, whose minting had been reserved for the government after 1879 and which has been discontinued since 1892. As has already been mentioned, the silver florin is still a legal, face-value coin; however, it is no longer of great importance. At the end of 1904, the monarchy’s entire inventory amounted to 336 million crowns in silver florins, according to estimates by the Austrian Finance Ministry. Due to the agreed-upon minting of an additional 64 million crowns in five-crown coins, which already had been partially implemented, the amount has decreased to 272 million crowns. The increasing demand for the monarchy’s token coins should be able to absorb this remaining amount in at least two decades, even at a modest increase in the token coins. Any threat to the gold-backed currency is thus not to be feared from this corner.

Incidentally, the silver florin has been slowly withdrawn from circulation since the beginning of 1908, and they are being accumulated in the Bank’s vaults. At the end of October 1908, with the minting of the new five-crown coins currently under way, the entire sum of silver florins may have amounted to slightly more than 300 million crowns, of which 285 million were held by the Bank, with the remaining 15 million being in circulation.4

During the summer and autumn of 1892, the foreign exchange rate corresponded fairly closely to the underlying parity of the currency’s exchange rate (100 Austrian florins = 170.1215 marks); indeed, it even dropped substantially below this rate for intermittent periods. Toward the end of the year it began to increase, and this unfavorable relationship continued for the next two years. An agio emerged in relation to the ratio established in the law of August 2, 1892, that temporarily even reached 6.5 percent.

The reason behind this unexpected drop in the value of the Austrian currency, whose continuing increase in value had been viewed as something to be prevented, was due to, as Kalkmann has conclusively shown,5 the simultaneous financial squeeze on the international monetary market. In 1892, when the rate of interest was low for the English, Dutch, and Germans, they had loaned money to the Austrians and bought Austrian notes. As a result of the Australian crisis in May 1893,6 the interest rate rose in London and then in Berlin and Amsterdam as well; the English, Dutch, and German investors now sought to pull their monies out of Austria as quickly as possible. They sent to Vienna the Austrian notes that they had in their possession and demanded payment. Since this could almost only take place through remittance of gold, the price of gold rose immediately and significantly on the Viennese bourse in line with the increase in the London private discount rate. The high discount rate on the foreign stock markets depressed the prices of Austrian and Hungarian investments even more, and caused a large reverse flow of funds that at the same time contributed to the decline of the exchange rate.

The devaluation of the Austrian currency in 1893 was only one link in a long chain of events that occurred as part of the effects on Europe from the Australian and American crises. The government, however, was not guilt-free, insofar as it entered the Western currency markets and aggravated the strain on them at the most unfavorable moment imaginable; that is to say, by issuing 100 million florins in gold bonds and by withdrawing gold assets from abroad.

The government of the Dual Monarchy would have had to undertake two measures in order to prevent the increasing agio. The first measure would have been the release of gold or gold exchange at the parity ratio fixed by the law of 1892. However, the Ministry of Finance was against this, being afraid that this would result in the loss of the gold reserves after those reserves had only recently been regained through great sacrifice. Furthermore, the outcome would have been in doubt. In spring 1893, the Austrian Credit-Anstalt for Commerce and Industry repeatedly made large amounts of foreign exchange available to the market, but without any noticeable effect. The attempted lending of foreign exchange by the Austro-Hungarian Bank had just as little effect.

A satisfactory outcome could have resulted only if the Bank had followed an energetic interest rate policy. However, that would have been impossible because the two governments, influenced more by political considerations than by economic ones, attempted to keep the rate of interest low, and by lending large amounts of money, they tried to create an artificial quantity of credit on the markets. On August 2, 1893, the Bank of England increased its discount rate from 2.5 percent to 3 percent; on August 9, from 3 percent to 4 percent; and on August 23, from 4 percent to 5 percent. While doing so, it announced that additional increases in the discount rate would be forthcoming, and soon rumors circulated that it would not balk at increasing its official discount rate to 10 percent, if the outflows of gold did not end soon. The German Reichsbank had already increased its official discount rate to 5 percent on August 11, and it was officially announced in Berlin that the Reichsbank planned to align its discount rate in accordance with London in order to protect its gold reserves. The Austro-Hungarian Bank, however, persisted with its discount rate at 4 percent, even though the agio on the Austrian currency was constantly increasing and already equaled 5 percent by mid-August; as late as September 27, the Hungarian finance minister, Weckerle, spoke out in parliament against any increase in the discount rate. Only on October 5, when the decline in the currency’s value was already very noticeable on Western markets, did the Bank increase the discount rate to 5 percent.

The definite improvement in international currency markets allowed even the Austrian foreign exchange rate to soon rise again. On November 9, 1893, the London foreign exchange rate achieved its highest level on the Viennese bourse, reaching 127.65. This rate marked a devaluation of 6.3 percent compared with the new parity of 120.087. Over the course of November, the agio fell extremely fast. After the London foreign exchange rate had fallen again to almost 125.00 on December 19, and then temporarily increased to 126.00 on February 1, 1894, it fell slowly but fairly constantly throughout 1894 and 1895. On October 17, 1895, for the first time again, the foreign exchange rate stood at parity.

From that point onward, the foreign exchange rates followed a less extreme trend. Since 1896, they have diverged no further from the parity ratio than would be the case following the legal resumption of specie payments. The small deviations from parity that could arise would be within the two gold points, that is, considering the costs of transporting gold coins, the wear and tear on the weight of coins circulating within the country’s borders, the costs of minting, and the loss of interest income during their minting and transportation.

From these numbers, it can be seen without a doubt that, since 1896, the Austrian currency has been able to match any of the European gold currencies in terms of the stability of its value.

As a result of the apparently successful achievement of a stable intercurrency exchange rate, which was the intended purpose of the currency reform, the two governments brought forward a bill before both parliaments in spring 1903 that had as its purpose the legal resumption of specie payments as the “crown” (as it was called) to the efforts for monetary reform. Because of the major political crisis that soon broke out, the bill never came up for parliamentary consideration, let alone for final passage. In the meantime, the proposals brought forward by the previous liberal government had become totally meaningless in the face of the complete change in the Hungarian government, and as a result, Austrian Minister Beck formally withdrew the bill on July 7, 1906.

Throughout this time, public opinion in Austria had remained negative toward the proposal. Of considerable importance were the opinions of the Industrial Council and the statements made by the Chambers of Commerce and Industry in Vienna and Brünn.8 These views were summarized and detailed in a series of newspaper articles. At the present time, it can be said with good reason that opposition to the legal resumption of specie payments and the reasons for taking this position are shared by all of the major Austrian political parties.9 Even the government appears to have aligned itself with this view, having abandoned its previous position and claiming to have found a theoretical support for this view in Knapp’s Staatlicher Theorie des Geldes [The State Theory of Money].10

The legal resumption of specie payments is said to be too risky, in view of the uncertainty of future events on the international currency market and the unsettled political situation at home. Its only purpose, it is claimed, is to assure the stability of the foreign exchange rate, which has already been achieved without legalized specie redemption due to the Austro-Hungarian Bank’s foreign exchange policy. The legal introduction of specie payments would require the Bank to resort to more frequent and larger increases in the discount rate in order to protect its gold reserves. This would drive up the cost of borrowing, which would in turn put obstacles in the way of manufacturing. The relatively low discount rate in Austria was made possible only by the fact that the Bank was not obligated to redeem its notes. Even in times of great tension on the international currency markets, the Bank could keep the interest rate appropriately low, because it did not have to fear that its gold reserves would be withdrawn for the purpose of being sent abroad when the price of gold made it seem right to do so.

A critical examination of these views must attempt, above all, to determine the fundamentals of the Bank’s foreign exchange policy.

II

The Position of the Austro-Hungarian Bank on the Currency and Foreign Exchange Markets

The foundation of the currency reform activities of the Austro-Hungarian Bank is based on the near total concentration of the gold reserves of the monarchy within the Bank, along with foreign gold reserves in possession of the Bank.

The gold reserves of the Austro-Hungarian Bank amounted to:

In comparison with these gold reserves, which as was mentioned are exceeded in amount in Europe only by those held by the Bank of France and the Russian Central Bank, the amount of gold still freely in circulation does not add up to very much.

The designers of the reform of 1892, which was in most respects modeled after the German monetary system, planned for a fairly wide circulation of gold inside the domestic economy. According to their plan, small transactions would be handled by silver, nickel, and bronze token coins, and medium-size transactions by face-value gold coins, while banknotes would be used only for large transactions, insofar as these could not be replaced through improved uses of checks, bank transfers, and the clearing mechanism. Accordingly, in Article 82 of the Bank Statutes, which were changed by an imperial decree on September 21, 1899, a provision was added that banknotes were not to be allowed in amounts smaller than 50 crowns. The issuing of twenty-crown notes would be permitted only until the time of the legal resumption of specie payments. On the other hand, the issuance of ten-crown notes to a maximum amount of 160 million crowns was also planned for the period following the introduction of specie payments. These latter notes could not be seen, however, as banknotes in the usual sense; it would be more correct to designate them as gold certificates because they had to be fully backed at all times by gold.11

The time was seemingly drawing near in 1901 when the Bank would be prepared to resume legal redemption in gold, since it was already doing so, on demand, though not as yet so obligated. In anticipation of this, the Bank began to issue ten- and twenty-crown gold coins at the end of August 1901, since at the time of legal resumption all smaller notes up to 20 crowns were supposed to be removed from circulation. It was thought that the twenty-crown notes could more easily be taken out of circulation if this was done at the same time that they were replaced with gold coins. In addition, as the population became accustomed to the use of gold coins, it would be easier to determine what the actual demand for them would be throughout the empire. Another way of determining the demand for them would be by simply determining the amount of twenty-crown notes in circulation. Concerns were expressed, however, about the amounts that might be needed to meet the demands in the rural areas due to a fear that the population there might hoard the gold coins. As was soon demonstrated, concerns of this type were completely unfounded.

To the great surprise of the government and the Bank, the public’s opinion about the gold coins turned out to be quite negative. It had been expected that the population would greet the appearance of a gold currency with jubilation and see in it a demonstration of the success of the currency reform. Instead, the people who had grown to adulthood under the reign of paper money found the use of gold coins to be uncomfortable. The five-crown coins, silver florins, and one-crown coins, which had been placed in circulation after 1892, could be kept in circulation only because the one- and five-florin state notes had been withdrawn at the same time. Everyone who received the gold coins in payment attempted to exchange them for notes as quickly as they could, so the gold soon flowed back into the Bank.12

Additionally, a smaller amount of 10 million crowns was placed in circulation by the Hungarian government by the end of March 1903.

At the beginning of 1908, therefore, there was at most 234.8 million crowns in circulation (ignoring the insignificant amounts placed in circulation by the Hungarian government, and about which no particulars are available). Considering the stability of the foreign exchange rate, it may be assumed that the coins in circulation did not flow out of the country in any considerable amount. On the other hand, it is certain that a large portion of the coins remained in the coffers of the government and in the vaults of the large banking institutions, and so on.

The actual amount in circulation, therefore, is thus found to be considerably lower than the maximum cited above. Even this smaller amount of gold was kept in circulation by artificial methods, with the exchequer trying to make its payments in small amounts of gold, often against the desire of the recipients. It is worth noting that, as was stressed in the 1903 report on guidelines for implementing specie payments, “recently the circulation of twenty-crown coins has been decidedly in decline, while the circulation of ten-crown coins has shown a fairly sustained increase. This leads to the conclusion that in view of the undeniable public distaste for using gold coins, the issuing of ten-crown notes that was set at 160 million crowns by an imperial decree on September 21, 1899, has turned out to be too low given the demand for notes of this denomination.”14 Bilinski came to the same conclusion when he referred, in particular, to the use of ten-crown coins in industrial areas.15

In the 1903 draft proposing the legal resumption of specie payments, the government completely dropped the position it had maintained up to that point concerning the denomination of notes and withdrew its opposition to the issuance of smaller notes. Paragraph 2 of the draft gave the Bank the right to issue ten- and twenty-crown banknotes, even after the legal resumption of specie payments; however, this was done with different regulations concerning the backing of these notes. These notes were to be completely backed by precious metals up to an amount of 400 million crowns; for any quantity in circulation that exceeded this amount, the same regulations would apply as those for other notes issued by the Bank that were backed by gold.

Thus, in a very short time, the government’s view on the question of the size of the denomination of notes and, therefore, on the question of how much gold would actually be in circulation had undergone a surprising change. It would be incorrect to assert that this reversal primarily was due to the experience of what happened after the gold coins had been placed in circulation. Similar experiences are to be found in other countries, without this leading to a change in government policy. Most recently in Russia, though gold coins were initially rejected, they were still forced on commercial transactions.16

Over the years, the Austrian government has not objected to imposing great inconveniences on the market if it was seen as furthering an important, or allegedly important, public interest. The relatively minor inconvenience that the citizenry experienced due to their unfamiliarity with gold coins would have been easy for them to get over. It is probably more accurate to say that the Finance Ministry had, in the meantime, discovered the great economic impact that is inherent in the concentration of the national gold reserves in the central bank. The reports about the reasons behind reform policy decisions offer many clues in this direction; on the other hand, the practices of the Bank and the exchequer to constantly try to put gold into circulation appear oddly in contrast with that.

The monarchy’s gold reserves for foreign exchange were not concentrated to the same degree as the gold reserves in the Bank’s possession; the monarchy still had control of large amounts in foreign exchange and other assets held in foreign accounts.

After the Austro-Hungarian Bank had acquired large amounts in foreign exchange, the Statute of 1862 (Plener’s Bank Act) formally granted it a qualification in paragraph 20: “for the maintenance of a corresponding ratio between its holdings of the precious metals (coined and uncoined gold and silver) and the banknotes in circulation, it may buy or sell foreign exchange at locations abroad.” However, only the edict circulated by the Ministry of Finance on October 30, 1868, in fulfillment of the law of June 30, 1868, gave the Bank permission to include negotiable foreign exchange as backing for the Bank’s notes. In the crisis during summer 1870, the Bank provisionally was granted the authority to include in its portfolio foreign exchange along with the precious metal as backing for notes in circulation.

In Article 111 of the 1887 Bank Statute, the Bank was, in general, permitted “for as long as the fixed exchange of state notes is not abolished in both parts of the Dual Monarchy, to include as part of their specie reserves any foreign exchange (up to a maximum amount of 30 million florins) that are held in locations abroad, and which are legally payable in a currency backed by the precious metals.” The purpose of this regulation was to transform a part of the Bank’s holdings of precious metals into interest-earning assets, and, thus, increase the stock dividends of the Bank and the portion of the Bank’s profits that went to the state.17

Under Article 111 of the Bank Statute of September 21, 1899 (which is still in effect) the Bank is permitted, for as long as its obligation to redeem its notes in legal hard currency is suspended, to include as part of its specie reserves any foreign exchange and foreign notes (up to a maximum amount of 60 million crowns) that are held in locations abroad, and which are legally payable in a currency backed by precious metals equivalent to gold.

The Bank is further allowed under Article 56k of the statute to buy and sell, in addition to foreign exchange at locations abroad, the acquisition of which had already been previously permitted, the following: checks at locations abroad; foreign notes and additional foreign exchange not denominated in crowns that may be bought domestically; also to issue checks and money orders at locations abroad; to undertake debt collections abroad and to make payments on foreign accounts; and to maintain sufficient funds abroad for the conduct of these activities. In addition, the Bank was authorized by Article 65, No. 4, to provide at locations abroad foreign exchange having a maturity of a maximum of six months (exactly analogous to foreign exchange held domestically), insofar as it—except for the maturity date—matches requirements for foreign exchange available for discount. The legal status of including negotiable and foreign banknotes redeemable in gold was included under Article 84. All of these provisions are separate from the suspension of specie payments; and paragraph 3 of the 1903 draft would have permitted the inclusion of foreign exchange (up to a maximum of 60 million crowns) as part of the Bank’s precious metal reserves after the legal resumption of specie payments.

Even though the Bank was allowed to acquire foreign exchange in this manner, long before the initiation of the currency reform, it made little use of it.

Up to 1887, the Bank was limited to the amount of 200 million florin notes that it could put into circulation under Plener’s Bank Act, which was modeled after Peel’s Bank Act.18 This limit on the Bank’s ability to issue notes not backed by the precious metals required the Bank to reduce its foreign exchange holdings because the growth in domestic market transactions resulted in an increasing demand for notes. Thus, due to the actual and anticipated domestic demand for notes, which had to be backed by gold, the Bank’s foreign exchange holdings were repeatedly, and almost completely, liquidated, particularly after 1882.19 At the end of 1882, for example, foreign exchange holdings amounted to only 95,981 florins.

On average, the foreign exchange holdings of the Bank at the end of each year amounted to:20

Prior to 1892, the Bank’s foreign exchange holdings did not have an important role in matters relating to monetary policy. After the end to the unrestricted minting of silver coins in 1879, the Austrian currency became a floating currency, with its value linked neither to the price of a precious metal nor to a foreign currency. Neither gold nor foreign exchange redeemable in gold could be obtained from the Austro-Hungarian Bank. The Bank’s operations in relation to its foreign exchange portfolio were limited to the exchange of short-term paper for long-term paper. Attempts to influence the currency exchange rate by selling off foreign exchange at a particular price failed completely. Doubtless any similar attempt would have led to a similar failure; the relative insignificance of the foreign exchange holdings would have certainly frustrated all such attempts.

The currency reform of 1892 did not initially bring about a change in the Bank’s policies. It was only the unfavorable structure of the foreign exchange rates for the Austrian currency in 1893 and 1894 that resulted in both the Austrian and Hungarian governments approaching the Bank at the beginning of 1894, with the initiative originating with Ernst von Plener, who was then Austrian minister of finance. They declared that it was particularly important that, so as to assure that “the legitimate needs of business could regularly depend upon the Bank’s assistance, that the Bank assign the greatest possible expansion to their dealings of foreign exchange and currencies, and make whatever adjustments necessary so a portion of its reserves might be used for the execution of foreign currency transactions.”21

After it was repeated not much later, the Bank met this request in the most generous way. Beginning in 1896, the Bank began to focus its interest on the foreign exchange market to a much greater extent. Making use of the ordinances in the new Bank Statute, beginning in 1900 the Bank acquired other foreign assets in its revolving accounts in other countries, in addition to its holdings of foreign exchange.

On the basis of the public records, it is possible only to a limited extent to present a quantitative summary of the Bank’s dealings in foreign exchange. The Bank provides no data about its holdings of foreign exchange and other foreign financial assets separate from its precious metal reserves; these are often simply covered under the entry “other activities.” We, therefore, have to limit ourselves to quoting the few numbers that are spread out through a number of different publications. However, these numbers are sufficient to offer a picture of how significant a part these foreign exchange holdings played in the Bank’s business.22

The Bank’s holdings in foreign exchange and assets amounted to:23

The following data are available about the Bank’s dealings in gold and foreign exchange:

An idea about the size of these transactions can be gained from a memorandum issued by the Bank’s governor, Dr. von Bilinski. On one day, December 12, 1903, the volume of transactions undertaken by the foreign exchange department of the Bank amounted to a total of 71,901,000 crowns, in the amounts: 203,500 British pounds; 41,876,355 German marks; 18,527,333 French francs; and 196,000 Dutch florins.

The Bank’s profits from its dealings in foreign currencies and exchange are correspondingly understood to have constantly increased. They amounted to:

By an intensive cultivation of its transactions in foreign exchange, the Bank succeeded in gradually attaining the dominant position on the Vienna foreign exchange market. The trade in foreign currency and exchange conducted by the major banks in Vienna, which had been a rich source of income for them, fell into an inexorable decline. In 1895 the earnings of just the Credit Anstalt, the Bankverein, and the Länderbank together (the three largest banks) amounted to 2.67 million crowns, but in 1907 it came to no more than 1.39 million crowns.

Of particular importance for the development of the Bank’s foreign exchange dealings was the transfer of all the government’s gold supplies to the Bank. Up until 1901, the government had deposited its gold revenues, most of them from customs duties, with Viennese investment banks for a low rate of interest. In exchange, these Viennese investment banks were under the obligation to furnish the necessary sums for foreign payments at the same low terms to both the Austrian and Hungarian governments. These transactions were quite lucrative for the banks, but not for the treasury in general. The government’s foreign payments on particular dates for bond coupon redemption constantly exceeded its receipts in actual gold, and therefore it was forced to make considerable purchases of foreign exchange to cover these expenditures. For obvious reasons, the foreign exchange rate on exactly these days is quoted above parity, and for this reason the banks could count on a high price from the state’s coffers. This disadvantage carried even more weight because this offered the banks the possibility of thwarting the discount policy of the central bank. Those clauses in the Bank’s statutes that allowed it to have interest-earning deposits as well as to handle certain types of coinage and liquid assets (in notes or coin) in foreign currencies (Articles 75 and 111) provided the prerequisites for the central bank to take over the official administration of the government’s gold, which it did in 1901.26

In this way, the Austro-Hungarian Bank gradually gained a preeminent position on the foreign exchange and currency markets. The vast majority of the country’s gold reserves, as well as a large portion of the foreign currency and other short-term receivables that the monarchy had to have abroad, were now available to the Bank. The majority of all foreign payments took place through the Bank’s mediation. Through this method an enormous power was concentrated in the hands of the Bank, which it employed in the defense of its specie reserves for the good of the entire economy.

III

The De Facto Resumption of Specie Payments

The discussion concerning the economic impact of Austria-Hungary’s currency policy is, therefore, often directed along the wrong channels, so there is frequently a complete misunderstanding about the nature of the actual circumstances at the present time. From a formal, legal perspective that focuses on the literal letter of the law, it is constantly pointed out that specie payments are still suspended within the monarchy. And from a purely legal point of view, it cannot be disputed that the Austro-Hungarian Bank remains exempt from meeting any obligation of redeeming on demand its notes for legal coinage in the precious metals. But we consider this legal fact to be of secondary importance.

From the economic perspective, the suspension of specie payments has no importance, because for twelve years the Bank has made no use of this legal clause; not for a single day has it barricaded itself behind Article 111. The Bank has been prepared at all times to issue gold and gold-backed foreign exchange, checks, and so on to anyone who was in a position to transfer to the Bank the equivalent value in its notes or other Austrian payment instruments. Therefore, no further particular explanation is required for explaining the stability of the foreign exchange rates since 1896. De facto, if not legally, Austro-Hungary is currently a gold-standard country.27 For this reason, any increase in the price for foreign exchange on the Viennese bourse that would be above the upper gold point is already impossible, because the Bank constantly supplies foreign exchange at a lower rate.28

Looked at in this way, it is unimportant that the Austro-Hungarian Bank primarily, but not exclusively, issues foreign exchange and checks backed by gold, instead of actually exporting gold like other central banks. In no way does this indicate the Bank’s desire to step back from its voluntarily assumed obligation to make specie payments. In fact, the opposite is true, since the Bank issues foreign exchange below the gold point, making it more advantageous to receive and to provide these instruments instead of any actual gold.

The Bank also has not viewed its supply of gold as a noli me tangere [an untouchable item], but rather has willingly placed it at the service of the business world. The Bank has exported gold as often as this has been considered necessary to replenish any reduction in its reserves of foreign assets, and receives an equivalent value in foreign exchange or other assets at its various branches, which it can then control by the issuing of checks.

Equally irrelevant is the fact that, in general, it is not possible to know in Vienna at what price the Bank will be ready to supply foreign exchange. It is no different in Berlin and London; even there no one can know at what price foreign exchange will be demanded the next day, and the only constant is that the gold points form the limits for any fluctuations in the foreign exchange rates. Exactly the same is the case in Vienna: the lower boundary of the exchange rate is determined already by the legal obligation of the Bank to redeem every kilogram of gold offered to it at the rate of 3,280 crowns (less the minting fee of two crowns); the upper boundary may not be legally fixed, but for all practical purposes it has been set at a rate lower than the upper gold point, as shown by the fact that the Bank never refuses to supply gold or foreign exchange below that upper point.

Admittedly, one could argue that while the Bank does indeed at this time voluntarily supply foreign exchange below the gold point, it, however, does not have to do so and could refuse to at any time; or it could refuse to supply it at lower prices, or at least it could refuse to issue it to certain individuals such as well-known arbitrage dealers. Whoever makes this claim, however, would only demonstrate his limited knowledge of the politics and economics of the situation. Under the current rules, the Bank could not introduce a change of such importance as refusing or restricting the supplying of foreign exchange against the wishes of both governments. No minister would give his agreement to this step without a very pressing need. Nor could there be a shift away from the Bank’s current policy of exporting gold on demand, until all other means were found to be ineffective at stemming an outflow of gold.

The Bank would no more thoughtlessly resort to such a drastic measure as discontinuing gold payments than would any of the other countries that are legally required to make such specie payments. The impact on the market would be the same as the suspension of specie payments in any of the gold-standard countries. The immediate effect on the currency market from doing so, and, through this, its effect on annuities rates and other securities, would be devastating, to say nothing of the deeper, more long-term effects on the entire economy from a new agio emerging for a period of time.

Legally, it may very well be the case that specie payments are currently made voluntarily by the Bank only because they could be discontinued under tacit agreement with the government; whereas after legal resumption of specie payments, a law or at least an imperial emergency decree with the temporary force of law would be required for specie payments to be stopped. From an economic perspective, however, the voluntary nature of specie redemption does not really exist, because the historical precedent of making such payments leaves no choice other than requiring the legal introduction of specie payments.

The domestic and foreign stock exchanges, as well as the banking world in general, have been accustomed to the current situation for a long time; and understanding the nuanced reality of this aspect of public life in the country, these markets have assigned the same value to the currency of the Austro-Hungarian Monarchy as they do to other gold-standard countries.

In these circumstances, the legal resumption of specie payments, as both governments requested it in the spring of 1903, represents nothing more than a legal formality. It would mean only that the law recognized an already existing situation; the economic reality of specie payments that now already exists would be made into the permanent rule by a formal legal adoption of a gold standard. For quite some time now, specie payments have already been implemented for all practical purposes, with banknotes being fully redeemable.29

The secretary general of the Austro-Hungarian Bank, Hofrat von Pranger, therefore, justifiably asserted in a session of the General Council on April 2, 1903, shortly after the introduction of the guidelines, that as far as the Bank is concerned, questions connected with the introduction of specie payments had already been decided. Whether or not the Bank was legally obligated to redeem its notes for a precious metal was no longer a deciding factor in the Bank’s behavior as guardian of the currency. The Bank would take exactly the same measures in the defense of the currency after the legal resumption of specie payments as it took currently, if the necessity for a defense of the currency were to occur.30 The Bank does not currently refuse to pay gold upon demand for domestic use or for foreign transactions, and nothing will be changed by a legal provision. Austro-Hungary thus currently makes specie payments in practice, if not as a legal obligation.

It is therefore unnecessary to ask how it has been possible for the Austrian currency to have so stable a value since 1896, since this appears to be sufficiently explained by the policy of de facto specie payments. Instead, it should be asked, what has made it possible for the monarchy to resume specie payments and to maintain them up to the present day?

The answer is found in the extensive account given by the Austrian Finance Ministry about the monarchy’s balance of payments, which is the only one currently available in the entire statistical literature.31 It shows that the balance of payments was “positive” even when this was achieved only by a considerable export of investments. Therefore, the Austrian economy constantly had sufficient foreign exchange available in order to meticulously meet any foreign demands.

The generally favorable pattern of the balance of payments naturally does not exclude the fact that for longer or shorter periods of time there temporarily has been an unfavorable exchange rate. A particularly severe disruption of this type was caused by the widely discussed devaluation of the Austrian currency in 1893. The agio appeared for the last time toward the end of 1895: since 1896 it has been completely gone. Is this an indication, perhaps, that since 1896 there has not even been a temporary need to export gold to cover a momentary deficit in the balance of payments?

Most certainly not. Even after 1896, the monarchy’s balance of payments—and this occurs in all countries, even in the wealthier ones—has repeatedly shown a deficit. However, the Austro-Hungarian Bank had changed its policy method in the meantime: it had learned to conduct a discount policy and indeed to conduct it as vigorously as the circumstances required: that is, the Bank would increase its discount rate to bring about an improvement in the balance of payments. In addition, the Bank has every time supplied gold and foreign exchange for export whenever required. This was made possible due to the large precious metal reserves and the stockpile of gold-backed currency that the Bank had accumulated over time.32

The change in the Bank’s activities, which it completed during 1896 without any fanfare, remained unnoticed by the public for a long period of time. Only gradually have people begun to recognize its importance, and it has still not yet entered everyone’s awareness that with the actual resumption of specie payments, the great task of the currency reform has been fully successful with only its formal adoption still remaining to be completed.

IV

The Alleged Advantages of Suspended Specie Payments for the Currency Market

The difference between legal and practical specie payments, which we have just developed, is not covered by the distinction between compulsory and de facto specie payments that is widely used in discussions about the Austrian currency. Compulsory specie payments, according to this distinction, mean the regulations governing the monetary system that would come into effect following, for example, the adoption and implementation of the specie payment guidelines of 1903; that is, a monetary constitution that legally obligates the Bank to redeem its notes for specie. In contrast, the present arrangement of de facto specie payments is one in which the Bank has the authority to redeem its notes, but is not under the obligation to do so.33

Indeed, the Bank does redeem them voluntarily, but the fact that this occurs only voluntarily, it is said, carries a weight of great importance. That is to say, this enables the Bank at any time to refuse to export gold and, in this manner, to protect its specie holdings and the currency during periods of rising interest rates on the international currency markets without having to implement a reciprocally spiraling hike in the discount rate. The expectation that the Bank may not pay in gold frightens away those who would desire to acquire foreign payment instruments merely to invest abroad at higher rates of interest; as a result, such individuals do not apply to the Bank for redemption, and thus the Bank does not have to actually refuse such demands for specie payment.

On the other hand, those with legitimate commercial claims for specie payments in order to import goods, as well as the demands by large bond debtors (countries, provinces, municipalities, private railways, mortgage banks, etc.) who need to redeem coupons that are reaching maturity can count on the Bank meeting their demands at any time. The entire economy, it is said, enjoys the advantages of a currency that is internationally stable in value at a low discount rate.

It is believed that the validity of this argument may be seen especially in the events on the currency markets during the tensions in 1906 and 1907. During this time, the Austro-Hungarian Bank in fact succeeded in defending its gold reserves with an interest rate that did not rise above 6 percent, while at the same time the bank rate in London

amounted to 7 percent and in Berlin to even 7.5 percent. If, like the other European central banks, the Austro-Hungarian Bank were solely dependent on its discount policy for a defense of the currency, it would definitely have had to take refuge in a higher interest rate in order to prevent an outflow of gold. And because Austro-Hungary is a debtor country, the interest rate would have to have been even higher here than abroad in order to get creditors to defer making their claims.

If we compare the discount rate of the Austro-Hungarian Bank with that of the German Reichsbank in 1898, the result is that the average rate in Berlin was higher than in Vienna; only in 1899 was the average rate the same for both banks, and throughout 1902, with some exceptions, the average rate in Vienna was not quite a quarter of a percent higher than in Berlin. In 1903, 1904, and 1907, the bank rate in Vienna was also lower on average than the rate in London; this difference amounted to a quarter of a percent in 1903 and was negligible in 1907. One must, however, keep in mind that the Bank of England discounted below its official interest rate, while the Austro-Hungarian Bank has not done this for many years. A comparison with the French situation, with respect to the particular position of the Parisian currency market, does not show anything of significance.

Of particular note is the great stability of the Austro-Hungarian Bank’s discount rate. It never climbed as high as that of the German and English central banks, and it also never fell as low. In the sixteen years from 1892 up to and including 1907, the Bank of England changed its discount rate seventy-four times; the German Reichsbank did so fifty-seven times; the Austro-Hungarian Bank, twenty-one times; and the Bank of France, ten times.

For the movements of international precious metals, however, it is the market discount rate, not the Bank’s discount rate, that is decisive. The leading position on the currency markets definitely centers on the private discount rate.

A comparison of the market discount rates immediately gives a different view than that given by the Bank’s discount rate. It is seen that the interest rate on the open market in Vienna consistently remained above that in Berlin; even 1900 and 1907 (crisis years in Germany) and 1903 were not exceptions to this. In general, the Viennese private discount rate was similarly above the London rate; only in 1902 and 1903 did the interest rate in London exceed that in Vienna. It is self-evident that Vienna also had a higher private discount rate than in Paris.

This structure of interest rates on the open market naturally does not exclude the fact that sometimes the rate in Vienna temporarily stood considerably below the rates in foreign countries. This was most clearly observed during the critical events in the last quarter of 1907.

It can be seen that sometimes even the private discount rate in Vienna sank below that in the Berlin and London markets, and that the Austro-Hungarian Bank’s discount rate was in general lower than that of the German Reichsbank, and even temporarily lower than that of the Bank of England.

The predominant explanation that the Bank could follow this interest rate policy due to the peculiarities of the Austrian currency system is totally unjustified.

Above all, it is not the case that the Austro-Hungarian Bank “simply refused to export foreign exchange and gold, when it considered this as only serving the purpose of facilitating foreign investments.”35

The Bank’s conduct was a far cry from this explanation. Whenever it seemed advisable under the circumstances, the Bank sent gold abroad. If the domestic currency requirements were temporarily low and the Bank’s gold holdings relatively high, the Bank would trade a portion of its gold reserves for interest-earning foreign exchange, rather than have the gold reserves remain in its vaults earning no interest. During extremely stressful times on the international currency markets, such gold exports by the Bank take on increased importance, because they help alleviate the situation on the international currency markets and therefore directly bring about an improvement on the domestic currency market.

This naturally assumes that domestic claims made on the Bank are sufficiently low that the gold does not have to be held, even under the most stringent observation of the regulations relating to gold reserves. Even putting aside the specific regulations concerning gold backing for the ten-crown notes and a portion of the banknotes that replaced the state notes, up to now the total notes in circulation have been far below the Bank’s authorized maximum limit of two and a half times the precious metal reserves (holdings in gold in domestic and foreign coins as well as bars, silver florins, token coins, and foreign exchange up to a maximum of 60 million crowns), even during times of heaviest demand, and are predicted to remain even lower in the years to come.

The only concern is if the Bank, due to gold exported abroad, runs the risk of exceeding its tax-free limit of 400 million crown notes in circulation. Every increase in notes above this limit imposes a 5 percent tax on the Bank; if the interest rate earned by the Bank does not exceed 5 percent, it suffers a loss from issuing these notes. The income earned from gold exported to foreign markets can, under certain circumstances, completely cancel out these losses. The Bank’s concern over this statutory regulation disappears as soon as its discount rate rises to 5 percent or higher, which is usually the rule in times of great financial distress.

The correct policy for the Bank, then, in these circumstances, is to send gold abroad in trade for interest-earning foreign exchange. The general economic advantage joins the private economic gain of the bank stockholders and the state treasury, both of whom are keenly interested in the profitability of the Bank. Thus, the gold sent abroad helps to mitigate the rise in the price of gold on foreign exchange markets and at the same time reduces the demands made on the Bank by those at home who want to send gold abroad in order to profit from the higher interest rates. Because the difference between Viennese and foreign interest rates becomes smaller than it would have been without the Bank’s gold exports, the incentive to acquire foreign currency or to export gold is lessened. In essence, this is exactly the same policy repeatedly followed by the Bank of France. The assistance that the Bank of England received from its French sister institution during the Baring Crisis and in autumn 1907 had its basis primarily in the discount policy followed in Paris. France most effectively protected its liquid assets and its relatively low interest rate simply by making its gold available abroad. The gold holdings of the Bank of France are enormous, and the Bank is not obligated by any legal clauses to maintain a particular ratio of currency to gold backing. It can, therefore, easily do without a large amount of gold and, like the Austro-Hungarian Bank, come to the assistance of foreign markets at critical moments.

By exporting gold, however, the Austro-Hungarian Bank increases its holdings of foreign exchange and other foreign assets. It is thus in a position to sell foreign exchange to those capitalists who want to send gold abroad, and can sell it at a price which always lies below the upper gold point. In this case, therefore, it never comes to an actual export of gold through private hands. The entire transaction peters out through foreign exchange passing into private hands out of the Bank’s portfolio. The effect on the domestic currency market, however, is the same as an actual export of gold. Notes flow back into the Bank and the market rate rises.

Foreign central bank disclosures about the transfer of the precious metals indicate the international gold transactions that have already occurred. The situation is not as simple in reference to the Austro-Hungarian Bank. In general, the Bank’s foreign exchange activities can be documented only through movements in “other assets” on the Bank’s balance sheet. If the accrual of “other assets” corresponds to a decrease in gold reserves, then it can be construed from this that the Bank exported gold and acquired foreign receivables in exchange for it. A decrease of “other assets” can indicate any number of activities. If it corresponds to an increase in the “foreign exchange reserves,” that is, those foreign exchange assets that are calculated as part of the gold reserves, then this can be considered to be a purely accounting operation, under which long-term foreign exchange that has come to be qualified as part of the foreign exchange reserves has been added to the precious metals account. It is also conceivable that the Bank has applied foreign exchange to its asset accounts with its corresponding banks. If with a decrease of “other assets” there occurs no corresponding increase in its precious metal holdings or in its foreign exchange reserves, then one must conclude that there occurred a transfer of foreign exchange and checks to the private sector, which has to be considered as a decrease in the circulation of notes.

The Bank avoids the need for supplying gold for export; however, since the voluntary introduction of specie payments that took place in 1896, it has never refused to supply foreign exchange below the upper gold point. It is possible, therefore, that requests for the surrender of actual gold never reach the Bank because, in these circumstances, it is cheaper to export foreign exchange than it is to export actual gold. For the Bank alone, with its large, non-interest-bearing reserve of gold, the export of gold is lucrative at any time, because it thereby exchanges uninvested capital for interest-bearing capital; for other capitalists, only an increase in the foreign exchange rate above the upper gold point creates an incentive for an actual export of gold. As soon as the Bank observes the emergence of a speculative demand for foreign exchange, it immediately increases the discount rate in order to defend its foreign exchange holdings and, therefore, its gold reserves. The Austrian situation differs from the mechanism of the international movement of precious metals as illustrated by Goschen36 only in that the export of gold and the trade in foreign exchange are concentrated in the hands of the Bank.37

As long as the Bank monopolizes the gold trade and the foreign exchange rate does not reach the upper gold point, the Bank has a preeminent though not a dominating position on the foreign exchange market. The Bank encounters competition from other banks, and therefore has to direct its foreign exchange sales according to market prices. The foreign exchange rates on the Viennese bourse are subject to the same determining forces as the Berlin or London markets. The rates cannot fall below the lower gold point, because otherwise it would be more lucrative to acquire gold and deposit it in the Bank; and it cannot rise above the upper gold point, because the Bank then seeks to counteract the dwindling supply of foreign exchange by the timely export of gold. This is the core of the Bank’s foreign exchange policy: always to hold in readiness a sufficient reserve of foreign exchange, even if actual gold would have to be exported for this purpose.

Thus, it would be a complete misconception of the Bank’s actual activities to assert that it refused to release foreign exchange when it concerned speculative demands for arbitrage rather than the satisfying of “legitimate” needs of business. It should be incidentally noted that it would be extremely difficult to make such a clear distinction between legitimate and illegitimate demands for foreign exchange, which would be necessary for such a different handling of the two. There are certain types of demands for means of payment in global commerce that could become exceedingly disruptive for the foreign exchange rate, but which nevertheless cannot be considered to be illegitimate: for example, the demand for foreign exchange to make payments for investments purchased abroad (even possibly speculative ones) that are flowing back to the domestic market. These backflows, however, appear regularly as soon as a persistent scarcity of money exists abroad.

The rates for Austrian as well as Hungarian bonds may remain relatively higher on the domestic market, due to the strong demand of domestic private banks, savings banks, and primarily the postal savings bank to meet their capital requirements by switching into fixed-interest-earning assets, when dividends on stocks are low or nonexistent.

A drop in the rate of Austro-Hungarian investments in the foreign markets does not generally generate a subsequent and corresponding drop on the Viennese and Budapest markets, therefore, because the domestic credit institutions purchased these assets and then sought to sell them to the broader public. Any difficulties created for the (doubtless speculative) acquisition of those financial instruments flowing back to the domestic market would shake the trust in the stability of their rate of return and increase the cost of credit far more strongly and more persistently than would ever be caused by temporary increases in the discount rate.

It should, incidentally, not be denied that the Austrian Ministry of Finance possesses an entire series of powerful instruments that it could use to prevent the large financial institutions from speculatively acquiring foreign currencies. We completely disregard the fact that at every Austrian credit-issuing institution a functionary of the Finance Ministry is appointed as presiding commissioner, to whom the task falls of overseeing that institution’s financial conduct; and that at two major Viennese banks the director (governor) was appointed by the crown.

However, it is far more important that over the last twenty-five years legislation has been passed that, more or less, has brought every type of economic activity under the unrestricted discretion of state oversight. This is not the place to provide more details about this oversight, or to demonstrate how Austria has turned away from political-economic individualism faster and more effectively than have other European countries. For anyone desiring to place obstacles in the way of a bank or an industrial enterprise in which a bank is interested, there is no more suitable method than this state oversight, including its desire to export gold. We do not want to claim that any such actions against the exportation of gold have ever occurred. On the contrary, as we will demonstrate later, we think that the banks themselves have never demonstrated the intention of sending gold abroad as a monetary investment, because there have existed within the borders of the monarchy opportunities for more profitable uses of their capital. Thus, there has not been the need for initiating threats or making appeals to their patriotism.

However, in the exceptional case that an Austrian bank still had the intention of loaning a large sum abroad—perhaps in order to come to the assistance of one of its own foreign subsidiary institutions or of a closely associated enterprise—the Austro-Hungarian Bank still has an effective weapon on hand in order to prevent this type of undesired gold export. The Bank is the ultimate source for monetary instruments within the country, and all other banks are obligated to maintain good relations with it, because they have to retain the possibility of re-discounting their portfolios with the central bank. Under these circumstances, a nod by the central bank is sufficient to bring an end to any demand for foreign exchange. The source for the closing off of this demand is neither the legal suspension of specie payments nor any related circumstance; rather it lies in the fear of possible countermeasures on the part of the central bank. The Bank’s position of power on the currency market would not be in the least weakened by the legal resumption of specie payments. It is generally known that the German Reichsbank, which is obligated by law to make specie payments, successfully uses similar methods to prevent the export of gold.

At the moment that the Bank actually absolutely refused to supply foreign exchange, or supplied it only below the upper gold point, whether for everyone or only for gold exporters, or indeed at the moment the possibility even existed that the Bank would plan or seriously consider doing it, the foreign exchange rate would skyrocket. The agio would experience a substantial height, because the demand for foreign exchange would rise to a significant magnitude given the available supply. The domestic currency market would be gripped by panic; foreigners who have deposited their monies in Austria and Hungary would forcefully attempt to withdraw them; on the foreign stock markets, a massive offering of Austrian and Hungarian investments would emerge at falling prices; and the monarchy would face the choice of either quietly observing the fall in the rates on investment or would have to at least temporarily buy them up and pay for the securities that were flowing back into the country. In addition, there would then arise a domestic demand for gold-backed currency on the part of those who wanted to cover, on a timely basis, foreign payments that were coming due at a later date.

A refusal by the Bank to supply gold would have the same effect, then, as a serious economic crisis or an impending political and military disaster. The effect on the bourse would be the same as the suspension of specie payments in a country legally obligated to pay them.

It should also be emphasized, again, that the Bank does not even remotely consider refusing to supply foreign exchange and checks abroad, and it is determined even in serious times of crisis to continue actual specie payments for as long as it is absolutely possible; this is no different from the central banks of England and France, and the German Reichsbank. In this endeavor, the Bank can count on the vigorous support of the state and the approval of the entire business community. How firmly the market trusted the Bank’s willingness and ability to pay specie was seen in the difficult days of November 1907; during that time and in spite of many difficulties the thought that the Bank would discontinue the delivery of foreign exchange was not considered even for an instant.

The often-heard claim that the Bank maintains the stability of the foreign exchange rate through the abolition of speculation should also receive a few words. The Bank, it is said, appears on the foreign exchange market as a supremely powerful counterforce that has paralyzed speculators who have an interest in frequent and severe price fluctuations. We are confronted here with that widespread and amateur view that tries to connect all adverse and apparently inexplicable market events back to speculative activity. On the one hand, reference is made to the well-known legal and criminal prohibitions against arbitrage. On the other hand, it is asserted that the Bank does not completely suppress foreign exchange speculation, but instead limits it to a narrow band between the two gold points. However, the Bank accomplishes this by no means other than by actual specie payments, identical, for example, to the actions of the Bank of England. If the initial assertion is accepted, then it also would be necessary to say that the Bank of England prevents an increase in the foreign exchange rates on the London market by consciously engaging in counterspeculation by, at any time, supplying gold at a fixed price.

Thus, it cannot be claimed that the relative low Viennese currency rate is connected to the fact that the Bank is not obligated to make specie payments. The Bank does not make use of its right to refuse redemption on demand, and could not do so without the greatest damage to the stability of the foreign exchange rate. The entire doctrine of the alleged advantages from merely de facto specie payments that are not obligatory under the law to secure a lower level of interest rates, is nothing more than a repetition of the old theory of “isolated” countries that lack currencies backed by precious metals, a theory that has been repeatedly disproved, most recently by Kalkmann.38

During the era of paper money the assertion was made that the international money market could not influence the Austrian currency, because its value was independent of foreign currencies, and therefore the monarchy could not be negatively affected by any outflow of specie. The conclusion was made that it was not necessary for the Austro-Hungarian Bank to align its discount rate to those set by Western European central banks. Since the country already had to bear all the disadvantages of a paper currency, it could at least benefit from the one advantage of its monetary isolation: the ability to adjust the interest rate to reflect the country’s domestic needs and conditions, with only the most cursory consideration to external circumstances.

Wilhelm von Lucam, the long-serving secretary general of the Austro-Hungarian Bank,39 had already fought this error for a generation and argued the following proposition: the Bank can do nothing with its discount policy that would be forbidden to a bank making specie payments, and is not prevented from doing anything that is obligatory to such a bank.40 He did not succeed in convincing his opponents. Similarly unsuccessful were the events of 1879-87 and 1893-94, during which the lack of an active discount policy led to a marked increase in the agio.

We have demonstrated that even today, the low bank discount rate in Vienna cannot be explained in this way. We must attempt to find another explanation for the evident fact that the Austro-Hungarian Bank actually makes specie payments and can maintain an interest rate lower than the central bank of the much richer German Empire.

V

The Discount Rate in Austro-Hungary in Relation to Foreign Discount Rates

Any theory that sees in the legal suspension of specie payments an explanation for the advantageous level of the discount rate in Austria-Hungary starts with the assumption that the interest rate in a debtor country like the Austro-Hungarian Monarchy necessarily must be higher than in creditor countries like England, Germany, France, and Holland. An incentive for foreigners to acquire Austro-Hungarian investments has to be created, and the most reliable way of doing so is by offering a higher rate of interest.

The validity of this statement for the capital market, that is, the market for long-term investments, cannot be doubted. Austria-Hungary, in fact, is in debt to foreign countries to a very large extent. According to reports issued by the Austrian Ministry of Finance about the monarchy’s balance of payments, foreign holdings of Austrian, Hungarian, and Bosnian securities at the end of 1903 amounted to 9,809 million crowns, compared with Austrian holdings of foreign securities of only 600-700 million crowns. The interest rate for long-term investments is also considerably higher in the monarchy than it is abroad. This is generally so well known that a closer statistical proof seems unnecessary. We will therefore content ourselves with a comparison of the market prices of German imperial bonds with Austrian crown bonds.

A comparison of the bond prices of different countries is reliable up to a certain point. The legal formalities under which public bonds are issued internationally and their technical financial structure have become more uniform in various countries over the last several decades, so the cost of credit offers a benchmark for the differences in their marketability. This is not true of observed differences in central bank discount rates. It has been pointed out that individual central banks have not imposed similar standards for determining the quality of the bills of exchange to be discounted, neither concerning the term of the bond nor regarding the type of their accrual and the number of necessary signatures. Attention has also occasionally turned to the central banks’ private rate and the treatment given to those applying for discount based on momentary fluctuations on the market. Even when only looking at the observable and legal bases under which credit is extended, the instances already cited ought to be sufficient to demonstrate that the importance of the central bank rate is different in each country.

Of much greater importance, however, is the Banks’ policy for determining the actual amount of credit extended. Whether a bank extends a loan to a certain person and in what amount is mostly delegated to the complete and free discretion of its functionaries. Sometimes a line is indirectly drawn by the decision of a bank’s governing body that it is obligated to select its officers from certain circles; however, even this limitation is basically irrelevant. More often the benchmark for creditworthiness is determined by the general guidelines of that bank, and the particular principles for making such decisions that have developed over time at each individual institution and from which great care is taken not to depart. Yet under these general principles the officials in charge have a completely free hand. Thus, even at the various branches of the same bank, the same practice will not be completely followed, let alone at the central banks of different countries. In these circumstances, any conclusions would be incorrect that are based on a comparison of the absolute levels of central bank discount rates. Only from their trends, either rising or falling, can conclusions be drawn about changes that are occurring on the currency markets.

The same is true for the private discount rate. Its importance also differs from country to country, and even from place to place within the same country. In addition, it is also subject to temporal and also secular and periodic changes. Even in the same location, the individual financiers in the brokering of private bills cultivate their own particular views about what constitutes first-class bills and refuse to accept other investments into their portfolios that they consider questionable. The number of firms whose credit is universally recognized as “excellent” is infinitesimally small. The decisive factor in determining the membership in this small circle is based on established business practices and the judgments of the participants in the credit transactions. Following these top, private discounts, there is also at some stock exchanges another level of “second-class” bills, which are locally awarded the characteristics of trustworthiness and reliability in private brokering. In addition, there are also investments that are indeed traded at the private discount rate; however, they are not considered fungible, and at the close of the business day on the stock exchange a specification of its status is required. All of these delineations are fluid and often are only discernible with difficulty owing to the intermingling of the normal brokering of bills with private brokering of bills at the bourse.41 Only the choicest, first-class bills of exchange can be spoken of in terms of absolute liquidity in international transactions, and only the signatures of a few large banks and large bankers—“international houses” in the literal sense—are considered to be in this category. The majority of the other, private discounts are dependent upon local circumstances linked to their particular market, so that even within the same country differences in the private discount rate can appear; and in periods of crisis, when the needs for currency are more pressing and general confidence has been shaken, considerable differences can appear in these rates without actually bringing about currency flows.42 More understandable are similar events in relation to the stock markets of different countries. It would therefore be premature for one to assume from the mere existence of differences in the private discount rates between two countries that compensating flows of the precious metal are called for, or that the absence of such flows suggests obstacles have been placed in the way of the mobility of gold.

The private discount rates on individual bourses differ in their importance because they generally have completely different institutional arrangements. An equilibrium in the flow of currencies can be established not only through a formal equality between the discount rates; there can also be an inequality between discount rates on different bourses that corresponds to an internal balancing within a bourse in which capitalists are too timid to deposit money abroad because of their limited knowledge about foreign markets or other various legal and political circumstances; only an especially strong incentive for undertaking foreign investments may overcome this.

In this way, different discount rates existing at the same moment in different countries can be explained regardless of differences, also at the same time, in the foreign exchange rate between areas having the same precious metal as their currency. This is because the harmonization of currency markets is not shown by a tendency for equalization between central bank discount rates or between private sector discount rates within the same country. Instead, harmonization is seen when there emerges an international abundance or scarcity of money, and movements in the discount rates move along parallel curves in the various currency markets. Gold flows do not result in creating a mathematical equilibrium between discount rates; rather they result in the establishment of a certain equilibrium relationship between interest rates in the individual countries; in their absolute level, however, the discount rates are influenced far more by national determinants than by international ones.

It is clear that the discount rate within the monarchy is dependent upon events on the international currency market. The private discount rate in Vienna rises and falls in parallel to the markets in Berlin and London; and whenever exceptions appear, these can always be traced back to particular events on the national currency market, regardless of whether there is an especially large excess supply of or demand for currency. The types of domestic events that can counteract international tendencies occur just as frequently on the currency markets of the Western countries.

It would be misleading in such a discussion to ignore the monarchy’s large foreign indebtedness. These debts are owed on the capital markets, and not on the currency markets where foreign-owned assets in Austria occasionally confront the much smaller counterclaims of Austrian-owned assets abroad. This strongly contrasts with the situation in Imperial Germany, where German-owned foreign investments are estimated to be 16 billion marks; yet Germany is continually borrowing large amounts from abroad on the currency market.

Foreign countries can acquire bonds in Vienna by returning Austrian and Hungarian investments they hold; but due to the high ratings of these securities, such operations are not easily accomplished. The lack of short-term debt abroad strengthens the position of the Austrian currency market to an extraordinary degree during times when discount rates are high. Foreign countries are not able to withdraw assets from the monarchy at these times, because they do not have debts at their disposal that are coming due; instead, they have to shift to borrowing on the Austrian money market. In Austria, such foreign applications for loans have to compete with the opportunity offered to Austrian capitalists for lending their money in Hungary instead. The official Bank rate provides only a very unsatisfactory indication about the interest rate prevailing in Hungary, parts of Galicia, and in Bukovina. The Austro-Hungarian Bank is considered of limited use for lines of credit in these areas. The need for credit by producers and traders in these parts of the empire are primarily provided by private banks, provincial banks (called “Sparkassen” in Hungary), and trade associations, whose intermediation enormously increases the cost of credit. Only indirectly does the central bank influence the terms for credit through these other institutions.

In Hungary, mortgage rates of 6 to 8 percent are not unusual, and for personal or corporate debt it can be as high as 10 to 12 percent. Those provincial financiers are in a position, even at the high interest rates they pay, to assure themselves of 2 percent or more above the Bank rate. Austrian lenders enjoy a monopoly over these financial assets, because they are the only ones in a position to judge the creditworthiness of these individuals and institutions. Their incentive to loan funds abroad is always very low, because they can enjoy a rate of interest in their Hungarian transactions that widely exceeds the highest rate they can earn at any time on the international currency market.

If foreign claims on the currency market of the monarchy are thus relatively low, then so too are the domestic claims. No complaint is repeated more often in the Austro-Hungarian Bank’s annual reports than the lament that a more intensive use of the Bank’s capital is not possible. If the smooth development of the German economy suffers from the fact that the demand for new capital exceeds available savings, the opposite is true for Austria, though less so in Hungary. Investment activity is low and the unfortunate political situation has paralyzed the enterprising spirit in Austria. The previous Austrian minister of commerce correctly pointed out that in Austria monetary liquidity is not a sign of economic prosperity, but instead a sign of stagnation and the languishing of entrepreneurial activity.

Even if it were assumed that legal resumption of specie payments would change this unfavorable economic situation and bring about a rise in the rate of interest, there still would be no reason to resist its implementation. The goal of a sound economic policy is not maintenance of a low market rate regardless of the circumstances. Rather, its goal is to unleash the use of the country’s productive resources. Between the two evils of an economic depression or high interest rates, the latter is certainly the lesser of the two evils.

VI

The Costs of the Foreign Exchange Policy

Professor Georg Freidrich Knapp is the author of the pathbreaking work Staatliche Theorie des Geldes [The State Theory of Money]. He has received credit for being the first to attempt a unified, comprehensive view of modern currency policy. He is also generally known for diametrically opposing the Austro-Hungarian Bank’s foreign exchange policy of coordinating its discount policy with that of other central banks. Both are acts of exodromic management.43 Exodromic interventions are necessary in order to establish intercurrency exchange rate stability, Knapp argues, because the exchange rate does not, as commonly believed, automatically adjust even when there are full-fledged specie payments. Every exodromic action requires sacrifices, Knapp says. Those businessmen who discount bonds and who receive loans at the Bank on the basis of collateral make these sacrifices in the form of reduced profits as the price for the Bank’s following its discount policy.

The Bank also makes sacrifices due to its foreign exchange policy, Knapp states. However, at the end of the day the Bank does not really make this sacrifice, because it expects to be compensated for it by the state. The Bank employs a portion of its capital to purchase a large quantity of bills of exchange on the English market and continually replenishes it as soon as any particular bills reach maturity. It occasionally purchases these bills with the intent of making a profit whenever the exchange rate should prove favorable; but more often than not, the Bank acquires the bills at unfavorable rates regardless of what they may cost. In addition, the Bank releases these bills at parity as soon as the exchange rate becomes unfavorable. In this way, the Bank indeed suffers losses, except in the unusual case when the bills that it is holding were purchased at a favorable time in terms of their price. The parity rate is reestablished through these interventions, which otherwise would be left to the anarchic forces resulting from the blind gambles of individual interests; thus an important goal of public policy is achieved that is well worth the sacrifice, Knapp concludes. And the Bank can expect that the state will compensate it for the losses that it may suffer from this process.44

It is not our purpose here to examine to what extent Professor Knapp’s theory is correct concerning the pantopolic character of the intercurrency exchange rate.45 It can only be judged and accepted in the context of the logical structure of his overall theory of money. However, a debate cannot be avoided over his view of the foreign exchange policy followed by the Austro-Hungarian Bank. Above all, it must be stated that the Bank’s foreign exchange policy required no sacrifices on its part; on the contrary, as was previously mentioned, it led to considerable profits. The investment of a portion of the Bank’s assets in foreign exchange and in interest-bearing gold investments abroad yields significant profits; even the quite negligible fluctuations in the exchange rate that are kept within narrow bounds through the Bank’s actions favorably influence its income. The Bank does not buy foreign exchange when it is up in price, but rather when it is down, and then releases that foreign exchange at rising prices for a profit.

It is also incorrect to say that the Bank releases bills and checks abroad at parity; more often it demands the price corresponding to the prevailing market rate. In order to prevent an increase in the exchange rate above the theoretical upper gold point, the Bank always acts to prevent its holdings of foreign exchange on the market from running out. In no way does it achieve this by presenting itself as a buyer on the market; indeed, there would be no more blundering method than that. The appearance of a new buyer on the market can only function to drive the prices even higher. As we have shown, when the price of exchange is moving in an unfavorable direction, the Bank more often seeks to increase its assets through gold exports. It increases the available supply of foreign exchange and creates the possibility for satisfying all subsequent claims that may be presented to the Bank.46

Because the demand for foreign exchange normally occurs most intensely on particular days and during particular months of the year, the Bank’s purchases of foreign exchange when its price is low and its sales of foreign exchange when its price is high serve to reduce the fluctuations in the price for foreign exchange. Thus, the divergence of the price for foreign exchange from parity seems less apparent in Austria than in London and Berlin. Looking over longer periods, however, the average height of the prices for foreign exchange is dependent upon supply and demand over the entire period under consideration and not upon these short-term influences.47

The supposed opposition between discount and foreign exchange policies should be considered just as incorrect. The Austro-Hungarian Bank is not relieved of the need to counteract temporarily unfavorable patterns in the balance of international payments by implementing interest rate increases, as well as through an intelligent use of its large foreign exchange holdings. In the case of defending the currency, the foreign exchange reserve is really best suited for increasing the precious metal holdings (indeed, it is the cheapest and easiest way). If the Bank wanted to yield up its entire inventory of foreign exchange holdings to foreign demands and use the resulting revenues to increase its gold reserves, the Bank could render the same services to the economy in the future as surely as it does less conveniently and more expensively at present. This is because the Austro-Hungarian Bank’s management of reserves is no different from the specie payment system used in England and Germany, only more refined and flexible. It is a specie payment system resulting from the centralization (one is tempted to say, the nationalization) of gold exports.

An otherwise sharp-eyed judge of foreign exchange policy emphasized that the Bank undertakes operations that appear to contradict all the rules of arbitrage with regard to approaching payment dates. For example, it acquires German bills at a 4 percent Reichsbank discount, even though its own discount rate is higher; or it sends gold abroad, even though the foreign exchange rate is still quite far from the gold exporting point.48 Upon closer examination, however, these operations lose their unusual appearance and can be easily explained. That is to say, the Bank’s assets in the form of foreign bills represent an advantageous capital appropriation whenever its own discount rate is higher than foreign rates. In the Bank’s portfolio, an entirely different importance is accorded to foreign bills in comparison to domestic bills. From the perspective of Bank policy as well as partly from a legal standpoint, foreign bills primarily serve as reserves just like the precious metal holdings which they partly replace. In comparison with the non-interest-bearing precious metal holdings any interest income, however small it may be, appears in a favorable light. Critics of the Bank’s foreign exchange policy start with the assumption that the monies invested in foreign assets are drawn away from funds otherwise available for domestic discounting of bills. If the critics were correct, then the Bank’s foreign exchange policy would have exactly the opposite effect ascribed to it (which would be incorrect, as we have demonstrated). It would drive up the domestic discount rate instead of pushing it down.

In truth, however, the monies employed in foreign exchange dealings are withdrawn from the stockpile of the precious metal and not from the Bank’s domestic bond portfolio. Undoubtedly, it is within the Bank’s power to apply these monies to the domestic currency market as well; this would have to be accompanied by a reduction in the coverage of notes and giro assets49 with the reserve of precious metals and foreign gold-backed assets. The Bank’s liquidity might be negatively affected and would be dangerous for maintaining the equilibrium in the balance of payments. Moreover, the resulting reduction in interest rates would promote the development of unhealthy speculation. These are reasons enough for viewing an expansion of domestic discount activities at the cost of the precious metal reserves to be highly undesirable.

That the export of gold is always lucrative for the Bank, even when the foreign exchange rate has not yet reached the gold export point, emerges from the most recent literature as well as from earlier statements.

It is inappropriate to speak, therefore, about costs that are imposed by the Bank’s foreign exchange policy, or about sacrifices caused from that policy in the name of maintaining the currency. The Bank’s policy is to the greatest advantage of the entire economy; that the policy yields tidy profits, as well, for the Bank’s shareholders and the two governments that receive a high proportion of the proceeds cannot be denied. It has been repeatedly explained by the Bank’s leading personages that the Bank ultimately has profits in mind in its currency and foreign exchange dealings. It is only necessary to look at the numbers in the Bank’s business reports to see that the proceeds have been increasing, year by year, from this branch of its business.

VII

The Form of the Bank Constitution

All fears expressed about the legal resumption of specie payments are unfounded. The legal resumption of specie payments will not require the slightest change in the current policies of the Bank. That which the Bank currently does voluntarily will be obligatory in the future, but there is no reason to believe that legal specie payments will cause any more difficulties than de facto redemption does now. However, should maintaining the gold-backed currency ever become impossible for the Austro-Hungarian economy in a time of crisis, the Bank’s legal obligation to redeem notes will prove neither an aid nor an obstacle. In any case, it is an illusion to think that halting foreign exchange transactions by the Bank, that is, halting de facto specie payments to maintain the currency’s exchange rate, would generate results any less serious than would be the halting of legal specie payments.

It must, in any case, be admitted that the existing rules under which the Bank currently operates might be impaired by the implementation of a law requiring specie payments. An entire series of changes in the present statutes of the Bank can be recommended to facilitate a continuation of the Bank’s current policy.

In this regard, an initial increase in the amount of foreign exchange that can make up a part of the precious metal reserve could be proposed. It would be advantageous to replace the rule that fixes the quantity of foreign exchange that can constitute a part of the Bank’s specie reserves with a variable amount, perhaps along the lines of saying that the Bank is granted the authority to invest a certain proportion of its precious metal holdings, for example, up to 10 to 15 percent, in foreign exchange. By this method, the costs of increasing the precious metal holdings would be at least partially reduced.

An increase in the amount of tax-free notes that may be issued by the Bank, which has been limited to 400 million crowns for more than two decades, could also be considered. A reduction in the 5 percent tax on banknotes issued in excess of those 400 million crowns could be especially advantageous under some circumstances. In order to remove every difficulty in the way of the Bank’s investing gold abroad, the banknote tax could be fixed at a level of half of a percent below the existing bank discount rate. The government’s revenue shortfall from reducing the tax on the banknotes that would occur from time to time when the interest rate was lower than 5.5 percent need not be worried about; it could be recouped by the higher income earned by the state due to the Bank’s increased revenues. The Bank would have a free hand to exchange gold for foreign exchange without fearing that it would suffer losses due to more frequent transgression of the tax-free limit on the issue of notes, which might then result in the Bank having to raise the discount rate. On the other hand, at interest rates of 6 percent and above, an increase in the revenue from the tax on banknotes would occur, which certainly no one would oppose. Any conflict between public and private interests that might exist, because the higher discount rate might be perceived as an undue pressure on the entire economy from which the central bank gained an advantage, would thus be essentially eased.50

It already appears to be a forgone conclusion that the smaller note denominations of 10 and 20 crowns will have to be retained, that the stamping of silver token coins will have to be augmented due to increasing demand, and that the silver florin, which will eventually be replaced by a two-crown piece, will be removed from circulation. Then the Bank and the exchequer can stop imposing gold coins on commerce, which has accepted them only grudgingly.

As it is assumed that the public’s habit of preferring paper to gold will not change in the foreseeable future, it may well be that in the future only banknotes and token coins will circulate domestically, while the essential role of note coverage and guardianship of commercial payments would devolve upon gold. It cannot be ignored that such a “constitution” for management of the currency would be in significant ways very far from the ideal of a gold-backed currency, which was envisioned by the champions of gold monometallism in the second half of the nineteenth century. It would not be correct, however, to describe such a monetary system as a paper currency with gold reserves for foreign commercial transactions. Even under such a system, gold would remain the standard of value in Austria-Hungary, while notes redeemable in gold would circulate at all times.

The single advantage of “saturating” domestic commerce with gold is the creation of a reserve upon which one can draw at times of war. A war chest can also be constructed in other, more efficient ways by increasing the country’s primary central reserve. This would not be allowed to lie fallow; rather, in the form of assets held in foreign exchange and investments abroad, it would be generating income. The Bank could take over its management.

Based on these assumptions, nothing speaks against the resumption of legal specie payments, while, on the other hand, much speaks for it. It would above all strengthen the international credit of the monarchy, which is urgently needed given the monarchy’s enormous foreign debts. The transition to a legally binding gold currency would offer the nation’s creditors no more of a guarantee for compliance with payment obligations than is already assumed under the current system of de facto specie payments. However, the great moral consequence of implementing this measure is not to be doubted. It would quite conspicuously bring to the consciousness of a wider domestic and foreign audience the reality of the currency reform’s success.

VIII

The Bank Feud Between Austria and Hungary over the Legal Resumption of Specie Payments

The problem of the legal resumption of specie payments raises a particular complication due to its relationship to Hungary’s efforts to dissolve the bank association between the two halves of the Dual Monarchy.

Since the conclusion of the Déak Compromise in 1867,51 Hungarian politics have ceaselessly endeavored to loosen the common bonds that connect that country to Austria. The achievement of economic autonomy from Austria has appeared as an especially important goal for Hungarian policy as a preliminary step leading to political independence. The national rebirth of the non-Magyar peoples of Hungary—Germans, Serbo-Croatians, Romanians, Ruthenians, and Slovaks—will, however, pull the rug out from under these endeavors and contribute to the strengthening of the national ideal of a Greater Austria.52 At the moment, however, Hungarian policy is still determined by the views of the Magyar nobility, and the power of the government rests in the hands of the intransigent Independence Party.

For this party, however, the Bank question has great political significance. Over the course of not quite three years of rule, the Independence Party has had to abandon one point after another in its program. If it were to concede on the Bank question as well, it must justifiably fear that in a short period of time a more radical group will displace it. Thus, political motives primarily influence the party’s opinion concerning the Bank question.

The Austro-Hungarian Bank appears advantageous for Hungary only when viewed from a purely economic standpoint. It generously makes available to the Hungarian economy the rich funds of the Austrian money market. Hungary’s portion of the Bank’s discount portfolio is much greater than Austria’s. Calculating to which part of the Dual Monarchy go bond payments, Hungary’s portion amounts to 60 to 65 percent, while Austria’s hovers between 35 and 40 percent. And this does not exhaust the advantages for Hungary. The negotiability of Hungarian bonds in Austria enables their issuance to Austrian capitalists and private banks, because it can always count on the central bank rediscounting them in emergencies. The competition for Austrian capital on the Hungarian currency market doubtless depressed the interest rate in Hungary, which still remained abnormally high.

Hungary is a country with an unfavorable balance of payments. According to Fellner, who certainly had no intention of painting a bleak picture, the annual deficit of the Hungarian balance of payments to all foreign creditors amounted to 176 million crowns. However, it should be noted that out of the total assets of 277 million, not less than 145 million, or far more than half, rest upon cash remittances from emigrants that are subject to fluctuations based on the circumstances in the countries to which Hungarians have immigrated. In addition, on the asset side are the notable postings of an export surplus of 96 million and transactions for finished products of 24 million crowns. On the debit side, there appear interest, dividend, and bond transactions worth 352 million crowns.53 Much more hazardous for Hungary is its exceedingly high rate of debt to Austria. The unity of the currency market has reached the point where the Austrians have deposited incredibly large amounts in short-term investments in Hungary. As long as the Dual Monarchy lasts, these obligations pose no threat to the Hungarian currency. This would be different following a political separation. Hungary would be able to prevent the withdrawal of these monies only through large sacrifices in the form of higher interest rates.

On the other hand, Austria has little to fear from dissolution of the Austro-Hungarian Bank. Austria has, in contrast to Hungary and other foreign countries, a favorable balance of payments even without including investment exports. Assuming that Austria wanted to withdraw monies with short maturities that are deposited in the land of St. Stephen’s crown,54 it would create a currency surplus on its own money market, which should in part enable industry to find new markets to replace the ones lost in Hungary. Only a devaluation of the Hungarian currency, which could easily occur as a result of dissolution of the Austro-Hungarian Bank, would be hazardous for Austria. Initially this would be because of Austria’s large holdings in Hungarian investments; later, for as long as the customs union persists, that is, until 1917, the agio resulting from a Hungarian currency devaluation would reduce the competition of Austrian producers facing the Hungarians. However, there can be no doubt that the banking and currency policies implemented by an independent Hungary would attempt everything possible to prevent a devaluation of its monies.55

Nevertheless, at the conclusion of the last compromise in the fall of 1907, Austria knowingly inserted a series of stipulations to be prepared in case of a possible appearance of a gold premium in Hungary. A special ordinance in the final protocol of the compromise, which has the power of law, determines that if the bank and currency union is terminated the method for calculating all payments should be in gold. This would not only apply for reciprocal state financial benefits, that is, the benefits from country to country, but also for all other benefits to the nation, in regard to which there exists a contractual obligation between the two countries. This also applies to benefits concerning all parties in the country insofar as they are subject to contractual obligations. This pertains not only to sales taxes, in particular the beer, brandy, sugar, and mineral oil taxes, but also freight payments by the railways, because parity in the railway tariffs was agreed upon in the compromise.56

Terms accepted in the initial protocol (dubbed in honor of their initiator the “Benedikt formula”) relating to the Bank go even further in their regulations, which, while not having the force of law, possess, however, the character of a binding contract. Accordingly, the two governments are obligated to reach agreements, prior to the reorganization of an autonomous Hungarian note-issuing bank, to assure the execution of the ordinances under the treaty concerning the regulation of trade and commercial relations between the two nations. In particular, the agreements prevent any impediments or interference with the goal of free trade between the two nations that might arise from any eventual differences in the value of separate Austrian and Hungarian currencies.57

It appears ever more likely that Hungary would be prepared to give in on the Bank question for setting the conditions under which the Austro-Hungarian Bank will be legally obligated to pay in specie. Hungary’s interest in the “crowning” of the currency reform is a purely political one. If the Bank’s privilege has to be renewed once more, the monetary constitution should contain this type of redemption rule, so that the construction of an autonomous bank will at least be possible later. For that reason above all else, Hungary wants to be financially independent from Vienna, to at least partially pay off its debts to Austria, and to receive new support in Western Europe for this. The possibility, in the first instance, of having investments in Hungarian crowns in France remains very limited, however, as long as a gold-backed currency does not exist in Hungary.

As was shown, Austria has at the moment no reason to refrain from giving legal sanction to the current currency situation; from the standpoint of enhancing Austria’s international credit standing, there is much that speaks for it. Even the financial emancipation of Hungary cannot appear undesirable. Austria’s large holdings of Hungarian bonds make it much too dependent on the changing fate of the Hungarian economy; the sale of a part of these investments, which at present is difficult to accomplish, could only improve Austria’s position. Currently, Austria possesses, not including domestic bonds, a barely appreciable amount in investments that have an international market: in times of war, this could hinder fund raising far more than is desirable. After creating a large market for Hungarian bonds in Paris, those Hungarian investments remaining in Austrian possession would become a valuable asset. The Hungarian market would receive a further powerful boost, in that the domestic demand for investments would turn more than previously toward bonds on the international market.

Austria’s opposition to the legal resumption of specie payments rests solely on fears concerning what its impact will be on the structure of the discount rates. We believe we have demonstrated the erroneous nature of these fears. To fight against an institution that would be beneficial for Austria merely on the basis of a traditional mistrust that says that anything that Hungary actively desires must be disadvantageous for Austria is not an intelligent policy. Just because Hungary could also profit from the change, and even if the general bitterness of the Austrians toward the dodges of the Magyar politicians is justified, it is wrong-headed on that basis to oppose legal specie resumption.58

Neither in Austria nor in Hungary can substantive arguments be made for the continuation of the current currency situation of de facto specie payments. Nothing speaks against the legal requirement that would be the fait accompli of the transition to the gold-backed currency.

CHAPTER 3

The Foreign Exchange Policy of the Austro-Hungarian Bank1

The monetary system of the Austro-Hungarian monarchy has, during the last few years, aroused general interest in economic circles both at home and abroad. Theorists were first attracted to this question by Prof. G. F. Knapp’s excellent work,2 which found as many ardent admirers as opponents. In the recent bank enquête [inquiry] instituted by the German Government this subject was exhaustively treated. Under such circumstances, it may not be out of place to devote a little attention to this question, removing the numerous misconceptions both in the monarchy and abroad.

I

According to the law paper currency is still the standard currency, for the legal tender of the Austro-Hungarian Bank is inconvertible. In 1892, it is true, a number of legislative measures were taken in order to pave the way for a gold currency. One such measure obliges the said Bank to buy any quantity of gold offered to it at the rate of 3,280 kronen per 1 kilo pure gold (less 2 kronen for coining), thus hindering once and for all any increase in the value of the Austro-Hungarian standard with respect to gold.

Since that time pure gold cannot be valued at less than k. 3,278 per kilo in Austria-Hungary, for should it decline the Bank must continue purchasing until the price rises again to par. A further measure, which was actually carried out, was the coining of gold, silver, nickel, and bronze coins. The old silver coins were withdrawn from the market, only the silver gulden remains, and even today it has unlimited legal tender quality. Since 1879 the silver gulden has been coined for account of the State only; in 1892 the coining was stopped, and at the moment (November, 1908) there are about 300 million kronen of such gulden in the Monarchy. This stock will very shortly be reduced by 28 million kronen, which will be recoined into 5-kronen pieces to meet the increasing demand for these coins. The 5-kronen pieces are, however, tokens; their coinage is limited, and no private person can be compelled to accept more than k. 250 in such coins as payment. Since the beginning of 1908 the Bank has been withdrawing the silver guldens and storing them in its cellars. These silver guldens will be gradually recoined into small coins, for, since wages have continually risen, the demand for fractional coins is especially great. Considering the unlimited legal tender quality of the silver gulden, the currency of Austria-Hungary must still be taken as a “limping standard,” even were the banknotes redeemable, just as the French currency must be described owing to the unlimited legal tender quality of the 5-franc piece.

In 1892 another very important measure was taken, viz., the redemption of the Government paper currency, i.e., legal tender notes issued by the Government. The Government raised a great loan and handed over the proceeds in gold to the Bank to enable it to redeem the Government paper currency for account of the State. This has actually been done, and today Government paper currency is a thing of the past.

The Bank, however, did not give gold for this Government paper currency, but banknotes, and in part silver guldens and silver fractional coins; the gold was retained as cover for the banknotes. In place of the not redeemable legal tender Government notes, not redeemable bank notes have been substituted. Whereas the old Government paper currency was not covered, the banknotes are partly covered by metal, bills, and loans, as in other Continental states.

To perfect the transition to a gold currency and thus finish the projected reform instituted in 1892, the Austro-Hungarian Bank ought to have been obliged to redeem its notes in gold when required. The law, however, has not yet prescribed such a procedure. Nevertheless, both the Government and the Bank have not lost sight of this point. The latter, especially, has done its utmost to augment continually its gold reserves. Besides the gold it possessed previous to 1892, and that already mentioned, which the Governments of both Austria and Hungary transferred for the redemption of the paper currency, it has also been able to purchase larger quantities of gold favored by the extremely good rates of exchange existing for a number of years. On the 7th of December 1908, the gold reserve of the Bank amounted to 1,135 million kronen, being only surpassed by the Bank of France and the Russian States Bank. But the Bank did not stop at the mere accumulation of gold, but endeavored to acquire a great number of bills payable in gold.

The Bank is obliged to cover its notes in circulation by at least 40 percent metal. As metallic cover the law recognizes gold coins, coined in Austria or Hungary, gold bullion and foreign gold coins, further Austrian and Hungarian silver guldens and fractional coins. For the so-called metallic cover of the notes in circulation are also recognized bills on foreign places, payable in gold within three months, and provided by at least two signatures of well-known endorsers, further foreign banknotes payable on demand in gold, the two together in the aggregate 60 million kronen. The other part of the cover has to be discounted bills and warrants, and loans against security. The Bank is permitted to include also in this part of the cover foreign gold bills and gold notes. As soon as the notes in circulation exceed the metal reserves, prescribed by law, by more than 400 million kronen, the Bank is obliged to pay a tax of 5 percent of the surplus. This latter clause is analogous to the German bank law.

Since 1899 the Bank is also entitled to have assets abroad and to draw checks, etc., on them.

Under such legal circumstances the Bank could very easily acquire great amounts of foreign bills and assets abroad. The gold lying in the Bank’s cellars does not bear any interest, but as soon as a part of it is exchanged for bills on Berlin or London—the Bank is allowed to do so to the extent mentioned above—it yields interest.

II

The Bank having in this manner increased its gold reserves and accumulated a great stock of foreign bills payable in gold, it took a further important step in 1896 to stabilize the foreign exchanges; it began to sell bills on foreign markets without reserve at a price which would be lower than the above gold point after the introduction of the gold currency. The sole aim of the Bank since then has always been to maintain a large stock of foreign assets payable at demand to enable it to satisfy any demand whatever that may be made, and in this respect has been very successful. It could sell bills on London or Berlin under such conditions that the exchange never rose above the par higher than it rises in countries with a perfect gold currency, and in which the bank-notes are redeemable at demand.

In August 1901, the Bank went still further, and began to issue gold coins of k. 20 and k. 10, and discounted bills and granted loans partly in gold instead of notes, and transferred gold to the Treasury for the salaries of their officials and other Government payments.

This change found but little sympathy among the public. For more than half a century only paper money circulated in both halves of the realm, and everybody got so accustomed to it that they were but little at home with the gold coins. Even today the public prefers banknotes to gold, and those gold coins issued soon find their way back into the Bank. The Bank, however, constantly sets them in circulation again, only to have them returned shortly afterwards. From August 1901 to the end of 1907 the bank gave out 1,616.4 million kronen, 1,381.7 of which returned by the 31st of December 1907, only 234.7 million kronen remaining out of the Bank. Of this latter amount only a part is in actual circulation, the rest being either in the State pay offices, at the private banks, or at the railway offices.

The state of things today is about as follows:

The Bank, it is true, is not compelled by the law to redeem its notes, but in fact it is always ready to do so. For home purposes gold is seldom, if ever, withdrawn, for—as mentioned—the public cannot break themselves of the use of banknotes and silver coins for small and moderate payments, and then, again, checks of the joint stock banks and the postal check service, as well as the clearing service of the Austro-Hungarian Bank, are all becoming more in vogue from year to year. As a rule the Bank is not called upon either to issue gold for payments abroad; this is merely because it always sells foreign bills at such a price that it is cheaper to purchase and forward checks or bills than gold. The monarchy enjoys in this way every advantage of a gold currency, while it is able to carry on the circulation with a medium the least expensive.

It is clear to everybody that the Austrian monetary system is thus almost that ideal which David Ricardo once upheld.3 The Austrian system differs but in two points from that of the great master of political economy. One is of small importance. Ricardo wished to avoid the use of gold coinage as a medium of circulation, and, as he presumed that if everybody had the choice of using £1, £2, or £5 notes or gold, they would naturally prefer the latter, he saw no other way of preventing this than by subjecting the Bank to the delivery of uncoined gold or silver, at the Mint standard and price, in exchange for their notes instead of the delivery of guineas. With the above-described habits of the public here such a restriction is superfluous; even were the Bank compelled to exchange the notes for gold, people would prefer to use paper to gold, as is the case nowadays where the Bank willingly pays notes in gold.

The second difference is of more importance, still not one of principle. It is that the Bank keeps a great part of the cover for its notes not in actual gold but in foreign gold bills, and besides, to meet its other daily obligations, holds a further stock of foreign bills and other foreign assets at short notice; further, that the Bank sells such foreign bills to those wishing to make payments abroad, and consequently the bankers and merchants do not want gold, but bills and checks, to pay debts or to loan money abroad. Should the foreign bills or other assets abroad in possession of Austrians and Hungarians prove insufficient to cover the bills drawn on inland places and the checks in foreign hands, then the Bank exports gold on its own account. The gold is exported betimes, and bills acquired for it that the Bank then gives in exchange for its notes.

This policy of the Bank has been the cause that the rate of exchange in Austria-Hungary does not fluctuate as in other countries. This seems only natural, for today Austria-Hungary actually has a gold currency, although not de jure, because for more than twelve years the bank has voluntarily paid in gold or gold bills.

The Bank having succeeded for so many years always to keep a sufficient stock of gold and foreign assets to meet any possible calls made on it, it must be concluded that the Bank will also be able to pay its notes in gold on demand should the law prescribe it. Such a prescription would only alter the face of things in one respect, viz., that, whereas the Bank redeems its notes nowadays voluntarily, it would in future merely follow the demands of the law. But even then gold would not be taken by the public for home payments, though the Bank is empowered to issue small notes.4 Should the law prescribe payment in specie, the Bank can still buy foreign bills for its portfolio, and offer them at prices below the export prices, so that bills are used for sending money abroad instead of bullion or gold coin.

III

Nevertheless, numerous protests are made in Austria against the legal payment in gold for the following reasons, which must be considered. It is asserted that the discount rate of the Austro-Hungarian Bank has been lower and changed less than the foreign note banks. This is doubtless correct. The rate of discount of the Austro-Hungarian Bank was, as the following table shows, always lower during the last few years than that of the German Reichsbank, and often lower than that of the Bank of England, whereby we must not overlook the fact that the Bank of England also discounts below its official rate; the Austro-Hungarian and the German Reichsbank never do so.

The yearly average of the bank discount rates was:

The great stability of the discount rate of the Austro-Hungarian Bank is especially remarkable. It never rises as high as the German or English, nor falls so low. Even in the critical November days of 1907, when the Bank of England increased its rate to 7 percent, the German Reichsbank to 7.5 percent, the Austro-Hungarian Bank did not exceed 6 percent. On the other hand, its rate of interest has never fallen below 3.5 percent. From 1892 till 1907 included, the Bank of England altered its discount seventy-four times, the German Reichsbank fifty-seven, and the Austro-Hungarian Bank only twenty-one times.

The private discount rate, too, is not always higher than Berlin and London, often even lower. This was distinctly perceptible during the crises in the last quarter of 1907, when in November the private rate for three months’ bills, on an average, was Vienna 5.28 percent, Berlin 6.62 percent, and London 6.54 percent.

If the Austro-Hungarian Bank were legally constrained to redeem in gold, the opponents of such a measure maintain that the discount rate in Austria would always have to be higher than abroad, for the monarchy has foreign obligations, and must necessarily entice her foreign creditors by a higher rate to leave their money in Austria-Hungary. The suspension of the gold payments had the advantage of the Bank being empowered to pay in cash if it wishes, or, in other words, redeem its notes in gold or gold bills, but by no means compelled to do so. Importers wishing to pay for goods bought abroad, and those5 who have to pay the interest and amortization quota on foreign loans could always get the desired amounts from the Bank at any time in gold bills or checks. On the other hand, by refusing to sell bills when wanted merely for the purpose of sending capital abroad to profit by the higher rate of discount, the Bank would be protected against losing large sums of gold, and can easily maintain a lower rate than the foreign banks. Presuming the legal prescription of gold payments the Bank would be forced to participate in the international fight for gold like other banks, and as an only protection against attacks on its gold reserves raise the discount rate. In favor of industry and agriculture an increase of the interest on the home market must, however, be avoided at all costs.

This theory, which is supported by nearly every political party in Austria, is, however, entirely false.

First of all, it is not at all true that the Bank refuses to deliver bills and gold if it thinks they are for investments abroad. Far from upholding such a policy the Bank itself sends money abroad when the market appears to be favorable. If the momentary home demand is small and the gold reserves in the Bank fairly large, the Bank exchanges a part of its reserves for foreign bills in order to procure, in this way, interest on its capital, which otherwise would lie idle in its cellars. The moment greater demands are made on the Bank for bills for profiting by the difference in the discounts abroad, a corresponding rise in the rates of discount immediately takes place.6

Did the Bank act otherwise, i.e., refuse to sell the bills and gold, as it is wrongly accused of sometimes doing, the exchange would immediately rise considerably. This is best seen if the present state of affairs is compared with those existing prior to the actual introduction of the gold payments in 1896. In 1893 a great tightness existed on the international money market owing to the Australian and North American crises. As at this period the Austro-Hungarian Bank declined to raise its rate of discount, the foreign holders of Austrian bills returned them to Vienna and demanded payment. Neither gold nor gold bills were to be had on the Austrian market and the Bank would not dispose of them either; the London bills on the Vienna Exchange rose to 127.65 guldens. This rate meant an agio of 6.3 percent, as compared to the par of 120.09 guldens fixed in 1892.

Later it also repeatedly happened that difficulties on the London and Berlin money markets caused an external drain in Austria. The Bank then immediately raised its rate of interest, and sold bills below the imaginary export point, as it would be after the redemption of gold payments. The same as note banks of other countries, it was able, in this way, to secure the stability of the Austro-Hungarian standard. Professor Knapp, therefore, is greatly mistaken in assuming an essential difference between the policy of the Austro-Hungarian Bank and that of other central note banks. In such cases the Bank of England redeems its notes in gold, the Austro-Hungarian Bank in gold bills, viz., gold in foreign hands. Yet the public who present their notes to the Bank are quite satisfied with this procedure, because they get bills at a price apparently so advantageous that they prefer to buy and forward Devisen (foreign bills) abroad instead of bullion or gold coins. To have the requisite stock of Devisen and able to meet any demand, the Bank sends gold abroad and procures bills in exchange. The whole difference, as compared to England and Germany, is that gold is not exported by private businessmen but the Austro-Hungarian Bank itself. True, it cannot be denied that the large Austrian private banks sometimes do not export gold for the mere reason of fearing to offend the Bank who, otherwise, could possibly place difficulties in the rediscounting of their bills. In Germany, affairs are very similar but much more severe, and have absolutely no relation with the suspension of gold payments and the Devisen policy.

The cause of the comparatively low discount in Austria-Hungary must be sought in the bad state of business in Austria. The speculative spirit of the populace is almost entirely wanting, and the unfortunate state of politics is a stumbling block to active production. The former Minister of Trade, Dr. Baernreither, rightly declares that cheap money in Austria is by no means a sign of economic soundness, but, on the contrary, of stagnation and want of speculative spirit.

Another misleading assertion is that Austria-Hungary is burdened with obligations abroad, and consequently compelled to maintain a higher discount rate than other countries. For these obligations are only on the capital market, i.e., on the long loan market, and consequently the interest for rents and mortgages is higher than in Germany, not to speak of England. On the other hand, there are times on the money market, i.e., market for short loans, when the greatest Austrian foreign assets are met with but a trifling set-off on the part of the foreigners. This contrasts vividly with the state of affairs in Germany, whose holding of foreign stock may be estimated at 16 milliards of marks, even after deducting German stock in foreign hands, and nevertheless is regularly indebted abroad on the money market for big amounts. True, the foreign markets can get bills on Vienna by returning Austro-Hungarian stock, but the high classification of this paper hinders such an operation. The want of short foreign loans remarkably strengthens the Austrian money market in times of high discounts, for then the foreign markets are not able to withdraw money from it, but in the absence of claims due must accommodate themselves with loans on the Austrian money market.

IV

Professor Knapp regards the foreign exchange policy of the Austro-Hungarian Bank as diametrically opposite to the discount policy of other central note banks. He is of opinion that it is not right for two States having the same metallic currency automatically to reestablish the par of the standard by the use of metal. The authorities ought to make it their special duty to maintain the standard value in international exchange. The English and German discount policy and the Austro-Hungarian “Devisen” policy could be taken as examples. In both cases some sacrifice has to be made. With the discount policy the sacrifice falls upon the business people, who are accustomed to discount bills and take Lombard loans7 from the Bank. The “Devisen” policy also demands some sacrifice; the Bank, it is true, bears it in this case, but only because it expects some compensation from the State.

The Bank employs a great part of its capital to purchase a number of bills on England, and regularly replaces them as they fall due. The Bank buys these bills at any price, and sometimes in the hopes of making a profit should the rate be favorable, but more often than not without any such prospects whatever, especially when the rate is unfavorable. Further, the Bank has decided to sell these bills at par as soon as the rate becomes unfavorable. With very rare exceptions, it loses on the bills. The exception is with bills bought at propitious times. By this intervention in the rates which otherwise are determined to suit personal interests, the par of exchange is reestablished, and a weighty administrative task performed that is well worth the sacrifice. The Bank may, therefore, justly expect the Treasury to recompense its losses.8

It does not lie within our sphere to inquire how far Professor Knapp’s view that “an automatic reestablishment of foreign exchanges does not take place” is correct or not. Because this theory is closely connected with his general conception of money, it consequently can only be judged in connection with it. Such a task would surpass the limits of this article, which is devoted exclusively to the “Devisen” policy of the Austro-Hungarian Bank. But Knapp’s opinion of this policy must receive a little more attention.

First of all it must be shown that the “Devisen” policy claims no sacrifice from the Bank; on the contrary, it gives it enormous profits. The investment of a part of its assets in foreign bills and current accounts with foreign banks throws off a considerable profit in interests; also the fluctuations of the foreign exchanges, however small they may be, have a favorable influence on the Bank’s balance. For the Bank does not buy bills when they are high, but when low, and sells them with rising rates at a profit.9 It is not true either that the Bank’s foreign bills and checks are sold at par, but at the corresponding market price of the day. To prevent the rates rising above the ideal gold export point, the Bank endeavors to keep a plentiful stock of foreign bills at the disposal of the market. As soon as this stock gets low it is replenished. But the Bank never appears on the market as buyer when the price of foreign bills is high; this would be the worst step it possibly could take. The appearance of a new buyer would be more likely to drive prices up still higher. As already mentioned, the Bank—when the price of foreign bills is high—strengthens its stock by exporting gold, and thus places itself in a position to meet all and any demand that may be made.

The Bank is also able to drive the rates up if it buys foreign bills at low prices; but then its economic importance is entirely different. The demand for foreign bills being better distributed over the single days and weeks of the year, the fluctuations in the rates are more equalized; the average level can naturally not be affected in this manner.

The contrast drawn by Knapp between “foreign bill policy” and “discount policy” must also be described as equally incorrect. By its great stock of foreign bills and the clever use it makes of them, the Bank is not freed of its duty to prevent any temporary unfavorable situation of the balance of payments by raising the discount rate. To maintain the gold standard the stock of foreign bills merely acts as a strengthener of the metal reserves—an augmentation both the cheapest and the best. Were the Bank to realize the whole stock of foreign bills and augment the gold reserves with the proceeds, it could do the same economic service in future, true, less to the purpose and dearer, but with just as much security as nowadays. For the system of the Austro-Hungarian Bank is nothing else than a system of gold payments like England and Germany, yet better and more appropriate. The sole difference is the monopolization of the gold export by the Bank.

V

Consequently, it is utterly wrong to believe that the discount rate of the Bank and the market would be higher than at present after any legal prescription of gold payments. For more than twelve years the Bank has upheld the policy of a gold-paying bank, and, therefore, any legal prescription can affect it but little. Even such law could not prevent it from always keeping in future a large stock of gold bills and gold assets abroad, and in this manner maintain a cheaper reserve than would be the case with the whole reserves lying idle in its cellars.

On the other hand, the monarchy will profit immensely by a legally prescribed gold payment, for its international credit, which it urgently needs for its enormous foreign debts, would considerably improve. For only the de jure gold payments would clearly convince everyone abroad that Austria-Hungary enjoys nowadays a perfectly regulated currency.

CHAPTER 4

On the Problem of Legal Resumption of Specie Payments in Austria-Hungary

A Reply to Walther Federn1

The remarks that I published in this journal last year about the problem of legal resumption of specie payments in Austro-Hungary2 have received a response by Walther Federn3 in this journal’s first issue for this year. The author says that my claim that the Austro-Hungarian Bank made foreign exchange available at all times at a rate that was lower than the upper gold point does not correspond to the facts, and, therefore, my conclusions are incorrect. In his article Mr. Federn develops his own theory (with which I disagree) more substantially and in far greater detail than in his previous, shorter newspaper articles. He is, without a doubt, one of the few representatives speaking in favor of the advantages from the current currency arrangement in Austria-Hungary who should be taken seriously. Thus, it seems appropriate that his remarks should not be left without a response.4

There is a great theoretical importance to the problems discussed here. On the one hand, there is a close relationship between this problem and the questions that Knapp’s State Theory of Money has placed at the center of modern theoretical economics. No less important, however, is the practical importance of this issue for the Austro-Hungarian Monarchy, where the question about the legal resumption of specie payments has not disappeared from the agenda. It is also of importance in Imperial Germany, where the Reichsbank is attempting to establish a position of power on the foreign exchange market similar to that already held by its Viennese sister institution.

I

The Development of Erroneous Views about Foreign Exchange Policy

I believe I have already said everything essential in connection with the question about the legal resumption of specie payments in my earlier essay, and Mr. Federn’s new remarks do not induce me to recant a single word of it. It should be emphasized, again, that the claim that the Austro-Hungarian Bank sometimes denied the release of foreign exchange to interest rate arbitrageurs is absolutely inconsistent with the facts.

If one asks how such an incorrect claim could be made at all, one comes upon the following:

Several banks and private bankers have complained that the Bank sometimes capitalizes on its preeminent position on the foreign exchange market to demand high prices for the foreign exchange that they request; however, it should be pointed out that the prices are always still below the upper gold point. Similarly, here and there laments are made that the Bank occasionally does not release any foreign exchange. Concerning this latter grievance, it turns out that whenever the foreign exchange rate is a considerable distance from the upper gold point the Bank sometimes shows no interest in supplying some of its foreign exchange, that is, it instructs its representatives on the foreign exchange market to reply negatively to every request for surrendering foreign exchange. Whenever the demand for foreign exchange is not insignificant, the Bank’s restrictive policy results in a rise in the foreign exchange rates. Then, when the foreign exchange rates have reached a certain level, the Bank again releases foreign exchange onto the market and brings any further increase in the exchange rates to a halt.

However, the importance of the Bank’s intervention is that it constantly occurs before the foreign exchange rate has reached the upper gold point. It is this last point that is of importance for monetary policy. How high may be the price that the Bank demands for its foreign exchange is a matter of complete indifference, so long as it demands less than would justify the costs of actually exporting gold. That the Bank, ex facto, pays specie for foreign exchange is unaffected by this. Whether it is to settle debts coming due abroad or merely to invest money abroad, anyone wanting to purchase foreign exchange or checks should certainly be pleased that it is supplied to them as inexpensively as possible. It is, of course, understandable that as long as it does not interfere with its monetary policy goal of keeping the foreign exchange rate below the upper gold point, the Bank manages its foreign exchange portfolio to earn the highest proceeds possible by charging the best price it can get for its foreign exchange.

When absolutely no gold was obtainable on the unofficial foreign exchange market of the Austro-Hungarian Empire,5 the Bank lacked any precise way of determining whether or not the upper gold point had been reached or even surpassed. In those early years of its new policy (1896-1900), the Bank sometimes released German foreign exchange at a rate of 0.75 percent, or sometimes even at one percent, above parity; indeed, once it did so at an even higher rate on March 23, 1900. However, even this represented significant progress in comparison with the older situation; indeed, in 1893, an agio emerged of up to 6.5 percent. The desired stability of the foreign exchange rate had not yet been completely achieved.

Beginning in the second half of 1901, when the Bank began to supply gold on the unofficial market, it had a reliable indicator of whether or not the upper gold point had already been reached. Whenever this point was reached, gold in circulation began to be exported and the Bank received inquiries whether it would be willing to release gold as well as surrendering foreign exchange.

To counteract such inroads into the monarchy’s gold reserves, the Bank needs no other method than to increase its discount rate. As far as banks in Vienna are concerned, the most important foreign exchange market outside Austria-Hungary is the banking centers in Germany. In comparison, the foreign exchange markets in London and Paris are only of secondary importance. The great importance of the German foreign exchange market dates from the time of close political ties between Austria and the countries of the German Confederation, and it is the many economic connections between Austria and Germany that explain the persistence of this preferential treatment.6

In 1908, trade with Imperial Germany amounted to 42 percent of Austria-Hungary’s total foreign trade. According to estimates by the Austrian Ministry of Finance, foreign investment in Austria and Hungary at the end of 1901 came to 9,353 million crowns, of which 4,568 million crowns were held by citizens of Germany, or almost 49 percent of the total. Besides this, it should also be pointed out that a large portion of the monarchy’s trade with other foreign countries takes place through German intermediation.

Therefore, the Austro-Hungarian Bank turns its attention first and foremost to the foreign exchange market in German banking centers. Since the end of 1900, the Bank has intentionally maintained the purchase price for its foreign exchange and, as a rule, it has never risen more than one-quarter of a percent above the specie parity rate of 117.563. Only on a few days in the second half of March 1907, and then in November and December of 1909, did it rise above this to a maximum of 117.925 (0.31 percent above parity); and only once, on March 26, 1907, did it reach a rate of 118.05 (0.41 percent above parity).

II

The Bank’s Policy in Light of the Statements by the Bank’s Governor and the Viennese Stock Exchange

Federn’s claim, that the Bank occasionally denies the release of foreign exchange, however, can only be demonstrated through counter-evidence. It should be noted that Federn stands out in making this case, because other supporters of the same viewpoint have little knowledge of the detailed facts and simply assert their claims about the supposed benefits for interest rate policy from a suspension of specie payments. Their claims about the advantage from an “isolated” currency not embroiled in the international fight for gold have been repeatedly refuted.7

If, as Federn claims, the Bank actually did occasionally deny the release of foreign exchange to interest rate arbitrageurs, then financial circles in Vienna would have some knowledge of its actions. This is, however, not the case. Whenever increases in the prime rate were being considered in Vienna due to increases in foreign exchange rates and rising interest rates on foreign markets, a refusal by the Bank to release foreign exchange has never appeared in the statements made by experts and is never mentioned in the newspapers. Rather, everyone completely understands that the Bank releases foreign exchange at a higher price and must unconditionally supply it, if it does not want to trigger a panic increase in the foreign exchange rate.

Completely opposite to what Federn alleges are the remarks made by the Austrian finance minister, Leon Ritter von Bilinski, who was governor of the Austro-Hungarian Bank at that time.8 Bilinski explained that opponents of mandatory specie payments incorrectly assumed that variability in the interest rate would arise only in the case of legal resumption of specie payments, since the Bank was already required at that time to coordinate its interest rate policy with other foreign central banks. The Austro-Hungarian Bank, he said, did not consider every export of gold to be a catastrophe. The gold did not absolutely remain in the vaults of the Bank simply to cover its banknotes; rather, it was used to cover international payments as well, insofar as they resulted from the legitimate requirements of trade and commerce.

This last statement appears to give support to Federn’s theory that the Bank satisfies only the “legitimate” requests for foreign exchanges, and sometimes refuses to release foreign exchange to the interest rate arbitrageurs. However, Bilinski’s next statements show that the Bank knew of no deterrent other than an increase in the discount rate to counter illegitimate requests for international means of payment. Namely, Bilinski then continued, “Thus, we vigorously resist every unjustified export of gold; for example, in October 1905, we already increased the interest rate as soon as gold exports exceeded two million crowns; conversely, we also often send gold to foreign markets whenever we have the expectation that this method will prevent a further increase in the foreign discount rate. By this means we stem any future export of gold from the monarchy that would require us to increase the Bank’s discount rate.”9

That is exactly the opposite of what Federn has alleged to be the policy of the Bank.

Concerning the events in 1907, about which Federn has claimed that the Bank denied the release of foreign exchange, it is stated in a report to the Viennese stock market that at the end of June, “multiple requests were sent to the Austro-Hungarian Bank, as well as other domestic institutions, whether gold bullion or gold coins could be released for export (namely to Germany and the Netherlands). Since the Bank wished to maintain its voluntary adoption and up to then impeccable record of acting as an institution that paid in specie, it was compelled to increase the discount rate from 4.5 percent to 5 percent on the 27th of June because of the small amount of gold available on the unofficial markets of the monarchy.” This increase in the rate of interest achieved the desired goal of stemming the outflow of gold.10 That it was not necessary for the Bank to increase its interest rate beyond 6 percent in the autumn of that same year can be traced back primarily to its policy earlier in the year, as can be inferred from the same report to the stock exchange: money was readily available in Vienna in November due to the precautionary action exercised by the Bank.11

Incidentally, there is nothing peculiar in the large difference in the private discount rates and the central bank rates during times of crisis. Precisely in such times, financiers become more anxious over risks that are always connected with foreign investments during a crisis; they prefer lending their money at lower interest rates closer to home to bearing the increased risk of a better rate of return abroad. In turbulent times, noticeable differences appear even between currency markets within the same country, such as between Berlin and Frankfurt.

However, even if it can be ascertained that the Bank does not proceed as Federn has depicted, a moment should still be spent to consider whether such a policy would even be possible, and in what manner an increase in the foreign exchange rate could be prevented in spite of the Bank’s refusal to release foreign exchange. There are two instances that Federn cites here. Initially, he refers to the fact that an increase in the foreign exchange rate decreases the gains from interest rate arbitrage. That this is true has never been denied. The entire objection appears invalid, however, if it is taken into consideration that since 1900 this increase in the foreign exchange rate has extended only to the upper gold point for foreign exchange at German banking centers. Thus, a limit to foreign exchange speculation receives little support on this count.

III

Transactions During the Bosnian Crisis

Additionally, Federn states that during the Bosnian Crisis12 the Bank took particular advantage of the fact that it was not obligated to release actual gold upon demand in support of its interest rate policy. If it had been obligated, in fact, to unrestrictedly release gold, the banking sector would have prudently withdrawn gold from the Bank and sent it abroad, Federn says. However, because the Bank did not have to actually release gold, the demand would have been concentrated on foreign exchange.

But the Bank only reluctantly satisfied this speculative demand for foreign exchange, Federn argues. It allowed the rate of foreign exchange to rise above the redemption rate, indeed somewhat above the upper gold point, and successfully countered the speculation. Whoever wanted to buy foreign exchange had to purchase it above the price for gold: consequently, he would have to bear an exchange risk and therefore decided to delay making the purchase thinking that there would always be time to acquire foreign exchange the next day in case the situation deteriorated. There would have been no need for such patience if the Bank had been obligated to release gold at its going rate, because then this risk would have disappeared. The Bank’s precious metal holdings would have been prematurely weakened, with all of the disadvantages that go hand in hand with this, Federn concludes.

In response to this argument it may be pointed out that during the entire period of the Bosnian Crisis (from October 1908 to the end of March 1909), the rates for foreign exchange at the German banking centers, without exception, ranged below the mint parity; the rate of foreign exchange in London ranged below mint parity during most of this period, with the maximum never exceeding 0.08 percent above mint parity during those six months.13

If Federn’s allegation about foreign exchange is thus completely unsubstantiated, the same goes for the claim that the Austro-Hungarian Bank did not release gold during the Bosnian Crisis. It was precisely during the Bosnian Crisis in March 1909 that an admittedly unimportant, domestic demand for actual gold occurred for the first time in Austria; when the reservists rallied to the banners and the active-duty officers and reserve troops departed for the borders, they required certain sums of money. This increased demand resulted from runs on a few provincial savings banks, and was satisfied without exception by the Bank. To have done anything else would have shaken the solid trust among the people that the Bank’s wise policies had built up over a long period of time.

Federn claims that banks carry a risk connected with the purchase of foreign exchange, while the acquisition of actual gold bears no such risk for them. It should be pointed out that the purchase of actual gold at the current parity rate for gold appears more expensive than the purchase of foreign exchange, since the latter is purchased at a rate that is already close to the gold point.

Federn makes a similar error when he claims at another point in his argument that the Bank hampers interest rate arbitrage when it releases foreign exchange under fixed-term contracts while denying foreign exchange for cash. A capitalist who desires to take advantage of a higher interest rate abroad can most easily achieve his goals by purchasing long-dated foreign exchange at foreign banking centers. If the Bank were to actually pursue the policy alleged by Federn, this could in no way counter interest rate arbitrage. Only those individuals would seemingly be damaged who had to make foreign payments coming due in the short run, since in order to settle such payments, short-term foreign exchange is needed.

The Bank has no other means to limit a rise in the foreign exchange rate above a certain level than by satisfying the demand for foreign exchange at a lower rate, regardless of the reason behind that demand. This is the policy that the Austro-Hungarian Bank has followed for more than a decade.

CHAPTER 5

The Fourth Issuing Right of the Austro-Hungarian Bank1

The Austrian law of August 8, 1911 (Imperial Law Gazette no. 157), and the Hungarian Article of Law no. XVIII of 1911 (which are substantially the same) brought to a provisional close a disagreement that has continued for several years.2 They extended the note-issuing right [Privilegium] of the Austro-Hungarian Bank that had already expired on December 31, 1910, and which had remained in force after that date only through temporary arrangements made between the governments of both halves of the country and the Bank. Also simultaneously extended until December 31, 1917, was the coinage and currency treaty that had existed between the two countries since 1892, and which was supposed to expire at the end of 1910. The banking and monetary union, whose continued existence appeared to be in danger due to the fierce hostility of the Hungarian Independence Party, was assured at least for the short term. The status quo was also maintained in the areas of monetary and banking policy until 1917, the next crucial year when the Ausgleich3 will come up for renewal. This end to almost five years of conflict over the Bank was predictable, as there was never any doubt that an independent Hungarian central bank would not be founded on January 1, 1911. Such a solution to the Bank question would have been severely harmful for Hungarian interests, and would have been mourned from the Austrian side, as well. It was hardly likely that the governments and parliaments of both nations would have chosen such a course since it would have benefited no one and, indeed, would have resulted in severe disadvantages for the general economic development of the monarchy.

The Hungarian opposition to continuing the banking union was based solely and exclusively on political, and not economic, grounds. Hungary (or, more specifically, an influential group of Magyar politicians) demanded the establishment of an independent Hungarian bank, claiming that the mere existence of a common central bank was inconsistent with the status of the Kingdom of Hungary. Aside from vague national sentiments, even the most fervent advocates for a separate Hungarian Bank could not seriously assert that the banking union impaired Hungary’s economic interests.

The advantages that accrue to Hungary through the banking and monetary union with Austria were too obvious to allow for any differences of opinion on this matter. Hungary owes its unhampered access to the Austrian money and capital markets to the Bank, as well as the fact that Austrian resources are widely available to Hungary’s industries and its agricultural sector throughout its provinces. Austrian money supports Hungarian credit banks, and the sums that have flowed from Austria into the Hungarian mortgage market are astronomically high. The common central bank also serves as a primary source to satisfy Hungarian credit demands.

Beginning in 1906, the Austro-Hungarian Bank began publishing information about the territorial use of bank credit based on the location of the discount payments on the bills of exchange. Thus, the total of each region in the Bank’s bills of exchange portfolio were:

The drawdown from the Bank’s discount credit, therefore, is much larger in the Hungarian part of the empire than in the Austrian part. Without a common central bank, the interest rate in Hungary would undoubtedly be higher than is currently the case; the implications of this for the development of Hungarian industry are clear.

On the other hand, Cisleithania [Austria] had the greatest interest in the continuation of the banking union. The unity of the money and capital market assures Austrian industrial dominance over the Hungarian markets. Additionally, as long as there continues to be a common tariff area, an independent Hungarian monetary system could, under the current circumstances, bear serious consequences for Austria. However unlikely, it is possible that a separate Hungarian currency could be devalued; a falling exchange rate would hinder Austrian exports to Hungary and facilitate the importing of Hungarian goods into Austria.

Thus, the battle that was fought against the continuation of a joint central bank had to end with a complete success for the Bank’s defenders. The issuing right of the joint central bank was extended to 1917. The decision about its further continuation will be made simultaneously with the decision about the future form of the political and economic relationships between the two halves of the monarchy.

Along with the question about maintaining a joint central bank, the other question that has been at the center of banking discussions for several years has been the problem of legal resumption of specie payments. As is widely known, the currency reform initiated in 1892 has not yet come to a statutory conclusion. The “crowning” of the reform effort through the legal resumption of specie payments has yet to be fulfilled, and according to the letter of the law, the monarchy’s medium of exchange still remains a paper currency. This is because the Austro-Hungarian Bank is not obligated to redeem its notes for gold.

The actual situation is admittedly very different. For fifteen years now, the Austro-Hungarian Bank has surrendered any amount of gold and gold-backed foreign exchange demanded for commercial purposes at a price that lies below a level which would be equal to the upper gold point for specie payments, as similarly practiced in the English banking system. In fact, the Austro-Hungarian Bank is a specie-redeeming institution; the monarchy, therefore, already has enjoyed all the advantages of a regulated currency for several years.4

Thus, nothing stands in the way of the legal resumption of specie payments. It would simply represent a legal sanctioning of a long-standing practice. Economically, it would be irrelevant. However, it would have all the more meaning for the international prestige of both parts of the monarchy. The legal culmination of the transition to a gold-backed currency would give visible expression that Austria-Hungary had overcome the period of its fragmented financial management. With one blow, the value of the crown traded on the financial markets would become the value of gold. The psychological importance of that moment should not by any means be underestimated. The stimulus this would create would certainly do much to improve the monarchy’s reputation, which has been severely shaken by the domestic political events of the last several years.

Nevertheless, the suggestion that the Austro-Hungarian Bank be legally obligated to redeem its notes with specie is met with strong opposition in Austria (though not in Hungary). This antagonism is a consequence of the inflationary tendencies that have repeatedly played a large role in the history of the Austrian currency. The “theory” about the alleged advantages of an “isolated” monetary system for the setting of the rate of interest is as popular in Austria today as it was three or four decades ago. A bank that is not obligated to redeem its notes in specie, one hears, can emancipate itself from any need to consider the international monetary situation when setting its own official rate of discount. According to this theory, it can allow any degree of “tension” to exist between its central bank rate and that of foreign central bank institutions without any concern, because no gold could be withdrawn from its bank. As early as a generation ago, Wilhelm von Lucam, who served as secretary general of the Austro-Hungarian Bank for many years, laid this error completely to rest; since that time, distinguished authors have repeated his rebuttal. However, serious scientific works are unable to convince those who refuse to come face-to-face with their arguments.

Seven years ago the publication of Knapp’s The State Theory of Money offered renewed confidence to the opponents of a gold-backed currency. In Austria, a small literature appeared in brochures, the daily newspapers, and in popular reviews that fought with zeal and passion against the legal resumption of specie payments. Knapp, and his followers to a greater extent than himself, misconceived the essence of the often-referred-to foreign exchange policy of the Austro-Hungarian Bank. They have neither acknowledged nor refuted the criticisms leveled against their views.5 Regardless of this, however, essays constantly fill the columns of the daily newspapers and economic weeklies promoting Austria-Hungary’s “modern” monetary system and reproaching the monetary institutions of all other countries in the world as being backward. It is characteristic of many authors from this group that the monetary history of the last twenty years, in terms of the developments in America, Asia, and India, has completely escaped them. It is self-evident that they are conversant neither with the literature on monetary theory nor the most recent works about the gold exchange standard. They hardly know anything about Carl Menger,6 William Stanley Jevons,7 Leon Walras,8 Friedrich von Wieser,9 J. Laurence Laughlin,10 or David Kinley.11

Among the opponents of the legal resumption of specie payments, Walther Federn, in a certain sense, temporarily held a special position. Federn held the view that the current legal situation offered the Austro-Hungarian Bank the opportunity to leave unsatisfied any demand for foreign exchange for so-called interest rate arbitrage, and to limit the release of foreign exchange solely for the “legitimate” needs of importers and those persons and corporations owing debt payments abroad.

According to Federn, the Bank also availed itself of the following possibility. The foreign exchange rate cannot increase beyond a desired level when foreign exchange is not supplied for short-term investment abroad, because when the foreign exchange rate is above a certain level, the demand for foreign exchange for this purpose decreases of its own accord. This was an argument against the legal resumption of specie payments that would have carried considerable authority if it had been valid. I believe that I have produced the proof for the incorrectness of this and similar claims in the above-cited articles, and more recently in another publication.12 The Austro-Hungarian Bank has not (at least prior to the autumn of 1911, during which its policy suffered a fiasco) attempted to deny issuing foreign exchange for use in interest rate arbitrage.

In addition, Federn has surrendered his original viewpoint on the question of the Bank’s policy. In an essay13 that appeared last year there was missing his claim that an increase in the foreign exchange rate does not occur in spite of the Bank’s refusing to issue foreign exchange. Instead, Federn tried to demonstrate that, in fact, the foreign exchange rate on the Vienna bourse often increased above the upper gold point, and that, as a consequence, the Austrian currency did not have a stable value. It is quite difficult to debate with an author who constantly changes his views. Perhaps in another setting I will return to Federn’s statements and reveal their deficiencies to those people for whom they may not have been obvious up to now.

As could be expected under the circumstances, the Austrian government has had to deal with the opposition to the legal resumption of specie payments. Quite unlike in the Upper House of the Austrian Parliament, it would have been completely futile to attempt to gain agreement on a new issuing right for the Bank in the Austrian House of Deputies [the Lower House] that would have included the legal resumption of specie payments.14

On the other hand, the Hungarian government had to insist (likewise due to parliamentary considerations) that the status quo be moved at least slightly in the direction of a legal resumption of cash payments, because in Hungary there was a general desire for the legal completion of the task for currency reform. The Hungarian politicians are more closely linked to business life and banking transactions than their Austrian counterparts; they do not underestimate the significance of the legal resumption of specie payments for easing Hungary’s access into the money markets of the West.

The two conflicting tendencies are reconciled by a compromise in the new Bank Law. The suspension of the Bank’s obligation to redeem its notes for specie under Article 83 remains in effect until further notice. Abrogation of the suspension may occur only in accordance with the usual procedures of an act passed by both the Austrian and Hungarian legislatures. However, the third paragraph of Article 111 of the statutes grants the Austro-Hungarian Bank the right to petition both legislatures for ending the specie suspension under Article 83 at a point in time when the Bank considers that the international financial situation is favorable for a resumption of specie payments.

In the event that the Bank makes this proposal, the Austrian government is obligated under Article V of the Bank Law to immediately enter into negotiations with the Hungarian government, to conduct these negotiations with all expediency, and in accordance with established procedures of the Hungarian government. Identical drafts are to be submitted in both houses of the Parliament, on the appointed day, for approval of the Austro-Hungarian Bank’s petition for ending specie suspension under Article 83. The approval of this petition is granted by affirmative decisions in both houses of Parliament. A negative decision by just one of the two houses results in the denial of the approval of this petition. If within a period of four weeks from the time the draft has been submitted during the parliamentary session no decision is reached by one of the two houses, then the petition is considered approved by that respective house or both houses of the Parliament.

These provisions, which are analogously covered by Hungarian law (with one inconsequential difference), are extremely idiosyncratic in the context of the constitutional relationship between the two halves of the monarchy. The underlying motive is clear, considering the obstructionist elements that currently influence both the Austrian and Hungarian parliamentary systems.

The constitutional objections to this procedure should be partially eliminated in Austria by the provisions of the special law of August 8, 1911 (Imperial Law Gazette [Reichsgesetzblatt] no. 158), that was announced on the same day as the Bank Law. This law instituted a series of special provisions to assure the government’s businesslike handling of the draft submitted to the House of Deputies, based on the Austro-Hungarian Bank’s petition for abolishing specie suspension under Article 83 of the Bank Statutes. The president of the House has to immediately assign the draft (without a first reading) to the committee appointed for the preliminary discussion. The committee has to submit a written report about the draft to the full House within a period of no more than one week. The president must, without objections, place the committee’s report as the first item on the agenda of the session immediately following the dissemination of the report; and it must be the first item on the agenda for every subsequent session of the House until a decision has been reached.

If the committee has not submitted a report within the one-week period, then the president must, likewise without objections, present the government draft for a final resolution as the first item on the agenda of the session occurring immediately after the expiration of the deadline set for the committee; and it must be the first item on the agenda for every subsequent session of the House. If debate over the draft extends up to the third day prior to the expiration of the four-week period set by Article V of the Bank Law, then the president must declare the debate closed, whether or not the delegate who has the floor has finished his remarks and whether or not there are still delegates registered to speak on the issue. The president must, at the latest, call the vote the next day after debate has been closed.

It is not our task to address the constitutional aspects of these provisions. From a purely economic point of view, the new Bank issuing right offers plenty that is of interest.

Article 1 of the Bank Statutes obligates the Bank to ensure, with all means at its disposal, that the price of foreign exchange reflects the value of its banknotes, and that this remains stable over time. The value of the Bank’s notes shall also correspond to the legal mint parity price of the crown currency. In the case that the Bank does not meet this obligation (i.e., for as long as suspension of specie payments continues), its noncompliance will result in the Bank losing its issuing privilege in accordance with paragraph 2 of Article 111, insofar as this is not superseded by a “higher power” recognized by both governments. An exception is made for a temporary suspension of the Bank’s obligation if there has occurred a lawful decree simultaneously approved in both nations of the monarchy.

The Gordian thought processes that led to this provision in the Bank Statutes can be understood only in the context of the polarized views that exist in the two parts of the monarchy over legal resumption of specie payments. Indeed, it was aimed at somehow legally sanctioning the status quo of de facto specie payments without employing the (in Austria) unpopular idea of specie redemption of notes. Each of the two governments could return home as victor rather than vanquished from the debate over the Bank Act.

Obviously, that was not completely achieved, because what in the plain language of the law would have constituted a decision equivalent to the Bank being given the obligation to institute specie payments was not achieved in this provision. Foreign countries will continue to consider the value of the crown as not being equal to its gold par value, and will view Austrian and Hungarian credit as being substandard.

From a technical legal viewpoint, the frequently discussed item in the Bank Statutes concerning the parity value of the currency can hardly be described as successful. Even the style in which it is expressed is quite awkward. As is highlighted in the report about the reasons for the law, it is not meant to force the Bank to guarantee that the foreign exchange rate constantly coincides with the mint parity of the currency. Instead, henceforth, the Bank’s legal obligation would be to maintain its current practice, which it has followed for years without legal compulsion, of not allowing the foreign exchange rate to rise above the upper gold point. Thus, the Bank must continue to pursue the same policies that it has followed up to the present; in the future (as has currently been the case), it must simply ensure that the upper gold point is not exceeded. In other words, it must guarantee that there occur no significant fluctuations in the foreign exchange rate above the currency’s mint parity. A shrewd loophole was left open, wherein the range in which the foreign exchange rate might vary above the mint parity was not defined in this law or elsewhere.

It is superfluous and contradictory to all legal terminology if, as it is expressly noted in Article 111, the Bank does not lose its issuing rights when it fails to comply with the obligation to uphold the exchange rate parity, other than in situations in which a temporary suspension has been decreed in a lawful manner in both nations of the monarchy. It appears that during the compilation of the Bank Statutes, the legal rule “lex posterior derogat priori”15 was completely forgotten.

According to Article 83, paragraph 2 of the Bank Statutes, there does not occur a loss of issuing rights due to failure to comply with this obligation after the resumption of specie payments, if it is prevented from doing so by a higher power recognized as such by both governments. The official report points out that there could be cases in which the Bank might be prevented by insurmountable external circumstances from meeting its obligations to redeem its notes, and a temporary cessation of note redemption could not be immediately decreed in a lawful fashion. The official report also indicates that there also could be similarly valid reasons in regard to the Bank’s failure to meet its obligation to maintain the exchange rate parity. In practice, this gives both governments the authority to relieve the Bank at any time of its obligation to maintain the foreign exchange parity, and its obligation to make specie payments. Due to the vagueness of the term “higher power” applied within the area of finance, it may well be possible for the governments to find any pretext for such a suspension of the Bank Act. Any deterioration in the balance of payments can be viewed, with a stretch of the imagination, as being an act by a higher power. It is, however, hardly to be feared that the governments will misuse the authority that has been placed in their hands.

By far the most important innovation in the Bank Law is the expansion of the tax-free quota for the issuance of banknotes. In 1887, the Austro-Hungarian Bank’s second issuing right broke with the system of strictly limiting the number of banknotes in circulation; this system had been introduced by Plener’s Bank Act of December 27, 1862, in the manner set by Peel’s Bank Act.16 The second issuing right declared that any issuance of banknotes not backed by precious metals in excess of the 200 million florins (Austrian currency) quota was subject to a tax of 5 percent on any notes in circulation exceeding that maximum.

Since that time the quota of 400 million crown notes has not been increased, and has remained at that level for almost five decades.17 In recent years, the issuance of notes in excess of 400 million crowns has occurred primarily in the autumn months. In 1907, there were no fewer than 21 times when the total number of notes in circulation was in excess of that maximum amount. The new Bank Statute expands the tax-free note quota from 400 million crowns up to 600 million crowns. Whatever significance this expansion of the tax-free quota of notes will have on the financial markets cannot be discussed here in any detail. Doubtless the effect will not be as harmless as is asserted in the official report, which leaves quite a bit to be desired on these points.

In any case, it is deplorable that the Bank Statute did not establish, as the German model does, that the quota of notes be determined at a higher level for the end of the quarters as opposed to the average level during the year. The official report cited the German provision and included as a quasi explanation that the quarterly deadlines (at the end of March, July, September, and December) regularly bring certain tensions on the German financial markets. The report remains silent as to the question (which surely would have merited a detailed explanation) about whether it has been ascertained that the same deadlines cause tension on the Austrian markets.

Indicating yet another tendency, an amendment has been made to the regulations concerning the backing of notes in circulation. In the agreements made incidental to the conferral of the third issuing right in 1899 between the two governments and the Bank, the Bank was allowed to employ an amount of 401,305 million crowns in national gold coins (that has originally been supplied by the two governments) to cover the ten- and twenty-crown notes that had been issued in place of an equivalent amount of state notes. The Bank was not allowed to include this amount, which formed 40 percent of the precious metal backing of its notes, in the summary of its specie reserves.

Article VI of the Bank Law Amendment abrogates this limitation. At the same time, the previous limitations on the issuing of ten- and twenty-crown notes are dropped. In their place appeared a provision (Article 82 of the Bank Statutes) that to cover transactions of less than fifty crowns, twenty- and ten-crown banknotes can be issued in any amount mutually agreed to by the two finance ministers. Due to this, banknotes in denominations of twenty and ten crowns will become a permanent institution. This corresponds to the principles first promulgated in the specie payment guidelines of 1903, and which stand in contradiction to straightforwardly adopting the English and German institutions, which were envisioned by the legislators of 1892 and 1899.

Also taken from the 1903 guidelines was authorization for the Bank to include in its calculation of specie reserves an amount up to 60 million crowns in holdings of foreign exchange and foreign banknotes that are payable in gold or an equivalent precious-metal-backed currency.

From a financial perspective, the expansion of the tax-free note quota was partly a compensation for the increased share of the Bank’s net profits taken by both governments in the monarchy. In general, the provisions concerning the division of the Bank’s net profit remained unchanged, though with a modification. Previously, the two governments received two-thirds of the net profits whenever common stockholdings exceeded 7 percent of the equity capital; in the future, the two governments under those circumstances will receive three-quarters of the net profits. In addition, the Bank is obligated to establish twenty new subsidiaries, ten in Austria and ten in Hungary, at locations determined by the ministers of finance.

In general, nothing was changed in the Bank’s time-tested organization: it remains as it had been until 1917, and hopefully will remain so long into the future. And there are a few provisions about the handling of the gold reserves at the expiration of the issuing right in 1917, as a reminder that that possibility must be kept in mind in all calculations about the future.

Foreign judgments of the situation following the passage of the new note issue right will likely conclude that little success has been made in solving the Bank question. Fault will be found with the complicated parliamentary procedures preceding the future resumption of specie payments, and with many other details and aspects of the new issuing right. This is completely aside from the fact that foreign opinion will hardly be able to comprehend why the new issuing right fails to validate the de facto situation of specie payments by sanctioning the legal resumption of specie payments.

Anyone who completely understands the situation in the monarchy will in no way agree with such a disparaging judgment. For it is indeed the truth that the Bank’s issuing right, in spite of all its defects, unquestionably demonstrates a full and complete success for the Austrian ideal of the nation-state. An important part of imperial unity was secured for the coming years. What that will mean, and how the diplomatic and political success of the two governments is to be estimated, can only be answered by those worthy to judge, those who truly understand the parties in Cisleithania and Transleithania [Austria and Hungary], ruled as they are by rallying cries and only seldom guided by dispassionate logic.

CHAPTER 6

Financial Reform in Austria1

After more than a century of chronic budget deficits, about twenty years ago Austria succeeded in reestablishing a balance in its public finances. From 1889 to 1909 the national accounts generally showed a surplus. The situation changed again in 1908, and the estimate for 1909 predicted a deficit, which could be converted into an apparent surplus of 60,000 crowns only by the introduction of a fictitious entry of 29 million crowns. The budget for 1910 already openly admits to a deficit.

It cannot be determined exactly how much the deficit amounts to in the ordinary budget, and which has to be covered by new increases in taxes. On this point differences of opinion will always exist, ideas being divided on the question of what should be understood by investment and what must be considered as current expenditures. One fact is certain: this deficit is very large. The minister of finance evaluates at about 17 million crowns the increase of revenue that the state will have to obtain annually from a tax increase or by the creation of new taxes. To this must be added a deficit of about 40 million crowns, which has come about in the budgets of the various Austrian provinces. Since the provinces are not able to cover it with their own resources, it too must be made up for by the state. Thus there is, at this moment, an assured budget deficit of 110 million crowns; and this figure will increase significantly in future years if new resources are not found in time.

In fact, enormous expenses will have to be met soon. The army and the fleet have been completely neglected for many years. Their allocation has not been raised for twenty years, while at the same time all the other European states have considerably increased their defense forces. Moreover, the weaponry of the army leaves much to be desired, and the reduction of service time from three years to two, which cannot be postponed much longer, will entail enormous costs. The navy, too, will be the object of more serious attention in the future. In the presence of the enormous naval armaments of Italy, aimed directly against Austria, our navy too will be forced to construct some “dreadnoughts.”

The obligations of social insurance will likewise impose heavy expenses on the state. According to the calculations in the government’s plan, the contribution of the state to social insurance will in the end amount to 100 million crowns per year. How are the needed resources to be obtained? Neither the government nor Parliament has so far said a word about it. One can already perceive here an essential difference between the causes for the financial embarrassment of Austria and those of the other states (Germany, France, and England) that are presently struggling with financial difficulties. In these latter countries, it is mainly military and social burdens that have swollen the budget; in Austria, on the other hand, the deficit already exists even though the state has up to now only insufficiently fulfilled its military and social obligations.

Nevertheless, for the last ten years governmental expenditures in Austria have gone from 1.5 billion to 2.3 billion crowns. If we investigate the causes of this huge increase, we shall immediately discover that during the same period interest and amortization payments on the national debt rose from 345 million to 411 million crowns (of which 356 million were for the payment of interest and only 55 million for amortization). Direct taxes and the excise on beer together produced just enough to provide this amount.

Excluding the increase of payments related to the national debt and national defense, the increase in expenditures comes mainly from the rise of those relating to domestic administration. These expenditures have increased considerably in the last few years: for the Finance Ministry they have gone from 61.2 million to 105.9 million crowns; for postal employees, from 48.9 million to 92.1 million; for the Ministry of Justice, from 58.4 million to 92.5 million; for pensions, from 48.6 million to 91.6 million crowns. Up to 1908 the state has paid out for the acquisition of the railway network about 4 billion crowns, which it obtained on the basis of credit. The interest on the capital invested in the railroads amounted to 173 million crowns.

By contrast, in 1908 the surplus from the operation of the state railroads was only 95 million crowns. Thus the state had to cope with an operating deficit of 78 million crowns. To remedy this state of affairs the fares of the state railroads were raised after January 1, 1910, by such a proportion that a profit of 47 million crowns can be counted on for annual receipts. In spite of this, the management of the railroads will always be in serious deficit and will constitute a burden for the budget. In Austria the administration of the state’s railroads is excessively expensive; moreover, in the unanimous opinion of all the interested parties it operates exceptionally badly. This deficit must be attributed only secondarily to the fact that the state also operates—for strategic and political-economy reasons in general—certain lines that scarcely yield anything; it is due just as little to the circumstance that the creation of the Austrian state’s railroads is very burdensome, given the difficulties of construction in a mountainous country; the principal cause is, instead, the incompetence of an administration that does not have a commercial and economic character, an administration in which everything depends upon political and personal points of view, while the economic point of view matters least. A reform of the administration of the railroads is desirable not only in the interest of shippers and travelers but also in the interest of the public treasury.

The organization of the Ministry of the Interior is just as irresponsible. If this fact generally attracts less attention, it is only because one cannot be given an account of the results of the Interior Ministry in the same way as the results of a state-run firm like the railroads. Some years ago Minister Koerber,2 who was then in power, had prepared and published a memorandum concerning the reform of the interior ministry, which constituted the most acerbic criticism of his own activity that was ever made by the government of a country; in it the Austrian government is the object of a merciless criticism.

One of the most important measures recommended by Minister Koerber was to intensify the productivity of state agencies. This idea sank along with Minister Koerber himself, as did other impressive plans of that statesman. One of the chief ills, which the Austrian government suffers from and which considerably increases its expenses, is the coexistence and cofunctioning of a dual administrative apparatus. Alongside the national administration and the national authorities there exist, absolutely independent of them, the autonomous authorities of the provinces and of the municipalities. The administrative organs of the state are appointed by the government and depend upon it. On the other hand, the autonomous administrative organs depend solely on the Diets (Landtag)3 and the municipal administrations, both of which are the result of elections. Far from trying to support each other mutually, these two organs often have a tendency to oppose their reciprocal endeavors. This is especially the case in those districts where a powerful and energetic party is in power in the Diet and in the municipalities. In these conditions, and aside from the fact that it entails excessive expenses, this administrative dualism does not in any way appear to be an advantage to the population. Nevertheless, a reform in this area is difficult to carry out since the Diets and the municipalities do not want to give up any of their prerogatives. And yet such a reform would be the first step toward a reduction of the bluntly excessive cost of the administration.

In Austria, the problem of reestablishing equilibrium in the management of public affairs is particularly complicated by the fact that it is a question of reforming not only the management of the state but also that of the provinces, and that in this activity one must take a whole series of difficulties into account. The constitution grants to the provinces the right to collect taxes, in addition to the direct taxes of the state to cover their expenses. If these supplementary taxes do not exceed 10 percent of the national taxes, they do not have to be authorized by the government or by the emperor; however, if they exceed 10 percent, a special approbation by the emperor is needed. Moreover, the provinces are free to introduce their own indirect taxes, with imperial authorization.

Twelve years ago, at the time of the creation of the new income tax, it was feared that the provinces and municipalities might use the right to collect supplements to the new income tax too liberally and might raise the level of taxation to such a point that the temptation to make false declarations would become very great. The Parliament of the empire did not have the right to forbid the municipalities and provinces to collect such supplements to the income tax; that is why it had to act in another way to keep the above-mentioned tax free of supplements. Until the end of 1909 the Reichsrat4 allotted a certain portion of the yield of the income tax to those provinces that committed themselves not to impose supplements to the income tax for purposes related to provincial and municipal administration. That is what happened in all the provinces. Meanwhile, different individual provinces began to create their own indirect taxes, which previously had not been done. Later, when in 1901 the excise tax on alcohol was raised, a part of the yield of the excise was again assigned by the state to the provinces on the condition that they, on their part, would renounce any provincial excise on alcohol. From then on the provinces and municipalities fell back upon the taxation of beers and imposed special taxes on them. Thus three independent excises on beer coexisted in Austria: that of the state, that of the provinces, and that of the municipalities.

In spring 1909 Finance Minister Bilinski5 presented a plan based on the following principles: The state would raise the excise tax on alcohol from 90 crowns or from 110 crowns, respectively, to 140 crowns or 164 crowns per hectoliter6 of pure alcohol and the tax on beer from 34 hellers7 per hectoliter to 70 hellers. The total yield from these two tariff increases was estimated by the government to be 95.5 million crowns. Of this total the government intended to assign 32.2 million crowns to the provinces on the condition that they would renounce their individual taxes on beer, and in addition it allocated to them 40 million crowns on the condition that they should give up the special tax on alcohol and continue to leave the income tax free of supplements. Thus there would have been left to the state a gain in revenue of only 22 million crowns.

Among the public this financial plan was first blamed for focusing on only indirect taxes and for putting the entire burden of expenses required by the new needs of the state on the least fortunate classes. In spite of the government’s promise to introduce a provision that would increase the yield of the inheritance tax by more than 10 million crowns, this fiscal reform could not be justified in the eyes of the parliamentary parties. The government was therefore obliged to have recourse to other means. It presented a plan that would also raise direct taxes.

Meanwhile Parliament was adjourned, and in the autumn the minister of finance presented a new fiscal proposal to Parliament. This time the minister had completely discarded increasing the excise tax on beer, leaving the provinces with the problem of obtaining (by raising of their own taxes on beer) the part that they would otherwise have received as an indemnity for giving up the right to levy an individual tax on beer.

Here are the tax proposals on which the new financial plan is based: increasing inheritance taxes and gift taxes. The present Austrian inheritance tax is graduated only according to the connection linking the successor to the decedent. It amounts to 1.25 percent in the case of the transmission of the estate or of various objects to spouses, ascendants, or descendents [i.e., parents/grandparents or children/grandchildren] and to 5 percent in the case of the transmission to other relatives, including nephews and nieces. In all other cases it is 10 percent; nevertheless, if the heir is employed or salaried by the decedent and if the inheritance or legacy does not exceed either 100 crowns of annual income—for the duration of his life or for a specific number of years—or 1,000 crowns in capital, the tax is only 1.25 percent. If the total assets without the deduction of debts do not exceed 100 crowns, the inheritance is tax-exempt provided that it passes to spouses, ascendants, and descendents.

Now, it is also desired to apply the principle of progressivity to the inheritance tax. In the future, it will be differentiated in two ways: first, according to the personal situation of the heir with regard to the decedent, then according to the amount of the inheritance. On the one hand, five groups of heirs have been distinguished. The first group includes, as before, spouses, ascendants, and descendents; the second group includes, unlike the provisions in force up till now, collateral relatives up to the third degree, except for nephews and nieces. All the other physical persons except those who were employed or salaried by the decedent are relegated to the third group.

In each one of these three groups the inheritances are treated according to their size. In the first group, inheritances that do not exceed 500 crowns are exempt; those above 500 crowns but not exceeding 10,000 crowns pay 1.25 percent, the rate rising then, little by little and by degrees, up to 4 percent, which is applied to inheritances of the seventh and last category, that is, those above 2 million crowns. Each of the second and third groups has nine steps. For inheritances up to 1,000 crowns the rate is 5 percent in the second group and 10 percent in the third, and it rises then little by little to 13 percent and 18 percent respectively for legacies above 2,000 crowns. The inheritances falling to persons who were employed or salaried by the testator are included in the fourth group. They pay no tax up to 500 crowns; from 500 to 1,000 crowns they pay 1.25 percent. Above that amount the inheritances going to such persons are taxed according to their personal situation with relation to the decedent. Those left to indigenous charitable teaching institutions or humanitarian work are included in the fifth group; they are taxed at the rate of 5 percent no matter what their value.

Besides the inheritance tax, the beneficiaries of the real estate inheritances are presently charged with additional estate taxes according to their gross value. This tax amounts to 1 percent in case of transmission to spouses, ascendants, and descendents if the value of the estate does not exceed 30,000 crowns, and goes up to 1.5 percent for a value above the latter. In case of transmission to other beneficiaries, the tax is 1.5 percent up to a value of 20,000 crowns, and 2 percent for a value above 20,000 crowns. The real estate taxes, which are imposed in virtue of the law of June 18, 1901, are continued for the future along with the inheritance tax.

The yield of the present inheritance and gift taxes annually amounts to an average of 19 million crowns without counting the income from real estate taxes. The government expects an annual gain of 10.3 million crowns from the increase of the inheritance tax. The gain from the increase of the gift tax cannot be estimated at present. In addition to the national inheritance tax, an equivalent tax exists in all provinces of the Crown and in many municipalities. In 1905 the yield of the national inheritance tax amounted to 19.2 million crowns and the provincial and municipal taxes to 8.7 million crowns, which added up to approximately 45 percent of the yield of the national inheritance tax.

Although the taxation on inheritances will therefore reach a very high level in Austria in the future, the proposals to increase inheritance taxes arouse almost no opposition. The attacks are generally directed only against such applications, the adoption of which would create an inequality in the fiscal taxation of different classes of the population.

In the matter of indirect taxes, the minister proposes a series of increases and the introduction of new taxes. The increase of taxes on alcohol should bring the state an increase in receipts of about 35 million crowns. This increase, likewise, has met only weak opposition.

In addition, the creation of a match monopoly has been proposed. The yield from this monopoly has been estimated at 15 million crowns. The idea of the match monopoly is generally supported for both social and financial reasons.

On the other hand, two additional taxes proposed by the minister are encountering a vigorous opposition, namely, the tax on natural mineral waters and the tax on soda. Soda will be subject to a tax of 6 hellers per liter. The profit from this tax is estimated at about 1.8 million crowns. The fierce opposition to the tax is based on the fact that the cost of collecting it will be very high since many small establishments produce soda.

Natural mineral waters will pay 10 hellers per liter. All mineral waters that are not suitable for use as refreshments and table drinks but only for medical use will be tax-exempt. However, it has been pointed out that many natural mineral waters are used both for medical use and as refreshments and table drinks. A peculiar fact is that the government also wants to tax mineral waters intended for export. The yield from the taxation of natural mineral water is evaluated at 2.25 million crowns.

An objection to the taxation of soda as well as of natural mineral water is that in many localities water supplies are of such bad quality that the residents are forced to buy soda or mineral water; it is not desirable to create a tax that would, to a certain extent, contribute to the spread of typhus. It is not very likely that the government will succeed in getting these two taxes passed by the Parliament.

It is also doubtful that another project of the finance minister will be accepted that would do away with the tax-exempt status for automobile gasoline. It is pointed out that automobiles are still not widely used in Austria, and it is more important to remove the obstacles that stand in the way of automobile utilization than to create new ones. Besides, the proposed gasoline tax would bring no more than a million crowns.

Finally, the minister has proposed to increase the tax on wine. The existing tax presently brings in 6 million crowns, but in the future it should yield 12 million crowns. Moreover, a special tax on sparkling wines is to be introduced, which should produce 1.5 million crowns, as well as a separate tax on bottled wines, which will yield another 1.5 million crowns. In this case the total yield from the tax on wines will amount to about 16 million crowns.

The government is also proposing to increase the income tax, which is provoking much greater attention and opposition. First, the plan projects an increase of the rate of income tax for those whose income is above 20,000 crowns. Today the highest income tax rate is just below 5 percent; in the future it will reach 6.5 percent. This increase will yield 6 million crowns annually. Second, the rate of income tax will be increased by 15 percent for the taxpayers who do not live together with at least one other member of the family (spouse or child) and by 10 percent for taxpayers who do not live with at least two other members of the family. The yield from this increase is estimated at 5.2 million crowns.

In Austria, the profits of stock corporations are taxed at the enormous base rate of 10 percent. To this tax the state adds supplements for the benefit of the provinces and municipalities, so that it often reaches the rate of 20 percent to 30 percent. It must be also mentioned that what the law views as the next taxable profit of the corporation by far exceeds the real net profit as the businessman normally determines it.

In addition to the general tax on corporations, companies that distribute dividends above 10 percent of the invested capital are subject to a special supplementary tax on the amount used to pay this excess of dividends. This supplementary tax is presently 2 percent of the amount necessary to distribute the 11th to the 15th percent of the dividend and increases to 4 percent for the amount distributed beyond that figure. According to the government’s proposal, the supplementary tax on dividends will not come into play when the dividends exceed 10 percent with regard to the capital stock invested, but only when they reach this level in proportion to the capital stock invested and the reserve. On the other hand, the rate of the supplementary tax will be considerably raised. The amount necessary to form the 11th and 12th percent will be taxed at the rate of 2 percent, the 13th and 14th percent at the rate of 4 percent, and the 16th percent at the rate of 6 percent. The yield from this tax increase would be about 700,000 to 800,000 crowns.

The tax on directors’ profit shares would constitute an innovation. The Austrian tax on dividends is obviously modeled on that of the German Empire, which was introduced in 1906. But while the German tax affected only the supervisory boards of stock corporations, the Austrian tax also applies to the director, board of directors, management, and members of the corporation. The rate of this tax is progressive and goes from 2 percent to 8 percent. Its yield is estimated at 1 million crowns.

Finally, one last provision of the new plan must be pointed out, which is stirring up vigorous opposition in commercial and industrial circles: in the future, according to the plan, fiscal authorities will have the right to inspect the books of businesses and industries. Austrian entrepreneurs rightly see in this arrangement an intensification of the harassment that the authorities display toward them.

In Austrian governmental circles, people like to compare the Austrian finance minister’s plan with that of Lloyd-George. Just like the English budget, they say, the Austrian plan focuses on the wealthy classes and tends to grant relief to the less well-to-do. The Austrian minister of finance, Mr. Bilinski, attempts to parry the attacks directed against his fiscal plans by businessmen and industrialists by making tirades against them; his assault on business considerably exceeds in harshness and hostility anything that has ever been said by the Austrian government against any other group whatsoever. One is reluctantly tempted to make a comparison between these almost-personal attacks of the Austrian ministers, and the oratorical procedures that English ministers use in the electoral battle against the peers.

In the end, all of that may cause public opinion to lose sight of the essential differences between the Austrian scheme and the British budget. The English fiscal reform as a whole constitutes a surtax on the real estate owner: it is directed above all against the land-owning lords, whether they own property in the city or in the country. The targeted social class is the conservative aristocracy and the circles immediately associated with it. The English project carries no trace of hostility toward big industry and commerce. It is precisely the opposite of what characterizes the Austrian project.

Austria today is a country which by necessity has become a large importer of cereal grains. It imports these grains partly from Hungary (which, though in a customs union with Austria, should be considered as a foreign territory in all respects) and partly from other foreign countries. Austria then must be regarded as an industrial country since its economy is based on industrial production. The political strength and importance of the urban industrial population, however, does not correspond to the existing state of affairs. In the Reichsrat the representatives of the agrarian interests have the majority. Large and small real property owners join together to fight the urban and industrial interests. Moreover, the representatives of the cities and the industrial localities are not in agreement. Only a rare few deputies who represent large industries and the socialist deputies are resolute partisans of modern economic evolution and modern industry. The other elected officials from urban electoral districts represent primarily the interests of the petite bourgeoisie and do not understand anything about the general interest in the development of industry. They are always ready to form alliances with the agrarians against industry. Even in questions of commercial policy they often march in step—though not overtly—with the agrarian deputies.

Thus the agrarian deputies have succeeded in gaining great advantages in the fiscal arena. It can be seen most clearly in the taxation of profits, the income tax, and among indirect taxes where the excise tax on alcohol is concerned.

While all other direct taxes continually increase, real estate tax is the only Austrian tax that has gone down during the last decade, and not only in relation to the other receipts of the state but also in absolute terms. The real estate tax is an assessment tax, and from 1881 to 1896 the yield of this tax for the whole empire was evaluated at 75 million crowns. Since then, it has fallen to 59.5 million crowns. The real yield of the property tax, however, remains well below that figure. Every year, large reductions are granted for damages caused by the weather. Thus, in 1907, the real estate tax actually brought in only 54.5 million crowns.

The privileges of rural real estate owners are no less in the area of income tax. Here, however, the farmers are favored not by the law but by certain provisions concerning the instructions for its execution, and especially by practices which are completely different in the country and in the cities. That is why the yield from the tax in the countryside is so small from the fiscal point of view. In 1908, on a total gross income of 4.268 billion crowns that were subject to tax, only 308 million or 7.2 percent was associated with income from rural property. It is a distressing result considering the importance of agricultural production in Austria.

The advantages that agriculturists draw from the legislation on alcohol excise are much greater. Just as in the German Empire, the excise tax on alcohol is presently set up on a dual basis: 1,017,000 hectoliters of alcohol are taxed at the lower rate of 90 crowns; the rest at the higher rate of 101 crowns. The distilleries among which these 1,017,000 hectoliters are distributed therefore enjoy an expense differential of 20 crowns per hectoliter sold. Thus the system of taxation on alcohol brings them an annual benefit of 20 million crowns.

Of the total of 1,017,000 hectoliters—called the “Alcohol contingent” [or quota]—only 155,000 hectoliters have to do with distilleries belonging to industrialists, all the rest being allotted to distilleries owned by rural proprietors. The new government plan lowers the contingent attributed to the professional distilleries by a further 40,000 hectoliters in order to raise the contingent of the agricultural distilleries. In addition, the difference between the higher rate and the lower rate has grown from 20 to 24 crowns, so that the value of the contingent tax will be even greater. For each hectoliter in the future, the distiller will gain not 20 but 24 crowns, and the profit that the distilleries will obtain at the expense of the community will rise from 20 million to 24 million crowns.

As if that is not enough, the agricultural distilleries will continue to enjoy a production subsidy, which in 1908 totaled 7,000,317 crowns. However, the new law is meant to slightly reduce this subsidy.

Since he is eager to increase the resources of the state, the finance minister should, without any doubt, start with removing the advantages granted to the land-owning distillers by fiscal legislation. A gradual diminution of the difference by raising the rate of tax for contingent alcohol would assure the state’s gain of about 20 million crowns without the slightest surcharge for the population.

This should be the direction of a financial policy that aims at an equable distribution of the tax and not at a differential increase of burdens on the urban population. Political conditions and the party division in the House of Representatives, however, are not favorable to such a policy. Far from following the path indicated above, the government constantly seeks to reduce the taxes of the agrarian population. For years the tax on urban buildings has been considered crushing. The government is moving toward reform very slowly and timidly, but at the same time it is lowering the tax on buildings in the countryside by 6.3 million crowns, where it is already not excessive.

While in full financial distress, the government has just voted in a law opening up an annual credit of 6 million crowns on the funds of the state in favor of Austrian agriculturists in hope of advancing certain particular branches of agricultural production. If we consider how reluctantly the government grants even the most insignificant credit for any other purposes of recognized necessity, we can understand the censure that this financial policy generates in urban areas.

None of the new taxes proposed by the finance minister move in the direction of leveling the fiscal inequalities that exist between the city and the country.

The increases in income tax affect the urban and industrial population most severely, for it is they who, in the main, pay the income tax. The rate of income tax in the country is unchanged; the increase proposed by the government targets exclusively commercial and industrial urban populations. Likewise, the introduction of the tax on mineral water and soda as well as the elimination of the tax exemption for automobile gasoline will affect the rural population only minimally. As far as the new proposal for an excise tax on wine is concerned, the wine consumed by wine producers, members of their families, and their employees will remain tax-exempt, as it is at present: the increase of the tax on wine will then affect only the wine consumers, who almost exclusively reside in the cities and industrial areas.

The essential feature of the current Austrian economic policy is the fight against the capitalist mode of production. In the matter of industrial policy there is an attempt to support the artisan class and to save it from its inevitable demise. In the matter of tariff policy, the raising of import taxes on grains and meat raises the cost of living for the working classes, thus diminishing their ability to consume industrial products, and thereby exerts an unfavorable influence on the development of large industry.

In Austria, public opinion is hostile to the capitalist system of production, in contrast to the dominant opinion of all the Western countries. This tendency in Austria should not be compared to what is called anticapitalism in England, the United States, and other Western countries. The large profits of capitalist enterprises are not, of course, looked upon favorably in Western Europe and America, but nobody there would like to bring about a reversal of industrial evolution. In Austria, the most influential political parties are firm adversaries of the entire modern economic system. The agrarian parties dislike industry because it raises wages. Big industry and big commerce irritate the petite-bourgeoisie parties (to which the small artisans and small businessmen belong) because they have the upper hand in commerce. But these two parties, the petite bourgeoisie and the agrarians, have a huge majority in the Austrian Parliament: on the one side, hundreds of representatives of agriculture and small business, and on the other side, some twenty representatives of big industry. This state of affairs is aggravated by the fact that the bureaucracy exercises an excessive influence in the administration, and that the free initiative of the individual is constantly frustrated. The same tendencies dominate financial policy. Large industry and big business, the prospering of which is hampered in all possible ways by legislation and by the administration, must bear the greater part of public expenses.

In the long run, such policy cannot be continued. Even in Austria we will have to resolve to remove the obstacles that stand in the way of industrial evolution and thus favor the flourishing of industry, for which all the required natural conditions exist. Fiscal policy, too, must be modified: the agricultural producers, who today are practically free of tax burdens, will have to be taxed more heavily, and the privileges of large property will have to disappear. A radical reform of the Ministry of the Interior is also absolutely necessary.

CHAPTER 7

The General Rise in Prices in the Light of Economic Theory1

The problem of rising prices, which has for many years occupied the attention of our best minds, cannot be dealt with in the usual statistical-empirical manner. The collection and comparison of price data is not a substitute for the intellectual work of theoretical economists; nor can it lead to clear thinking and a correct understanding of the interrelationships involved. The multivolume publications of the statistical bureaus, with a wealth of figures and tables, have not brought the problem one step closer to a solution. What we know about the origin, nature, and significance of fluctuations in prices has not resulted from the processing of statistical materials. On the whole, statistical material is valuable only insofar as it can be used in conjunction with the findings of economic theory. Those who seek to find their way through the darkness of statistical figures will succeed only where economic theory lights the way.

Once the work of gathering the numbers is completed, the statistician has finished his job. The conclusions drawn from the assembled material are determined by economic theory. The conclusions are not strengthened by being linked to a statistical apparatus. They do not follow with the force of logical deduction from the study of the statistical material. Contradictory conclusions can easily be drawn from the profusion of complementary and opposing economic factors, the relative significance of which the observer must determine by means of abstract reasoning for the purposes of his investigation. Apart from a few trivial matters of detail, it is impossible to ascribe to price statistics any role other than that of illustrating the sound results of price theory. If we look more closely we can easily see that every writer who did not limit himself to the assembling of data but also tried to study causal relationships started out from certain theoretical conceptions that guided his thinking. The literature on inflation is completely dominated by the premises of price theory, and these form the basis of the various articles on the subject.

Nowadays, these articles are not always of the highest caliber. Very often—insofar as we are speaking about German writings, it would unfortunately be more correct to say nearly always—we find lines of reasoning that have long since been surpassed by more recent scholarly developments. The basic theory of supply and demand and the quantity theory of money are referred to and challenged in these articles in a manner similar to what one would expect to find one or two hundred years ago. But this is only a minor problem. The cost of production theory is presented in a naïve manner as well; and frequently we even run into the layman’s favorite theories presented with ethical and political commentaries that seek to make commodity speculation and usury responsible for all our economic ills. The forty-year-long development of the theory of subjective value has made hardly any impact at all in Germany.2

In addition to these “internal” difficulties, there are equally great “external” ones that confront the scholarly treatment of the problem of inflation. Rising prices are now one of our most important political problems. Every political party is committed to a specific theory about the causes of inflation, and each has a specific prescription for combating it. Whoever tries to examine the problem runs the risk of falling out with all the parties at the same time. Such a person would be getting off lightly if either the “political pragmatists” merely ignored his explanation as the work of a “theoretician alienated from the real world” or if the attacks directed against his scholarly efforts remained within the bounds of civil decency. Anyone daring to question the popular dogmas on the causes of and the cures for inflation must be prepared for rough treatment.3

General Price Increases and Particular Price Increases

When a general rise in prices, or simply higher prices, is referred to, this means a decline in the purchasing power (or the objective exchange value) of money. In an economy in which a general medium of exchange is not used, if the exchange relationship between one economic good and another changes, this refers to a rise in the price of one good relative to another. In this case, a higher or lower price cannot be discussed without more detail. If we set aside the use of money, it is clear that one good cannot become more expensive without all other goods becoming less expensive.

The problem that exclusively concerns us is a general rise in prices. We certainly do not claim that this is the only problem that is of interest in terms of increases in prices. Besides those changes in the exchange relationship between money and all other economic goods that originate from the side of money, there is also the issue of changes in the relative price relationships among different economic goods. It has to be recognized that a general increase in the level of prices does not affect the prices of all goods proportionally. The prices of some goods may rise more than others, and the prices of some goods may, on the contrary, actually decline.

This phenomenon is by no means attributable solely to the fact that the changes in the value of money always bring with them changes in the distribution of wealth and income, and therefore lead to changes in consumption, which then influence supply and demand and through them the prices of consumer goods. A number of independent causes lead to this phenomenon, and in the majority of cases it is not difficult to discover them. If it is in reference to the prices of meat, of milk, or of housing, the causes are seldom hard to find. Even the efforts of interested parties cannot succeed for very long in misleading the public about it. It is abundantly clear that the problem of general inflation (the general rise in the prices of goods) and the increase in the price of a particular good (the rise in the prices of individual goods or services) must be strictly separated. There is much confusion in journalistic discussions due to the failure to distinguish between the two.

The prices of individual commodities can rise or fall at the international level, though it is not always the case. It can happen that such changes are limited to the local level. If, for example, the price of brandy rises in Austria because the tax on brandy is increased, or if the price of meat goes up because the importation of cattle and meat is prohibited, this has no direct effect on the prices of brandy and meat in other countries. Foreign prices are not directly changed due to these taxes or regulations; if there is any indirect influence that takes place, it tends to work in the opposite direction. For example, it can lower the price of meat in Romania because exports to Austria have been banned, and therefore Austrian demand for Romanian meat has been stopped. To the extent that there is a general rise in prices, it is international in character. This results from the fact that at the present time gold is the international money. Gold is the world’s money, nowadays, and not only the money of a particular region or nation; therefore a lowering in its value always occurs at the international level.

The Quantity of Money and the Value of Money

The exchange relationship that exists between money and other economic goods must experience a change if individuals in the economy have a change in their demand for or supply of money. Ceteris paribus, the purchasing power of the monetary unit must decline if the quantity of money is increased and, conversely, the purchasing power of the monetary unit must rise if the quantity of money is decreased. This is the essence of the quantity theory, the oldest and most unchallengeable conclusion in the theory of money.4

The demands for money by individuals are not only satisfied by money alone. The same service can be provided by money substitutes, that is, generally recognized and secure claims to money that are payable on demand (e.g., banknotes, cashier’s checks, small coins, and the like). Money substitutes may or may not be “covered” by money. When they are covered by money, we call them “money certificates,” and when they are not covered they are called “fiduciary media.”5 It is clear that an increase or decrease in the quantity of fiduciary media must result in the same effect on the value of the monetary unit that is caused by an increase or decrease in the quantity of money.

If the supply of money (in the wider sense, including the supply of fiduciary media) is increased while the demand for money (in the wider sense, including the demand for fiduciary media) remains unchanged, then the objective exchange value of money will decline. This decline is, however, by no means inversely proportional to the increase in the supply of money; in addition, the change in the value of money does not occur simultaneously in the entire economy to the same extent with respect to all goods. It is not necessary to justify and explain this further, since I have done this elsewhere.

All attempts to use the quantity theory of money for statistical investigations into the causes and degree of change in the objective exchange value of money must always remain a failure. Of the two factors whose interactions determine changes in the value of money, only one, the supply of money, can be determined. The other one, demand for money, is one whose size is dependent upon subjective factors that in the best of cases only can be approximately estimated.6

But even were it possible to quantitatively determine the changes in both the supply of and demand for money, this would still be very far from being able to reach any quantitative conclusions about changes in the value of money. As was already pointed out, movements in the objective exchange value of money are not inversely proportional to those that take place in the relationship between the supply of and the demand for money. Furthermore, we lack the ability to precisely measure changes in the objective exchange value of money.

All index number methods, even the most ingenious and complete, can make no claim to such precision.7 Usually, statistical investigations into the value of money ignore all of this. They quietly assume that the changes in the quantity of money (in the narrower sense, not including fiduciary media) indirectly cause proportional changes in the purchasing power of the monetary unit—and that such changes simultaneously affect the prices of all goods throughout the entire economy.

While index numbers are considered a method for precisely measuring changes in the purchasing power of money, this view is no more justifiable even when they are constructed by combining several different principles and procedures. These procedures turn an allegedly scientific work into a meaningless juggling of numbers and words. The errors in this approach end up damaging the reputation of economics as a science, since the general public always tends to blame economic theory for the “failures” of those providing economic information through the collecting and manipulating of the statistical data.

In general, economic theory is not likely to lead to blunders in economic policy. In only one area is there an incomplete theoretical understanding which can lead to questionable conclusions for purposes of policy. It is customary to ignore the fact that fiduciary media have the same effect on determining the objective exchange value of money as money itself. Ceteris paribus, an increase in the quantity of fiduciary media will lead to the same decline in the purchasing power of the monetary unit as will an increase in the quantity of money proper.

In a complete reversal of all that economic theory demonstrated five generations ago, it is now again believed that it is possible to reduce the rate of interest by increasing the quantity of fiduciary media in circulation. This has generated very strange results. On the one hand, a battle is undertaken against inflation, though certainly with more pretension than with any serious intention behind it. On the other hand, there is an attempt to increase the number of unbacked banknotes in circulation, including efforts to artificially expand the supply of fiduciary media through the use of checks. This generates a tendency for a decline in the purchasing power of money.8

Recently an argument has been made that opposes what has been said above about the influence of changes in the relationship between the demand for and the supply of money on the purchasing power of money. Othmar Spann9 considers as more or less useless a theory that explains inflation as being due to the increase in gold production, as an attempt to employ one underlying concept for explaining the phenomena of rising prices.

Therefore, “everyone who has a good instinct for inductive analysis of economic relationships becomes distrustful of a theory which tries to explain increases in prices and finally the whole history of prices, with its great rising and falling price curves, according to a surplus or a shortage in the media of exchange, rather than by the ‘inner progress’ of the economy, itself.” The older Physiocratic10 attempt to understand economic processes by basically assuming the absence of money should be reintroduced and viewed with greater respect than it has enjoyed up until now. For analyzing general movements in prices, this method allegedly would be especially useful in order to be able to precisely separate the effects caused by money in circulation from those effects that are inherent in the underlying economic processes.11

One of Spann’s claims does entirely agree with our own view: an explanation of inflation not by one principle but—as the next section will show—by two different principles which interact in their effect. For the rest, however, Spann’s remarks must be rejected as being wrong.

For a long time, it has been customary in economics to first discuss the problem of the formation of prices (the prices of goods, wages, real estate rents, interest on capital, etc.) under the assumption that it was as if there was direct exchange. Not only did the Physiocrats assume this, as Spann mentions, but so did all economic theorists; a glance at the works of the classical or modern writers on economics will easily convince anyone of this. The knowledge that can be gained by this method, and by this method alone, then needs to be completed by a study into how the result is affected by the use of money and fiduciary media.

In addition to the theory of direct exchange, there is the theory of indirect exchange—the theory of money and of fiduciary media (that is, money and banking theory). If a criticism were to be raised against economic theory during the last several decades, it would certainly not be that this distinction between direct and indirect exchange has been neglected. Quite to the contrary! Though the study of direct exchange logically must precede the study of indirect exchange, the problems of the former have so thoroughly claimed the attention of economists that the problems of the latter have been passed over. Among those that have suffered severe neglect, for example, is the problem of economic crises, the complete understanding of which can be provided only by the theory of indirect exchange.12

Among the economic processes that can and should be studied under the assumption of direct exchange, the problem of a general rise in prices is not one. A general rise in prices means a change in the existing exchange relationship between money and other economic goods. In an economy in which money is not used, a general inflation of prices is not possible.

How can money be excluded from the investigation? Spann, of course, attempts this obviously hopeless task. If he presumes to explain “a higher price level” on the basis of natural [barter] exchange, he demonstrates a misunderstanding of what in everyday speech is called, for the sake of brevity and convenience, “price,” but what more fully and correctly should be called the “exchange relationship between money and goods.” If the following exchange relationship prevails today: 5 kilos of A = 7 kilos of B = 9 kilos of C = 16 crowns; and tomorrow 5 kilos of A = 7 kilos of B = 9 kilos of C = 18 crowns, then the change that has occurred overnight can never be explained from causes which lie in the relationship between A, B, and C.

Devaluation as a Consequence of Certain Characteristics of Indirect Exchange

A change in the objective exchange value of money does not occur only due to a change in the relationship between the demand for and the supply of money. There is another reason for such changes, and it is to be found in certain characteristics of indirect exchange. There is a fundamental distinction between the exchange relationships existing between money and the other economic goods and the structure of exchange relationships among the other economic goods themselves.

In direct (or barter) exchange, an exchange can be carried out only if each of the two parties in the transaction values less highly the quantity of goods that he is to give up than the goods he is to receive in exchange. If this assumption does not hold, there will be no exchange. This holds for indirect exchange facilitated by money only with an important modification. The willing buyer can decide to pay the price demanded by the seller on the presumption that, even if the price is beyond his appraisement of the value of the goods, he hopes that he will be able to obtain a higher price for the goods and services he brings to market because he has paid higher prices for the goods and services that he purchased.

The higher money price does not at all have to mean also a higher “own price”; it can very well be the case that in terms of barter relationships the exchange relationships among goods themselves (with the exception of money) has remained unchanged. The only change that has occurred is in the exchange relationship between money and all other goods.

If workers demand higher money wages and the entrepreneurs give in to their demand, this does not by any means signify that there has been an increase in real wages. It can happen that the entrepreneurs succeed in passing the wage increase on to the consumers, so that the prices of goods also rise, with the result that real wages remain the same or do not rise to the same extent as money wages have gone up. If the producers of a certain product push through an increase in its price, this also does not have to mean an increase in the “own price”; in this case, too, the price increase may be only a nominal one.

This can also sometimes happen due to the type of information possessed by the producer and the consumer when they are in a face-to-face relationship with each other. This is, however, by no means necessarily the case. Market conditions are more clearly and easily understood and compared when consumption and production are more directly connected.

The situation is different in the more developed stages of a national and, especially, the global economy. The lay of the land in the market is not as easily surveyed as it was when the market was smaller and exchange relationships were more direct. The producer no longer comes into direct contact with the consumer. The product is “taken up by the market,” which means that the evaluation of the good by consumers may not be the same as the one upon which the producer based his calculations.

Producers and traders face an unknown factor; they can anticipate the future decisions of consumers with only a greater or lesser degree of skill; but, of course, they cannot talk about it with any degree of certainty. For the majority of ready-made consumer goods, dealing with individual consumers is impossible. The producer and the trader must set “fixed” prices, which the consumer either accepts by paying the money prices asked or refrains from buying and not paying the money prices being asked. This either maintains or alters the purchasing power of money.

In order for there to be a tendency for a decline in the objective exchange value of money that encompasses the entire economy due to an exchange process mediated by money, significant disturbances must occur in the relationships between production and consumption. In a static, or more or less static economy, reciprocal exchange relationships between economic goods (excluding money) experience no or only minor changes. Under such conditions businessmen and workers do not have an incentive to push for increases in their prices and wages.

It is otherwise during times of significant change in production and consumption, if there are also significant changes in the reciprocal exchange relationships. Then sellers (including the sellers of labor services) are groping and feeling their way, trying to establish new prices for the goods and services that they are bringing to market. They set prices that, according to their perspective, are prices at which their goods and services can be sold; but they can easily aim too high. If they have aimed too low, that is, asked for too low a price, they will quickly become aware of their mistake as soon as the demand exceeds the supply.

In the opposite case the error is not so quickly recognized. If the sellers demand too high a price, then, as the law of price teaches us, quantity demanded will be less than quantity supplied. The unwillingness of buyers to purchase the good will finally force the sellers to reduce the price they are asking. But here the special characteristics of indirect exchange come into play. The willing buyer does not hold back from buying the product even if the price asked exceeds his valuation of the good by only a small amount because he, on his part, also hopes to get more money from the sale of the goods and services that he brings to market. The seller has raised his price and he sees that the buyers accept it; and for the same reason that the buyers paid higher prices for his product, he, in turn, also pays them. Everyone expects that their higher monetary costs will be balanced by their earning higher money incomes; they expect a decline in the purchasing power of money which their own behavior in fact brings about.

Because of the particular ways in which markets are organized, upon which money facilitates transactions, major changes in the reciprocal exchange relationships among economic goods create a tendency for declines in the purchasing power of the monetary unit.13

The Social Effects from General Inflation

Before we use an important example to explain what we have said, it seems appropriate to add a few words about the social significance resulting from a general rise in prices. If changes in the objective exchange value of money were to appear simultaneously and to the same degree in the entire global economy, if the prices of all goods and services were to rise or fall simultaneously and proportionally, the social effects on the structure of contractual obligations fulfilled through the use of money would be very limited. All deferred payments are affected if money rises or falls in value. If the purchasing power of money declines, debtors gain while creditors lose. The assumption here, of course, is that when debtors and creditors entered into their contracts they did not anticipate and incorporate into the contract future changes in the objective exchange value of money. This is a reasonable assumption, since for various reasons it is impossible to foresee the extent to which there may be changes in the purchasing power of money.

If changes in the purchasing power of money really occurred simultaneously and proportionally throughout the entire economy, then complaints about inflation nowadays would not be so loud and would hardly result in governments undertaking anti-inflationary policy measures. Creditors who have binding contracts specifying particular sums of money to be paid would most probably not calmly accept the damages they would suffer. No doubt they would attempt to bring about changes in prices more favorable to their situation. However, it is highly unlikely that they would succeed in this attempt. Their complaints would hardly be likely to bring any positive response from the majority of the population. The numbers of people whose incomes are mainly or exclusively derived from invested capital is much too small in most countries for their desires and interests to significantly influence the direction of economic policy.

The detrimental effect that is experienced by most people from a monetary devaluation is not due to the fact that it hurts the interests of creditors; rather it is due to the fact that it only appears gradually throughout the economy. The prices of various goods do not rise proportionally all at once. Inflation first appears in some particular part of the economy, affecting only some goods, and then gradually spreads out from there. Let us first consider the case of a monetary devaluation that comes about due to an increase in the quantity of money or fiduciary media, while the demand for money remains the same, or does not rise at the same rate in the broader sense as the money supply has increased.14

Let us suppose, for example, that a new gold mine has been opened. The new gold first pours into the hands of the gold producers; it increases their income, reduces their subjective valuation of the monetary unit, and so intensifies their desire to purchase goods on the market. They now express on the market their demand for those goods that they now more intensely desire than before; they can offer more money for the goods they wish to acquire. These are the goods that first rise in price, and the objective exchange value of money declines first in terms of these goods. This is the point at which the monetary devaluation begins. The next step in this process is that those who sold the goods that were purchased by the first possessors of the new money now, in turn, have an increased buying power and are able to express a greater demand for the goods that they desire to buy, so the prices of these goods rise, as well. The rise in prices continues until, to one degree or another, the prices of all goods are included in the process.

This gradual progression of rising prices causes its associated effects. The particular social groups who first receive the new quantity of money benefit from the process, while those are harmed who receive the money only later in the process. So long as the monetary depreciation has not yet worked its way through the entire economy, those who already receive a higher money income reflecting the eventual decline in the value of money are able to purchase all or some of the goods they desire at prices that do not yet fully incorporate the devaluation of the monetary unit. On the other hand, those whose money incomes do not yet reflect the new situation pay for the goods they demand at prices that have already adjusted to the higher price level.

The exact same process is at work, of course, with those changes in the value of money that, as was described earlier, arise from sellers raising their prices. Here again, the increase in prices starts at some point in the economy and gradually spreads out from there. That group of sellers who begin the process of raising prices also benefit even if, over time, the prices of the goods they buy increase in proportion to the prices of the goods they sell. For while the process is continuing that leads to a general devaluation throughout the entire economy, they enjoy an advantage they will no longer have when prices will have fully adjusted to the new situation.

It is precisely this circumstance that provides an explanation of the practices followed by the groups that initiate the rise in prices. This applies to actions of cartels and trusts—insofar as they are not monopolistic practices—and also the methods employed by trade unions. The latter now require some further comments.

Increasing Wages and Inflation

It can hardly be denied that reciprocal effects exist between the movements of money wages and movements in the money prices of finished goods. Modern economic theory is distinct from the widely popular older theory of value that tried to explain a rise in prices of finished goods in terms of a rise in the cost of the factors of production. It is an anachronism to explain those movements in the objective exchange value of money that are caused by changes in the relationship between the supply of and the demand for money, by referring to the labor time in production and the influence of the money prices of the factors of production as the basis for the prices of consumer goods.

This customary way of analyzing the problem is seen to be untenable without much difficulty. Any useful result will require a different chain of reasoning. One thing that is common in all economic theories of wages is that they consider the determination of the level of wages to be a part of the theory of value. The different answers that were given over time to the problem of explaining the value of goods also led to different attempted answers to the problem of explaining wages. The objective theories of value followed paths different from those of the modern theory of value.

The modern theory of value was the first one to fully appreciate the significance of the problem. The theory of imputation developed by Böhm-Bawerk,15 Clark,16 and Wieser17 demonstrates how the individual complementary factors of production factors are evaluated; it forms the indispensable logical link between any theory of the formation of the prices of the factors of production and the distribution of the product among the factors of production.

The only interventions that can influence the level of market-determined wages are those that work within the laws of the market. Any wage policy that wishes to change the level of wages from the one that tends to form on the unhampered market, and which we can call the “natural wage,” must modify the factors whose interactions jointly determine the actual level of wages prevailing on the market. For example, it is possible to lower wages if one encourages the immigration of foreign workers, and one can push wages up if one restricts the influx of workers. The market price for labor is indirectly influenced by the use of these methods; the market wage that is formed under the influence of these changed conditions is the “natural wage” in this new state of affairs.18

Any direct influence on wages is as unworkable as with any other price on the market. It necessarily leads to a reaction that reestablishes the “natural” market situation. This is equally true for tax rates as it is for the wage policy of organized labor through trade unions. The older Classical School already understood this, even though it was based on an untenable theory of value.

We set aside for any further consideration the role organized labor may play for economic life, in politics, for law and social customs, or for national identity. We have only one question before us: whether or not organized labor can raise wages above their natural level. This question is immediately answered in the affirmative for all those cases in which labor unions can succeed in influencing the conditions of the labor market. As for influencing the demand side, in general the answer is no. More often the unions can succeed in influencing supply according to their wishes. If this influence is limited to individual industries, it always comes down to a question of advantages for the workers in one branch of production at the expense of all other workers. Artificially reducing the supply of labor in one or more branches of production results in an increased supply of labor in all other branches of industry; if the wages are pushed up in the former, then they must fall in the latter.

This by no means exhausts the consequences from such monopolies of the labor force in particular branches of industry; their effects go further than this. They also prevent the optimal combination of the factors of production, and as a result reduce the value of the total product. This second effect shows itself most clearly when the supply of labor is restricted not in one but in all branches of production. Two cases are conceivable: a decrease in the availability of new workers through a reduction in the total population (a reduction in fertility, for example), or a decrease in the supply of labor with no change in the total number of workers by shortening the number of work hours. The latter can be brought about either through legislation (a limit on the work-day), or through the actions of labor unions, or due to a restriction in the output of the workers (passive workers’ resistance, or a “ca’ canny” policy).19 If, however, the factors underlying the formation of wages are left unchanged, then a permanent deviation of the level of wages from its natural level cannot be achieved. That is generally true for almost all labor unions. Labor unions cannot permanently raise the level of wages because they cannot also change the underlying conditions of the overall labor market.

The last several decades seem to contradict this conclusion. We see organized labor move forward from one success to another; wages keep rising higher and higher. No doubt part of this increase in wages is merely a consequence of the increase of the supply of money (gold production and an increase in fiduciary media), which has brought about a fall in the objective exchange value of money. Yet another part is to be attributed to the increase in profits resulting from improvements in productivity; a part of the reward for this productivity goes to the workers in line with their direct contribution to the production process. This gain would have gone to the workers even without labor unions and wage conflicts. But is that all that labor unions have achieved?

Very many are of the opinion that the workers have achieved far more by uniting their forces than what would have fallen into their laps anyway. One can read today in all sociopolitical writings that the labor unions have raised the level of wages; people want to believe that this provides an inductive proof against the conclusions of those theories that declared the impossibility of increasing wages through this method. This is taken to be so obvious that no one has taken the trouble of designing a theory of wages to justify it.

One has difficulty figuring out what is the theory of wages in the approach of the German Historical School. One of its leading representatives tells us that, in the face of the limitless difficulties involved in finding a universally applicable explanation, the School has given up on developing a theory of wages.20 But these writers must have had something in mind if they spoke about wages and a wage policy. We do not think that we are far wrong if we assume that they vaguely had in mind a naïve “exploitation” theory of wages. Today it is the folk theory of wages. It can look back upon a famous literary past in the form of Marx’s theory of surplus value, an honorable but fruitless attempt by an ingenious spirit.

But Marx did not create the exploitation theory. He merely picked it up off the street and tried to formulate and establish it scientifically, an undertaking that by no means seemed pointless given the state of political economy at that time. It had already become widely known, however, long before Marx. The fact that Marx adopted it and the activities of the Social Democrats carried it out into the world may have multiplied its inherent attractiveness by a hundredfold. However, its strength and popularity are not rooted in the Marxian theory of value; thus it was able to survive the collapse of Marxism without being harmed.21

Many have read Das Kapital, but only a few have understood it. Even among the leaders of the Social Democratic Party one can find only a small group who are connoisseurs of the Marxian theory of value. Today, the basic conception of the theory of value in the Social Democratic movement is a naïve idea of exploitation, which is more closely related to that of Chartism22 than to the objective theory of value in the dialectical system of Karl Marx. This traditional exploitation theory, which, to vary a Marxist expression, one could also call people’s socialism,23 is, of course, never offered in a scientifically precise, mature, and conclusive manner. Nevertheless, at least in Germany today, one must designate it as the communis opinio. For outside the narrow circle of the friends of economic theory, it almost reigns unchallenged. It is the basis of what is taught everywhere nowadays about the nature of wages, whether in the textbooks, from the podium, in parliaments and in the press, in the churches, or in the National Assembly.

It influences legislation, and it serves as a guiding principle for the policies of the labor unions. Even the entrepreneurs have not been able to completely avoid its influence.24 The folk theory of exploitation seems to divide society into two mutually hostile classes: on the one side are the workers, whose industry creates all value and to whom by right the full product of labor ought to go. On the other side stand all those who live off unearned income; they live exactly on what they withhold from the workers. Wage determination is the outcome of a battle between entrepreneurs and workers; the more successful the workers are in this battle, the higher their wages rise and the greater their share of the national product. Labor unions strengthen the power of the workers and thus help them to achieve results.

If one disregards this naïve theory of exploitation, whose indefensibility probably does not need to be more carefully explained, there is not much to be found in the sociopolitical literature that can be used to support the supposed correctness of the doctrine that labor unions can succeed in raising wages. Nevertheless, it is striking that all those writers who start off with no comprehensive economic theory of value and price have no hesitation in asserting that it has been the unions who have had the power to raise the real wages of the workers.

So, on the one hand, it is said that the scientific theory of wages provides us with no basis upon which to decide whether the unionized organization of the workers can raise wages; on the other hand, we have the undisputed assertion that the organization of the workers increases the labor force’s share of the social product at the expense of the other classes in society. Or can we assume that all those millions of workers who see their salvation in union organization, and that all those thousands of entrepreneurs who oppose them, deceive themselves in their judgments about the effects of labor organization?

This seemingly insoluble contradiction with which we are confronted is easy to explain with the help of the theory that we developed earlier. It is true that no effort by labor unions can permanently succeed in pushing wages above their natural level. In the best of cases, all that they can achieve is to raise wages, but they cannot prevent the necessary adjustment of wages back to their natural level. The adjustment, however, does not come about by nominal wages coming down again to their old level. The money wage remains unchanged. The rise in the prices of goods has the effect of bringing real wages back to the “natural” wage that corresponds to the given conditions of the market.

Employers can raise wages above the natural level only in the expectation that they will be able to retain their entrepreneurs’ normal profit by passing the wage increase along in the form of higher prices for their products. What the consumers can do, however, to pay or not pay the higher prices can be seen from what has been said above. Hence the success of the organization of labor lies in the advantages that come to the workers during the transition period, before the higher money wages have been adjusted back to the natural level of wages through the rise in the prices of finished goods. If this adjustment is completed, then any success that the working class has achieved by raising the money wage is completely gone. The labor unions can make permanent this advantage offered to the workers only by attempting over and over again to raise the money wage above its natural level. They repeatedly create, however, a new tendency for a change in the objective exchange value of money.

In a static economy there would be no place for such an influence by the labor unions. In such a static economy, the law of wages would have to rule with its full force. Only in a dynamic economy does there come into effect that which has just been explained. Under dynamic conditions the labor unions can also do something more; for example, they can reduce the number of unemployed during the transition periods.25

A Shortage of Raw Materials as a Cause of Rising Prices

People are used to often asserting that a rise in the costs of production is a particular reason behind a general inflation. This view cannot be reconciled with the theory of subjective value. The modern school of economics points out that the prices of the goods of higher order are dependent upon the prices of goods of the first order. Thus, the popular explanation must be rejected in advance. Moreover, it does not solve the problem; it only postpones it. Instead of the question of what causes a rise in the prices of consumer goods, it shifts the question to what causes a rise in the prices of the means of production.

Behind this concept stands the idea that the supply of goods becomes smaller and that as a consequence there is a tendency for the prices of these goods to rise. The economic interest in the availability of consumer goods always eventually leads back to the availability of higher goods that are provided by nature. All of man’s production activities amount to nothing more than combining the original forces of nature in such a way that a particular desired result will be forthcoming. The materials and forces existing in nature constitute the only fund that we have at our disposal. The progress in developing the methods of production certainly makes it possible for us to enlarge the quantities of goods available by employing higher and higher orders of goods and following longer and technically more fruitful roundabout paths of production.

Yet the assumption is still taken for granted that technological progress lags behind the consumption of the existing supply of resources. From time to time we hear geologists and engineers express the fear that we are more and more rapidly approaching a point in time when the exhaustion of the mineral wealth of the Earth will bring about a severe crisis for us or our posterity. How far these assertions are justified, economic theory cannot say. But we shall assume that they fully agree with the facts. Thus, a general rise of the money prices of goods would result from this if money, alone among all economic goods, were not subject to this same tendency. While in the case of all other economic goods the relationship between supply and demand would change unfavorably for supply, it would have to be otherwise for money.

However, if the same change were to happen with money, too, then the supply of money available to individuals would decrease and the change in the exchange value between money and other economic goods would not occur. If a change occurred in the exchange relationship existing between money and other goods, then its explanation would have to lie among those provided by the quantity theory. Either the supply of and the demand for money had changed in a different direction than that between the supply of or demand for goods, or the latter has remained unchanged while the former has changed. We obtain no new knowledge either for economic theory or for a new approach to economic policy.26 It is completely reasonable, on the other hand, to bring up the progressive depletion of the natural resources available for mankind to explain the rise in prices for specific groups of goods. The rise in the prices of furs or of caviar is, of course, not that significant, but they are the most obvious examples.

The Recognition of the Reasons for Inflation and Inflationary Policy

Public opinion sees in inflation one of the most disturbing aspects of economic life. The struggle against inflation is proclaimed by governments and by political parties today with the same determination as was the battle against the decline in the prices of goods during the time between 1873 and about 1895.

He who wants to fight against an evil must first recognize what it is. One cannot get rid of inflation as long as one does not understand its causes and its nature. What the mass of consumers are most directly critical of, in the first place, is the rise in the prices of particular individual goods, and most especially the price of food. The protective tariff policy that all countries, with the exception of England, have been following for years has raised the prices of specific groups of goods in every country. In this instance, the fight against inflation coincides with that against high protective tariffs. General inflation is only an incidental consideration. Generally only those producers who are disadvantaged by the protective tariff refer to it in order to direct the attention of consumers to the obvious and easily correctible reasons for the rise in particular prices.

One speaks of the “international character” of rising prices in order to disguise the national policies behind the inflation; and one refers to the “generality” of rising prices in order to obscure the fact that, in addition to the rise in prices in general, a rise in the prices of a number of particular goods has been observed. In all of this there is no honest desire to debate the problem of inflation in general, so as to gain a clear sense about the significance and role that economic policy should take with regard to it.

The general hand-wringing about inflation, with which the general public is more or less in agreement, leaves little doubt that the general depreciation of money is widely unpopular. But the views of those who oppose inflation are by no means clear, and even less so in the case of the millions who agree with their opinions. It is known that in Europe and in America during the last quarter of the nineteenth century inflationism has had more advocates than opponents. The inflationist projects, especially the plan for an international bimetallic currency, have not been realized; but that is only because in the leading countries of the world there have been small but strong supporters of sound money, led by gifted leaders who have triumphed over the fiat-money people. Who knows whether the outcome would not have finally gone against the gold standard if the struggle had lasted a few years longer?

The “friends” of rising prices turned their attention in other directions; they became advocates of tariff protection because they saw in protective tariffs an appropriate tool for achieving their ends. In addition, the general decline in the objective exchange value of money that began in the second half of the 1890s, and which is still continuing, made the case for bimetallism irrelevant. The economic policy goal of most countries between 1873 and 1895 was attained.27 If today a violent reaction is taking place [in response to the general decline in the value of money], this can be explained by the great social changes that have taken place in the meantime.

The interests of producers, which until recently were still a determining factor in politics, are being partly superseded by the interests of consumers. If previously the slogan “good prices” was popular, today the slogan is “cheap prices.” It seems quite certain that the attractiveness of this slogan will continue to grow in the coming years. Nevertheless, it remains doubtful whether this will last, and whether it will succeed in destroying the old deeply rooted notion that high prices mean national economic prosperity.

If we look at the social consequences of the changes—it is the consequences from the devaluation that alone concern us here—from the objective exchange value of money, we find that their meaning is different depending on the underlying cause. A general decline of the purchasing power of money always brings with it changes in the distribution of wealth and income, from whatever cause it springs. But in every case, some groups of society benefit from it and other groups are harmed by it. If the objective exchange value of money decreases because the relationship between the supply of and the demand for money has undergone a change due to a disproportionate increase of the quantity of money in circulation, then those parts of the population to whom the additional money flows first achieve the greatest benefit, while those to whom it goes last are most severely harmed. Generally, no matter whether the increase in the quantity of money (in the broader sense) is caused by the production of money [an increase in the mining and minting of gold] or by expanding the quantity of fiduciary media, on the whole the entrepreneurs will have an advantage relative to the workers and clerical employees. It is certainly conceivable that in such circumstances clerical employees and workers, in general, easily could be won over to the side of those who oppose monetary devaluation.

But at the present, changes in the relationship between supply of and demand for money are not the sole and probably also not the most important cause behind the general rise in prices. We have succeeded in showing that, as a result of certain technical features of how markets are organized, forces are set in motion where money is the intermediary in exchanges that necessarily lead to a constant decrease in the objective exchange value of money. Those people are at an advantage who better understand than others how to anticipate the rise in the prices of the goods and services they sell. These are not always the entrepreneurs. Alongside the best-organized cartels are the best-organized labor unions. The big cartels of so-called heavy industry and the unions of the most easily organized clerical employees and working class members are the beneficiaries of the rise in prices so far as it is rooted in these causes.

At a disadvantage, however, are the groups that are difficult or impossible to organize. They can raise the prices of the goods and services they sell on the market only if the goods and services they buy have already risen in price; because of this lag between the rise in the prices of the goods they buy and the prices of the goods they sell, the harm which they always suffer in the meantime cannot be made up for. Only creditors who have monetary claims to specific amounts of money under contract obligations are in both cases harmed relative to their debtors.

Aside from this, however, since the social effects from a rise in prices are different depending upon their cause, there can be no single policy prescription.

In the first case is a relatively narrow circle of groups who are the beneficiaries of such changes in the objective exchange value of money; it does not include the broad stratum of wage earners whose burdens and demands are nowadays the decisive factor in politics. These groups, therefore, would prefer a monetary system in which the relationship between the supply of and the demand for money remains constant: that is, a situation in which there are no factors tending to bring about a change in the objective exchange value of money. Since this ideal is unachievable, then from the perspective of the wage earner (and also from the viewpoint of the many entrepreneurs who on this issue have the same interest as the workers, as well as from the standpoint of all creditors), those measures are condemned that aim at a reduction in interest rates brought about by an artificial increase in the quantity of fiduciary media. As was already explained, a permanent reduction in the rate of interest can never be brought about by an increase in unbacked banknotes and by an extension of the use of checks; the end result of such measures can only be an increase in the price of goods.

Judged quite differently are those changes in the objective exchange value of money that arise from those previously described particular properties of prices formed on the market through the intermediation of money. They benefit not only the most easily organized groups of businessmen, but also the best-organized strata of labor, which is to say, all those who better anticipate the rise in the prices of the goods they buy on the market relative to increases in prices of the goods and services they sell on the market. Insofar as the rise in prices has its root cause in this process, there is nothing that can be done to stop it. The only conceivable method would be government price controls; however, that would be in insoluble contradiction with the individualistic principles of organizing the economy.

It may appear to many that the struggle against the progressive rise in the prices of goods and services has only a small chance of success. There seem to exist few effective methods to slow down this process even a little bit, unless there again comes a time in which—as in between 1873 and 1895—there is a decline in gold production and a strong tendency for a progressive change in the economy that brings about a decline in money prices. It would be a gross exaggeration to think, however, that people would want to see this happen again.

As I have explained elsewhere,28 there is a serious danger for the future of the individualistic organization of the economy in the development of fiduciary media; if the legislature does not put some obstacle in the way of its expansion, an unrestrained inflation could easily come about, the destructive effects of which cannot really be imagined. Even if we ignore this, as yet, not immediate threat, there is sufficient risk from the very nature of the system of fiduciary media. We have already mentioned that it would be desirable to put an end to the artificial expansion of fiduciary media. It would not only slow down the rate of devaluation, but it would also be the best way of preventing economic crises.

If one pays no attention to this, then there is no reason why a progressive rise in prices should be seen as a disruptive influence. Only the completely uninformed can, perhaps, imagine that a rise in prices is a symptom of a deteriorating provision of goods that is leading to a progressive impoverishment of the population.

In reality, the disadvantages that it brings to some and the advantages that it brings to others are only transitory in nature. The fact that price increases keep going on results in its being appealed to over and over again, but then it arises again and again with its impact being reinforced by the fact that inflation and effects of inflation have occurred before.

As far as price increases have their cause in an increase in gold production, one must accept it as an unavoidable ill. It still can be hoped that the growth in gold production will once again experience an interruption. Insofar as inflation is a result of the method by which market prices are formed through indirect exchange, one must see it as a sign of the lively activity in the economic process coming from constant changes in the relationship between production and consumption. Only one who prefers the peace of the cemetery to the bustling whirl of life can be sorry that the purely static condition of an economy is only a conceptual device of theory; reality always means dynamism, change, and development.

CHAPTER 8

On Rising Prices and Purchasing Power Policies1

In the middle of the nineteenth century, prices increased dramatically all over Europe and reached their peak in 1874. At that point, prices began to decline and continued their downward movement until the mid-nineties. Since about 1896 a new upward movement in prices has set in, and its end point is nowhere in sight. This decline in the purchasing power of money has given new impetus to the old demand for a type of money that would not be susceptible to fluctuations in its objective exchange value. Ideally, with this type of money, the exchange relationship between money and all other economic goods would be stable from the money side. Similarly, there could be no general increase or decline in prices. The only disturbance in these stable market relationships would be a decline or rise in individual commodity prices with respect to each other, something that would be acceptable from the standpoint of both economic theory and political reality.

Money with an invariant objective exchange value, however, is an unattainable ideal.

It was commonly believed that the quantity theory of money provided the means to attain this goal. According to this theory, a change in the relationship between the supply of and the demand for money implied a change in the objective exchange value of money. All other things equal, an increase in the supply of money had to lead to a decline in the purchasing power of the monetary unit. This is one of the oldest and most firmly established doctrines of monetary theory.

Two factors, however, impede the practical application of this insight for stabilizing the value of money. The first is the inability to precisely predict how great will be the effect from a given change in the quantity of money in circulation. For even though it is certain that a decline or a rise in money’s purchasing power will result from an increase or reduction in the quantity of money, the extent of the changes in the objective exchange value of money brought about by specific changes in the quantity of money can never be predicted in advance. Changes in the quantity of money do not directly affect prices. Contrary to the notions of the older mechanistic price theory of supply and demand, changes in the quantity of money affect prices not directly but indirectly, by influencing the subjective valuations made by individuals.

Given this insurmountable problem, some proposals were made that accepted the intrinsic impossibility of creating money with a stable exchange value and settled for a more limited goal. For the bulk of transactions, money as we know it today would continue to be used despite all its imperfections. For credit transactions, however—whether by legislation or by voluntary agreement between the parties concerned—the means of exchange would not be money but a uniform composite of the majority of commodities. The debtor would agree to fulfill his obligations by repaying not a nominal sum of money but a sum of money representing the same purchasing power for a fixed number of commodities. The idea was to supplement a currency based on precious metals with a currency based on commodities.

These more modest reform proposals limit themselves to keeping the value of money stable only for long-term credit transactions and possibly for salaries of persons with a guaranteed position. But even the implementation of these proposals would not preclude a general rise in prices and the adverse consequences that would result from this in transactions between individuals.

Even within this self-imposed limitation, the compensatory commodity currency project has another deficiency. While it has managed to circumvent one of the problems faced by all proposals for stabilizing the value of money, it founders on the second flaw, which makes all these proposals unrealizable. Its mistake lies in its assumption that the fluctuations in the objective exchange value of money can be accurately measured. The various index number systems seem to be precise, but in reality they are not.2

To obtain useful results, index numbers must differentiate the effects between individual commodity prices. Changes in the price of wheat will not have the same impact as changes in the price of poppy seeds. Commodities must be treated according to the role they play in consumption. To take this into account, a weighted average is used, that is, changes in one commodity are counted more heavily than those in another according to a predetermined relationship. Changes in the price of wheat, for example, are given a hundred times greater weight in the determination of the index numbers than changes in the price of poppy seeds.

Obviously, the most important thing is the assignment of the proper weights to each commodity. The relatively best method of weighting is provided by the American budget method. Individual commodities are weighted according to the frequency with which they appear in individual households budgets. This method would be unobjectionable if consumption patterns did not tend to change over time; it is flawed because in the real world the relative amounts of these commodities keep shifting, reflecting the way human beings change their subjective valuations concerning those commodities. Just think how different is the pattern of consumption in a household in 1913 from a household in 1863, let alone 1813.

Even if we make the dubious assumption that we are merely comparing a contemporary social group with a social group in the past of comparable standing and income, many problems are left unsolved. Even a city dweller of modest means has different needs from those of his forebears fifty or a hundred years ago. And even with the same needs, we now have different ways and means of satisfying them than in days of old.

This lack of an objectively valid method for establishing a weighted average fully explains why all proposals that have been made in the course of the last three generations for stabilizing the objective value of money have fallen by the wayside.3

More recently, the American economist Irving Fisher proposed ending the free coinage of gold as a way to create money with a stable objective exchange value.4

Fisher takes the currency situation in India, the Philippines, and Austria-Hungary as his model. He maintains that these countries maintain currency parity with countries using a gold-backed currency by increasing or decreasing the quantity of money in circulation according to the state of the foreign exchange rate. Fisher has no support for this—erroneous—view of the gold exchange standard. The parity value of the Austro-Hungarian currency is not maintained by increasing or decreasing the amount of currency in circulation. Parity is not exceeded because the notes of the Austro-Hungarian Bank are in fact convertible into foreign exchange at a fixed exchange rate. It is the legal right to freely coin gold that preserves the currency’s parity.

The same can be said of all other countries with a similar arrangement, except for their having legally established the convertibility of notes into gold. People have sometimes claimed that the Austro-Hungarian Bank occasionally refuses to issue foreign currency and that the exchange rate might then exceed the gold point.5 Whether or not this claim is correct, all it would prove is that in the eyes of its advocates prompt convertibility of notes into foreign currencies is a prerequisite for parity of the coinage.

Starting from this erroneous assumption, Fisher proposes that bank-notes should be convertible not into a given amount of gold agreed to in advance, but to an amount of money that corresponds to a given purchasing power. He suggests that the quantity of gold against which notes are converted should increase when the purchasing power of the gold unit goes down and it should decrease when it rises. It is apparent that Fisher’s proposal is merely an expansion of the idea of a complementary commodity currency. It contains nothing that would help overcome the above-mentioned difficulty, that is, the impossibility of accurately measuring the fluctuations in the objective exchange value of the monetary unit. Neither does it offer anything to overcome the difficulties inherent in using monetary policy to manage changes in the quantity of money in circulation. Fisher’s proposals thus can be easily rebutted by the very same persuasive arguments that Karl Helfferich6 recently presented against similar projects.

Given that a monetary system with a fixed domestic exchange value is not attainable, Helfferich concludes that no government policy seeking to regulate the value of money can serve a useful purpose. Much as he may regret the subservience of our modern monetary system to the vicissitudes of gold production, he nevertheless considers it preferable to a dependence on human failings and errors and to policies catering to unbridled special interests. Even if one concurs with Helfferich’s views on this point, one might still favor government intervention against a decline in the purchasing power of money in some cases.

Notwithstanding complaints about increasing prices and despite all efforts to increase the purchasing power of money, the quantity of money in circulation, that is, notes and bank credit not covered by commodity money, is steadily expanding. In Austria-Hungary and especially in Germany there is a steady pressure to enlarge the circulation of uncovered notes. Both in the German Reich and in Austria-Hungary the quantity of tax-exempt notes has risen markedly in the last few years; Austria has seen a 50 percent increase, from 400 to 600 million crowns.7

Attempts are being made in Germany to extend the use of checks for smaller and medium-sized payments; the German Reichspost [post office] has added increasingly popular checking transactions to its services. The Austrian and Hungarian postal savings banks offer postal money orders that are exemplary. Yet these measures go counter to all the teachings of economic theory.

Since the time of Adam Smith, economic studies have confirmed that when businessmen complain about lack of money, they are really referring to a lack of capital; yet this lack of capital cannot be remedied by an expansion of the money supply. There is no dispute today about the basic correctness of this insight. Nevertheless, the attempt persists to relieve the lack of capital and to lower the interest rate by increasing the money in circulation. In truth, all these efforts in trying to lower the interest rate are of no avail. The only effect is to increase prices.

What should be done, therefore, is to give up all attempts to artificially expand the quantity of money in circulation. Presumably the flaws in the current policy will soon be recognized. It is already generally admitted that the sharp increase in the quantity of money and fiduciary media is one of the most important causes of the currently high level of prices. There is no need to decrease the quantity of fiduciary media, nor must their future expansion even be impeded. To moderate price rises, one must merely avoid artificially expanding them.

All this assumes, of course, that a policy to prevent increases in prices is inherently reasonable, as one might well imagine from the general clamor in support of this idea. In theoretically examining this problem, one must first clarify why a decline in the purchasing power of money is considered to be deleterious. One must also investigate whether all groups in society suffer from it equally, and whether certain groups might not actually benefit from a rise in prices. Only then can a purchasing power policy be integrated harmoniously into the whole system of social policies.

If changes in the purchasing power of money occurred simultaneously and affected all goods and services proportionally, their only effect would be to favor debtors over creditors. All those engaged in credit transactions who have claims on money would feel the effect of a reduced purchasing power, unless they had foreseen the impending change in the value of money at the time that they extended credit, and accordingly included this expectation when they drew up the loan contract. If it were possible to predict exactly the direction and extent of future changes in the objective value of money, appropriate provisions by one side or the other concerning monetary repayments could be included in long-term contracts. As no perfect prediction of this kind is possible, creditors are the ones who suffer from a decline in the value of money. The clamor against higher prices has such unanimous support, however, that it cannot be out of concern for those persons who derive their income from interest on their capital. The true reason for the unpopularity of rising prices lies elsewhere.

The fact is that rising prices will never affect all goods simultaneously and to the same extent, as was assumed above. Changes in the quantity of money in circulation spread out from a specific point, showing themselves wherever additional amounts of money flow into the economy. If the change is triggered by increased gold production, gold producers will be the first to experience the increase. The first possessors of the additional quantities of money will first express their changed evaluation of the value of money to those persons with whom they exchange. The decline in the value of money is then spread progressively from one class to another, from one economic group to the next, until it finally affects all commodities.

It should be noted, incidentally—though we will not go into any details—that not all commodities are equally affected by the change in the purchasing power of money even at the end of the process. Certain differences may well persist because changes in the value of money have a differential impact on various individuals and will therefore cause a shift in the underlying supply and demand relationships.

Furthermore, the fact that changes in the value of money do not affect all commodities simultaneously has a decisive influence on the way they are interpreted in society. The hardest hit are those persons who offer goods and services on the market whose prices have not yet been increased by the decline in the purchasing power of money, but who must already pay higher prices for commodities and services that they buy. They must pay more for what they buy, although they still sell only at the older prices.

Public servants with fixed incomes are especially victimized by rising prices because, generally speaking, their income lags behind changes in the price of goods. Public servants already must pay higher prices, although their salary has not yet gone up. When, finally, their remuneration commensurately goes up, the increase fails to compensate them for the loss they have incurred in the meantime. In Austria, for example, the salaries of senior public servants have not been raised in the last forty years. The same applies for certain incomes that tradition and customs have set at a fixed level, and where changes are exceedingly slow. Typical examples are physicians’ fees, fees for certain services, examination fees, and so on.

The situation is different with most wage earners, particularly workers and employees in private enterprises. We shall examine, next, how wages are formed and therefore identify a second cause for the changes in the purchasing power of money.

Wage earnings have been steadily rising for several decades. This undoubtedly depends in part on the unionization of workers and lower-level employees. One of the most controversial issues with respect to the problem of increasing prices, and in the theory of wages as well, is whether and to what extent this rise in real or “nominal” wages has any bearing on rising commodity prices. One side maintains there is no cause and effect between these two events. According to the other side, wage increases are the most important cause behind the rise in commodity prices, while a third group attributes the increase in wages to higher commodity prices.

There is no doubt that the working class has improved its economic position in the last several decades. All observers agree on that point, and even the most fanatical adherents to Marx’s theory of pauperization cannot fail to acknowledge this fact in the long run. The upward social mobility of the working class has generally been ascribed to the activities of the trade unions, for instance in Lujo Brentano’s8 and Sidney Webb’s writings.9

When it is asserted that trade union organizations are enabling workers to obtain a higher wage level, a serious difficulty arises from the fact that all scientifically developed wage theories deny the possibility that workers can permanently secure higher wages through trade union contracts. All wage theories share the view that the determination of wage rates is connected with the theory of value. The various solutions to this problem have led to numerous attempts to solve the problem of the theory of wages. The labor theory of value naturally pursued a different path from modern subjective value theory, the latter being the first approach to adequately deal with this problem.

Imputation theory provides a way to determine the value of the individual complementary factors of production. It thus supplies the indispensable logical link for any theory about the formation of the prices of factors of production, and thus to any theory of the distribution of the final product.10

The level of wages is a market phenomenon and can never be influenced by interventions outside the marketplace. A wage policy, that is, a policy that shifts the level of wages away from the level it tends to reach in an unhampered market (the “natural wage level,” in Clark’s terminology), can operate in only one way. It must act by influencing those factors whose joint action on the market determines the specific level of wages. One can lower wages, for instance, by facilitating the immigration of foreign workers and raise wages by impeding this immigration. These methods exert an indirect influence on the market determination of wages. Whenever wages are formed in the marketplace under the influence of such changed conditions, the “natural” level of wage will reflect this new state of affairs.

It is just as impossible to directly influence wages as it is to directly influence other market prices, because a reaction will inevitably set in to restore the natural level. Officially set wage rates are no more effective than any wage policy imposed by trade unions.

Since trade unions are generally incapable of changing market conditions, they can have only a limited impact on wages. Clark11 gives a detailed discussion of the cases where trade unions can bring about a real improvement in workers’ income. These are exceptional cases in which the actual wage level would have stayed below the natural wage level if not for trade union intervention.

Clark is convinced, however, that trade unions cannot permanently push wages above their natural level, and in this respect Clark actually agrees with Marx, or at least Marx in his early writings. It is a well-known fact that Marx took the iron law of wages as his starting point and proclaimed this openly in The Communist Manifesto. The iron law of wages essentially contests the possibility that the wages of workers can be permanently raised above their natural level.

It is usually asserted that Marx subsequently abandoned the iron law of wages. What is overlooked is that the theory of surplus value rests on this law. For surplus value is defined as the difference between the value of the product produced by labor and the amount of that value received as wages. The product of the labor force is the amount of work required to produce and maintain the labor force. That is another way of saying that it is the wage corresponding to the iron law of wages. In the recently published text of a lecture given by Marx in 1865, we read that Marx, like Clark, believed that trade unions could make only a marginal contribution to the betterment of workers’ wages.12

The actual wages in the last few decades are difficult to reconcile with these scientific wage theories. This fact has encouraged the Historical School of economics to give up on wage theories altogether. But there is one scientific theory of wages developed by the modern school that can actually be brought to bear on the facts of the case.

While it is true that trade unions are incapable of raising wages permanently above their natural level, they nevertheless can affect the point in time when wages change in response to changes in the purchasing power of money. It is of course of vital importance whether increases in wages, which are bound to occur sooner or later in conjunction with changes in the purchasing power of money, occur sooner rather than later; any negative effect resulting from the delay, discussed earlier, will thereby be avoided.

There is a further point: the working class may overshoot the mark in its struggle, and may at this time force wages up to a level that will prove to be unsustainably too high. Let us assume that wages increased 10 percent above the natural wage level. Though a reaction is unavoidable, this reaction may not take the form of a reduction in money wages but of a corresponding increase in the prices of all products. The increased money wage is sustained, but the real wage is eventually forced back to the natural level of wages.

Price theory teaches us that potential buyers resist any excessive price demands by potential sellers. This indisputable proposition applies in this manner only to direct exchanges; in indirect exchanges mediated by money, which is the only significant form of exchange at the present stage of economic development, a modification in the theory must be introduced. The potential buyer may decide to pay a money price that exceeds his evaluation of the commodity’s worth in the hope that when he himself acts as a seller, he will in turn receive a higher money price when he sells the product. The employer may give in to wage demands of unionized workers that he considers to be excessive on the assumption that he will be able to sell his product at a higher price. The consumer pays the higher price asked by the producers because he is not only a consumer and buyer but also a producer and seller; and he, in turn, expects to obtain higher prices in his capacity as a producer and seller. This is what is likely to happen under conditions of indirect exchange.

In fact, the more that improvements in communication permit a globalized expansion of markets, the more predominant will be these processes of indirect exchange. Only where all parties are fully represented in the marketplace, that is, only at daily, weekly, or annual markets in isolated areas or when certain branches of business assemble at the bourse, can face-to-face bargaining be effective.

In all other situations where two traders meet face-to-face, they represent only very small cross-sections of the global market for a particular commodity. Under these circumstances, bargaining is pointless, since what matters is not the respective strength of the two particular traders confronting each other on the market but the relative strength of all buyers and sellers of that particular good. We can thus see why a seemingly “fixed” price is being substituted in more and more places for a price set by bargaining. When prices are “fixed,” there are only two options: forgoing the purchase, something that may not always be feasible when an essential want is involved, or paying the higher price in anticipation of obtaining an equally higher price oneself on another segment of the market. This is a correct way to visualize how business and labor unions influence price formation under current conditions.

As long as increases in the prices of goods stem from these features of indirect exchange, they do not warrant the concern they often arouse. On the contrary, they should be viewed as symptoms of buoyant activity, burgeoning development, and unceasing transformation in the nature of production and consumption. The mutual exchange relations for economic goods are constantly in flux because every day sees the emergence of new consumption demands and of new ways to satisfy them. And from a sociopolitical point of view, price increases have even fewer adverse consequences—to the extent that they are attributable to this cause.

We have already referred to the fact that rising prices benefit organized labor and improve its position at a slight expense to those who live off their capital, a consequence that can hardly be given much weight.

In light of this, a comprehensive policy to deal with rising prices that pays no attention to the basic cause for the decline in the purchasing power of money is not worth implementing. Once we have broken down into their various component parts the forces that drive up commodity prices, we can restrict our countermeasures to those components that warrant an intervention.

CHAPTER 9

Disturbances in the Economic Life of the Austro-Hungarian Monarchy During the Years 1912-19131

In 1912-13 Austria and Hungary weathered a severe economic crisis, the effects of which are yet to be surmounted.2

The economic upturn on the world market, which had surpassed its three predecessors in almost all sectors of manufacturing, reached its zenith in 1912; however, 1913 brought a market reversal and the weakening of the business cycle.3 Though this general recession probably intensified the Austro-Hungarian crisis, it was not the cause. Austro-Hungary was already experiencing a severe downturn in 1912, but as long as the economic boom continued abroad, the effects of this domestic crisis could not have caused a breakdown in all branches of the economy. Thus, when, in 1913, the weakening of the world market occurred, the crisis in the monarchy became a general one. One must, however, keep the following in mind: the Austro-Hungarian crisis was an incident that occurred independently of the events on the global market, and the causes and development of the crisis can be explained only by the particular circumstances of the monarchy.

The hardening of the international monetary market in the last weeks of 1912 and in the first months of 1913 is viewed partly as a direct result of the bellicose developments in the Balkans and the fears associated with them. The Austro-Hungarian Monarchy was affected by these events more than any other country partly due to its geographic closeness to and strong economic ties with the Balkans, but primarily because the troubles in the region increased the monarchy’s domestic political difficulties and made a war with Russia a very serious concern. However, the economic crisis that Austria-Hungary weathered in 1912-13 was not caused by the war in the Balkans, though the war did contribute significantly to its intensification. The Balkan states ordered a general mobilization only in the last days of September 1912, and that war actually broke out only in October.4 Until then no one in Austria-Hungary had even considered the possibility of a war on the empire’s borders. The crisis, however, was already extant in the first months of 1912: in mid-February the secretary general of the Austro-Hungarian Bank advised against any additional extensions of credit and announced a stricter credit policy on the part of the Bank for the near future. The outbreak of the economic crisis can be dated from this point.

Those who seek instruction about the evolution and the proportions of the crisis can find abundant opportunity in the publications cited, though much of the data still requires modification, and the presented material is sketchy in more than one area. There is no doubt that in one or two years we will be able to survey the effects of the crisis much better. Yet the swift publication of the data, though suffering from unavoidable deficiencies, deserves special acknowledgment.

Understandably, both official publications say very little about the causes of the great economic crisis, and whatever is offered relates primarily to the general crisis on the world market and to the military crisis. We learn relatively little about the particular circumstances in the monarchy which led to the Austro-Hungarian crisis both prior to and after the weakening of the global business cycle. It is exclusively this issue that concerns us in the following presentation.

In one of the articles published as a series in the New Free Press [Neue Freie Presse], Böhm-Bawerk recently attempted to explain the increased deficit in the monarchy’s balance of trade.5 He points out that “it is said, and it may very well be correct, that many private persons in our country live beyond their means. However, it is certain that for some time many of our public bodies have lived beyond their means. The nation, the Crownlands, and the municipalities rival one another in the growth of their expenditures. The increase in revenues has not kept up with the increase in expenditures, and the difference must be compensated for by the assumption of debts. As the domestic capital market is not in the position to satisfy the large demands made upon it by the government’s budgetary requirements, the state had to turn abroad for funding. The increase in foreign debt is thus expressed as liabilities in the balance of trade. One must view these circumstances as the ultimate cause of the deficit in the balance of trade: we have become large and freewheeling in our economic expenditures.”6

These remarks by Böhm-Bawerk indicate the direction for an explanation of the most recent Austrian economic crisis. However, they are not completely satisfactory in their interpretation of the causes of the liabilities in the balance of trade.

In Austria and in Hungary, too much is consumed, or, in other words, too little is produced. The country, the provinces, and the municipalities have been led astray by the ease with which the modern banking system readily supplies loans. In the decade from 1902 to 1912, the country’s debt (for the Crownlands and provinces represented in the Parliament) increased from 3,640 million to 7,240 million crowns. The continual issue of new debt has unfavorably affected the price levels of pensions and the rate at which new loans have been extended. In 1903, the small sum of 6 million crowns, which would require a standardized 4.2 percent annuity for repayment on the occasion of its conversion, could be offered at par. Subsequent loans were issued at continually worsening terms. The crown annuity, offered in January 1912 at the nominal value of 200 million crowns, was issued to the consortium at a market rate of 89.50. Since that time, it has been absolutely impossible to issue crown annuities at 4 percent. The exchange rate for gold has had to replace the exchange rate for crowns, and an interest rate of 4.5 percent has replaced the 4 percent annuity rate, while treasury notes and bonds have replaced the annuities. The 4.5 percent treasury bonds that were issued in March 1914 at a face value of 396.6 million crowns, and which were repayable within 15 years through an installment lottery, were assumed by the consortium at a market rate of 94.5 percent. The actual burden, which accrued to the national treasury due to this assumption of debt, is estimated at 5.3 percent. The demand price for the Austrian 4 percent crown annuities on the Vienna bourse was 100.34 on average in 1905; it was 83.07 on average in 1913. The provinces and municipalities were doing no better, with a similar situation in Hungary.

In Austria, it is primarily the imperial administration that functions poorly and is too expensive. More than one hundred years ago, Stein wrote about the bureaucracy in the Austrian government, that they “concern themselves solely with the employment of a system of clumsy and labyrinthine formalities that halts the free activity of human beings at every instant, in order to substitute in their place masses of paper, and the civil servants’ negligible idiocy or laziness.”7 Stein would probably find this scathing judgment appropriate for the current Austrian administration; indeed, even official publications arrive at the conclusion “that throughout the entire organization of the domestic administration, beginning with the lowest body and continuing up to the highest judicial courts, substantial problems exist that prevent an adequate deployment of actions in the government’s areas of responsibility.”8 The excessive expenditures of the provincial governments, even more than the imperial government, explain why sufficient funds cannot be found, in spite of the fact that the tax revenues are more oppressive than in most other countries. As a result, new bonds must be constantly issued to keep up with expenditures.

A substantial portion of the public debt can be ascribed to the growing trends in a socialist direction of the last few decades at both the national and municipal levels that has resulted in the government taking over existing enterprises and building new factories with public funds. Nowhere has this trend been as strong as in Austria.

These large state companies are the greatest hemorrhage point in the national Austrian budget. They are poorly managed; they yield no income, and instead require subsidies every year to cover their deficits. These have been met from additional tax revenues or by issuing new bonds. The negative financial effect of these state enterprises has been most obvious in the largest of them, the National Railway Company. The failures of the Austrian state railway system, even in comparison with the performance of the Prussian-Hessian state-owned railroad, are commonly explained by the assertion that the conditions in Austria are essentially different from those in Prussia, and that the Austrian state railway labors under a series of circumstances that hamper its proper operational management.

Yet quite recently, one of the most successful Austrian industrialists, Georg Günther, the general director of the Austrian Berg- und Hüttenwerks-Gesellschaft [Mining and Steel Company], in a speech based on comprehensive quantitative data (including an exact comparison of the individual entries in the income statements of the Austrian and Prussian state railways), attempted to provide evidence that these difficulties could justify only a portion of the adverse performance of the Austrian state railroad. Even with a generous allowance for all of those circumstances that could unfavorably influence the Austrian state railroad, Günther arrived at the conclusion that the expenditures of the Austrian state railway were approximately 80 million crowns too high, and that this could be traced back primarily to the large number of employees, or, in other words, to the low work expectations for individual employees. Namely, if the disparities of the operational conditions were factored in, the results showed that the Austrian state railway employed approximately 50,000 more employees than would be employed by the Prussian state railroad in the same circumstances.

While each employee of the Prussian state railway is responsible for the service of 42,500 axle-kilometers, the corresponding service responsibility in Austria amounts to only 32,900 axle-kilometers. Most notable is the disparity for employees at the central service; in Austria job performance per worker is 571,400 axle-kilometers, whereas in Prussia each individual’s performance is 1,115,000 axle-kilometers. Within the central service in Austria alone, there are approximately 5,400 employees too many, requiring an annual expenditure of 23 million crowns. This explains quite sufficiently why the Austrian state railroad is incapable of delivering an income that corresponds to its investment capital despite higher tariffs.9

It also explains the poor state of public finances and the growth of the public debt, the enormous increase in tax burdens, and the difficulties hampering production and trade due to the defective functioning of the national transportation system.

However much the causes of the crisis may be found in the government’s overspending, a more fundamental reason is budgetary mismanagement in the private sector. Austria-Hungary proportionally produces less than Western Europe. Even the number of people actively employed in production is relatively lower than elsewhere, since the public sector draws too many people away from productive labor. That which was said above about the national railway administration is equally true about all branches of the national government: it employs far too many people everywhere.

However, even the producers’ economic labor is less profitable than in other countries. The high protective tariffs on grains and the prohibition against meat importation preserve a farming culture functioning in a long-outdated manner, which, located far distant from Western European agricultural activity, expects all salvation to come from established subsidies and so on, which the state (and the agricultural majority selected for the committees in the parliament) unsparingly guarantees from the tax monies levied on the urban, manufacturing population. The owners of large latifundia seldom care personally for the administration of their estates; this is more often left to an officialdom that uses the government’s leisurely and unimaginative business administration as a model. The property’s fideicommissary dependence prevents the transfer of the land to better landlords. In the largest of the Austrian Crownlands, Galicia, agriculture appears as large-scale land-holdings, on the one hand, whose prosperity is hindered by a lack of capital, scarcities of agricultural labor, and the owners’ lack of ability; and smallholdings (more than 800,000 properties, ca. 80 percent of that entire number amounting to less than 5 hectares),10 which can offer only meager nourishment to a family; the category of the mid-sized agricultural holding is almost completely absent from this province. In a special report about the ratio of agricultural output to general price increases, which Graf Hardegg reported to the Herrenhausen [the upper house, or House of Lords, of the Parliament] in 1912, the backwardness of Austrian agriculture was characterized in the following manner: “In broad areas, we remain closely tied to the old three-field system, which is inadequate for the agricultural resources and has long outlived its usefulness, where the land appropriate to the highest yield is barely worked, let alone cultivated, and where conventions and customs still hold sway that can no longer be considered up-to-date. We have, in fact, predestined entire landed areas to animal husbandry, where the number of animals has constantly decreased instead of increasing, where the production of provender for the animals is low, where the cultivation of the alps, feedlots, and meadows appears to have hardly moved past the initial stages, and where animal husbandry, directed in a completely irrational manner, bears tragic fruit.”11

A few numbers illustrate most clearly the backwardness of agriculture in Austro-Hungary. In 1912, the crop yield per hectare (in hundredweights per meter) amounted to:12

In the German Reich, 58.9 cows are supported by one square kilometer of productive agricultural land, whereas in Austria, the same area supports only 32.5 cows.

The situation in industry is no better. The Austrian worker (and the same is true for the Hungarians to an even greater extent) labors less intensively than, for example, the Germans or even the Americans. Entrepreneurial activity, for which only the slightest tendency exists, is impeded at every turn by a legislature that has set itself a goal of inhibiting the development of large firms to the best of its ability. The above-mentioned exposé of the Koerber administration includes the remarks: “The protection of the small firm, which is suppressed by the new form of economic life; the impediment of speculation in the exploitation of advantageous business activities in all directions; these and other attempts, whose partial validity should not be denied from an ethical point of view, have impaired the prosperity of our economic life in many cases, without bringing about any of the specified, desired results.”13 In 1912, a report by the economic commission for the Austrian House of Lords [Upper House, Reichsrat] concluded “that the improvement in the entrepreneurial spirit and, with this, the expansion of our industry outward, leaves so much to be desired that an ‘anticapitalist’ spirit, having encountered no resistance, has propagated itself with stultifying effect.”14

The farmer, the tradesman, the worker, and above all the civil servant work and earn little; however, they still desire to live comfortably, and thus they spend more than their circumstances would allow. The frivolity of the Austrians and Hungarians sets them sharply apart from the sober thriftiness of the Western Europeans. There appears little concern for the future, and new debts are added to old, as long as willing lenders can be found.

As long as the lenders are willing. Thus we arrive at the crux of the matter.

If cash payments were generally common in business dealings in Austro-Hungary, then this living beyond one’s means could never have achieved the broad extent that it has acquired in the last decades. Consumer credit could only have been obtained as a bank loan. The amounts which might have been supplied to consumers by this means would have remained far below the enormous sums that have been accessed with commercial credit. Additionally, one should certainly not underestimate the scope of consumer credit. A not insubstantial amount of credit available for agriculture, urban real estate, and small trade has found use, not for productive, but for consumptive goals. Included in the total, however, should be those large sums of consumer credit that the credit requirements of the civil servants have drawn down. Loans have been guaranteed to the state, provincial, county, and local public officials, who cannot be fired while they live; to officials of the public funds, the court, the railway companies and suchlike, the security of which loans are based solely on the references of the borrowers. As a rule, the pay office disbursing the salary assumes the loan, and this office extracts the monthly interest, expenses, and amortization quotas from the debtors’ emoluments, and pays them over to the lenders. In this manner, many thousands of public officials receive only a portion of their income paid in cash, often only the minimum required for existence remaining free of garnishment. The lenders are safeguarded quite well by this system. The risk that the debtor could die prior to repaying the debt is allowed for by insurance; these premiums increase the already quite substantial costs of these credit transactions, which are conducted not only by private moneylenders, but also by specific credit institutions that are generally organized based on confraternal links.15

If monetary loans were the only form by which consumer credit were guaranteed, then those circumstances that led to this crisis could never have developed. Whoever takes out a loan also has to pay it back eventually; the assumption of debt does not expand his consumer power, it merely relocates it temporally. The matter is different for the system of long-term commercial loans, as they are currently common in Austria and Hungary. The consumer does not pay for his purchases in cash; he remains in debt. This is true for both the exclusive customers of the glittering luxury boutiques in the center of Vienna and also for the miserable poor, who satisfy their needs in squalid country stores in Galicia or Slavonia. The major gentlemen’s tailors in Vienna owe hundreds of thousands of crowns, many of them even more; however, the business requirements of even the smallest “general stores” reach quite sizable numbers. If a customer makes a one-time partial payment on his debt, then this is often only the lead-in to a greater exploitation of commercial credit.

The retail dealer, who has direct commercial dealings with the end user, typically has insufficient capital; indeed, he often lacks his own operating capital. He could not extend long-term credit to his clients, if he were not also in a position to receive long-term credit for his own purchases; he remains indebted to the wholesaler in the same way that the consumer is indebted to him. The Austrian industrialist has to guarantee long-term credit, because otherwise he would not be able to market his wares domestically. In trade rivalry, neither the product’s excellence nor the lower price tip the scales; whosoever would drive the competition from the field has to guarantee more auspicious payment conditions, must seek to accommodate the purchaser through increasing deferrals of the payment dates. Under such circumstances, the bill of exchange has practically vanished from many commercial sectors. Even where it still appears, it does not ensure the punctual observation of the agreed-upon payment dates. If the debtor will not pay on the date of maturity, then the exchange is prolonged. Decades ago, one of the greatest initiates of the monarchy’s credit system had already made the statement that the exchange formula “in three months to the day, I will pay,” should correctly read, in Austria, “in three months to the day, I will extend.” Since that time, the conditions have only become generally worse; only where powerful cartels rule the market (iron, sugar, hemp) is it otherwise. In all those sectors, however, in which the formation of market-determining consortia was unsuccessful, the producers, for whom higher domestic production costs have barred the path to exports, must accommodate themselves to inauspicious payment customs. It has gone so far that today “cash payment” is, according to customary usage, understood to mean several months of credit.

A reform of these conditions would have to begin with the end user. The consumer would have to become accustomed to paying in cash, or at least punctually on the agreed-upon, not-too-distant, payment date. The large department stores, store chains, and cooperatives have completed this educational process abroad, as such stores must insist upon cash payment by virtue of their organization. In Austria, the middle-class policy of commercial development places insurmountable difficulties in the path of this form of retail trade; the policy supports the small shop owner and the handcrafter.

It is true that the small merchants are not pleased by their customers’ poor habits of payment. Even they would prefer to be paid in cash. However, a keen rivalry also reigns among them: the number of small commercial enterprises is far too high; the possibilities for earning a living in Austria are low. The required certificate of qualification generally impedes the path to an independent business, and, in addition to this, a number of industries are further hampered by the concession system. For many, therefore, no option is left except to establish small trading operations. Capital is either not necessary, or only a little is required. Anyone about whom nothing prejudicial is publicly known can easily gain access to credit from the manufacturers and wholesalers. This explains the superabundance of small trading operations, which often guarantee their owners a meager income despite considerable industriousness.

If the small trader wants to do any business at all, then he has to extend credit. And he may neither hand-select his customers, reject doubtful people, nor deny credit to those whose debts have grown too large. The village shopkeeper must view it as a special honor whenever the beadle or even the community recorder offers him their custom. Woe be unto him if he dares to demand from them (regardless of whether it is only after several months or even years) a settlement of accounts. Indeed, he is dependent upon the representatives of national and autonomous local administrations for every aspect of his business. They manipulate those hundreds and thousands of laws, ordinances, edicts (ukases), which are partly an inheritance of the vormärz absolutism,16 and partly the creation of the modern currents of the middle class and socialist politics. Whether or not the shopkeeper receives the concessions, permissions, and so on, which he requires to conduct his business, he remains completely dependent upon administration officials; they can make things uncomfortable for him during the assessment of taxes, in the exercise of authority by the commercial and market police, or sanitary inspectors, and in one hundred other ways. He has to play things correctly with them, and with their varied and numerous relations, no matter the cost. In Galicia and in Bukovina, in Hungary and its neighbors, everyone believes that he ought to be entitled to the claim that he, and only he, should receive credit unhesitatingly, and should always receive credit thusly. The merchant sees the sum of his outstanding credits with trepidation, not only as an absolute number, but also as growing in relation to his sales figures from year to year. However, he is powerless against the circumstances.

Someday, sooner or later, the day had to come on which it became clear, that a large portion of these outstanding loans, which were posted in the merchants’ account books as assets, were irrecoverable. All these officials, employees, functionaries of the public administration, local home rule, and so on, all these farmers and craftsmen had lived far beyond their means, they had accepted debts that they were neither willing nor capable of repaying. The officials’ emoluments were ceded or disdained up to the limit with only the minimum required for existence remaining free of garnishment; the farmers’ immobile properties were burdened by mortgages beyond their market value; the monetary creditors, who were able to safeguard themselves at the signing of the contract, regularly preempt the mercantile creditors, who, due to the reasons delineated above, can only approach the debtor energetically after a year and a day. It required only the gentlest external push in order to manifest the irrecoverability of these demands.

The much cited speech of Secretary General Pranger in the Wiener Saldierungsverein [Viennese Banking Association] gave this push. As a warning signal, it came years too late; nothing could be changed in that which had already occurred. He exhorted the lenders to caution and restraint, and provoked the inevitable and undelayable liquidation. The scope of the restrictions on and divestments of credit, which resulted in the first months of the crisis, were highly exaggerated; yet they were indeed large enough to be the final straw. The retail merchant, for whom credit was impeded, began to measure his outstanding loans and must have recognized, to his horror, that a portion of them were irrecoverable. In many cases, the retailer saw himself now forced to suspend payments himself; this functioned retroactively from the end consumers step-by-step back to the producers. Credits, which had for years been entered into the account books as “good,” were revealed at one stroke as rotten. The businessman recognized too late that he had already lost a majority of that which he thought he had earned through years of hard work.

The insolvencies mounted up. The Wiener Kreditorenverein [Viennese Society of Creditors] for protection from demands in cases of insolvency, to which textile firms primarily belonged, accrued:

The 1912/1913 crisis brought about the liquidation of the unsustainable borrowing system of previous years. It is true that not everything was liquidated; more than enough remained reserved for the future. And yet it is the pernicious system of poor payment conditions that remains; from this, the Austrian economy is threatened by ever-new dangers. As long as the overproduction on the domestic market lasts, and the unfavorable production circumstances impede industrial exports, no change, however, can occur.

The monarchy has to export goods in order to maintain equilibrium in the balance of payments without increasing the foreign debt. Today, remittances by emigrants form the most important asset of the monarchy’s balance of payments; this is an unhealthy circumstance that cannot be sustained over the long term.

Therefore, a pleasant sign of improvement must be welcomed, this being a recent increase in the export of textile goods. The Austrian cotton industry has suffered for years from a surfeit of new spindles that were established as a result of the 1907 economic boom. For years, attempts have been made in this industry to control overproduction through business restrictions on the one hand, and through forced exports, even at loss-generating prices, on the other. The result has not failed to appear. Exports amount to, in this and a few related articles (in thousands of hundredweights):

For 1913, the statistics demonstrate an essential increase in the export of semifinished and finished goods overall. Most notably, the increase in sugar exports is of consequence: from 254 million crowns in 1912 to 295 million crowns in 1913.

Nowhere is there as much discussion about the necessity of improving the balance of payments, of boosting the export of goods (and last but not least foreign commerce), as in Austria. However, the people remain a far cry from pursuing the single path that will lead to the desired goals. Because in this case, all of those small, beloved options, by which people in Austria prefer to solve large problems, fail. Only one possibility could help: the radical elimination of all hindrances that the economic policies have laid in the path of the development of productive forces.

[1. ][This article originally appeared in German in the Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 16 (1907).—Ed.]

[2. ][Agio is the rate at which a currency may be exchanged on the foreign currency market.—Ed.]

[3. ][Theodor Hertzka (1845-1924), an Austrian economist and journalist. In 1879 he founded the Wiener Allgemeine Zeitung, which he edited until 1886.—Ed.]

[4. ]See Stenographische Protokolle . . . der Währungsenquetekommission [The Stenographic Protocols of the Commission for the Currency Inquiry] (Vienna, 1892), p. 96.

[5. ][Emil Steinbach (1846-1907), Austrian economist, jurist, and politician. In 1891-93 served as minister of finance and in 1904-7 as president of the Supreme Court of Justice. He had a decisive influence on social legislation, supported the extension of the right to vote, implemented a currency reform, and reorganized the system of personal taxation.—Ed.]

[6. ]See Carl Menger, Der Übergang zur Goldwährung [The Transition to the Gold Standard] (Vienna, 1892), pp. 10ff.

[8. ]See Mecenseffy, Bericht über den Goldbesitz der österreichisch-ungarischen Bank [Report on the Gold Held by the Austro-Hungarian Bank] (Vienna, 1897), p. 15.

[9. ][“Saltworks Notes” (Salinenscheine) were short-term, interest-earning Austrian treasury bills.—Ed.]

[10. ]Statistische Tabellen zur Währungsfrage der österreichisch-ungarischen Monarchie, p. 145.

[11. ]Compare Heyn, “Das Steigen des Rupienkurses nach Aufhebung der indischen Silberwährung” [The Rise in the Value of the Rupee Following the Repeal of the Indian Silver Currency], Jahrbücher für Nationalökonomie und Statistik, vol. 28, especially pp. 176ff.

[12. ][The Congress of Berlin (1878) was a meeting of the political leaders of European Great Powers and the Ottoman Empire in the wake of the Russo-Turkish War of 1877-78, in order to reorganize the countries of the Balkans. Otto von Bismarck, who led the congress, undertook to balance the distinct interests of Britain, Russia, and Austria-Hungary. However, differences between Russia and Austria-Hungary only intensified, as did the nationality question in the Balkans.—Ed.]

[13. ][As a result of the Russo-Turkish War of 1877-78, Bulgaria regained independence after four hundred years of Turkish rule. Fearful of a Bulgarian uprising in 1876, the Turkish military put down suspected resistance, and in the process killed an estimated 12,000 to 15,000 Bulgarians. This massacre of unarmed civilians created an international uproar against Turkish rule in this part of the Balkans. This led first to a war between the Turkish Empire and Serbia and Montenegro, and then in 1877 to war between Imperial Russia and the Turkish Empire that finally led to a truce in the face of Russian victories on the battlefields, and the settlement in the Congress of Berlin in 1878.—Ed.]

[14. ]See Deutsche Übersetzung der von dem königlichen ungarischen Finanzministerium der für den 8. März 1892 einberufenen Valutaenquete vorgelegten statistischen und synoptischen Tabellen (Budapest, 1891), p. 115.

[15. ]See Benedikt’s articles in the Neue Freie Presse, August 24 and September 14, 1890.

[16. ]See Emil Sax’s article in the Neue Freie Presse, July 28, 1894.

[17. ]Neue Freie Presse, July 28 and August 2, 1894.

[18. ][The Sherman Silver Purchase Act that was passed on July 14, 1890, required the United States Treasury to purchase 4.5 million ounces of silver bullion every month, making it the second-largest buyer in the world, after the government of India, at the time. The act was repealed in 1893.—Ed.]

[19. ][The Bland-Allison Act of 1878 required the U.S. Treasury to purchase between $2 million and $4 million of silver bullion per month. It was replaced by the Sherman Act of 1890.—Ed.]

[20. ][Ignaz von Plener (1810-1908) was a prominent Austrian statesman who initiated what became known as Plener’s Bank Act of 1863, which was modeled after Great Britain’s Peel’s Bank Act of 1844 that restricted the issuance of banknotes to the amount of gold reserves at a fixed rate of redemption.—Ed.]

[21. ][Karl Ludwig Baron Bruck (1798-1860) was Austrian minister of commerce and public works from 1848 to 1851. As minister of finance from 1855 to 1860, he attempted to introduce a series of fiscal and monetary reforms that failed due to the Austrian war to retain its Italian provinces beginning in 1857. Unjustly blamed for Austria’s financial difficulties, he resigned as finance minister and committed suicide the next day. He was officially declared innocent of all wrongdoing in his ministerial position one month after his death.—Ed.]

[22. ]About the applicability of the term “agio” at all to the Austrian currency circumstances prior to 1892, see Spitzmüller, “Die österreichisch-ungarische Währungsreform,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 11, p. 342, note 1.

[23. ]See Dorns, Volkswirtschaftliche Wochenschrift, September 11 and 18, and October 2, 1890.

[24. ]See Neue Freie Presse, November 22, 1884.

[25. ]See Sax, Neue Freie Presse, August 2, 1894, and Carl Menger in the preface to Lorini, La questione della Valuta in Austria-Ungheria (Torino, 1893), p. xix and notes.

[26. ][Alexander Santor Wekerle (1848-1921), Hungarian statesman, who served several terms as Hungarian minister of finance and prime minister. Improved the financial position of the country, carried out the conversion of the state loans, and succeeded, for the first time in Hungarian history, in avoiding a budget deficit. In October 1918 declared Hungarian independence, which brought about his dismissal from office by Austro-Hungarian Emperor Karl I.—Ed.]

[27. ]The credit for winning public opinion in Hungary in support of currency regulation is due to the future Minister President Count Stephan Tisza, who caused a text about the reform of the currency to appear in the Magyar language in 1891.

[28. ][The Panic of 1890 was an acute depression precipitated by the near insolvency of the Baring Brothers bank in London due to poor investments in Argentina. The Bank of England finally bailed out the Baring Brothers. The panic was associated with call money reaching an astonishing 45 percent and a slump in the international commodities market.—Ed.]

[30. ]See Spitzmüller, ibid., pp. 498ff. Then Kalkmann, Wiener staatswissenschaftlichen Studien, vol. I, p. 3.

[31. ]See Lotz, “G. F. Knapps neue Geldtheorie,” Schmollers Jahrbuch 30, p. 360.

[32. ][The Panic of 1873, which affected financial markets on both sides of the Atlantic, especially in the United States and Germany, broke out in Austria on May 9, 1873, with a crash of the Vienna stock exchange. This was followed by a series of major bank failures in Austria-Hungary, from which the Austrian financial sector only slowly recovered.—Ed.]

[33. ][In 1884, the Austrian government founded the Imperial General Directorate of the State Railways and began to nationalize the private railway companies. By 1914, out of about 23,000 kilometers of railway track in the Austrian Crownlands, the government owned and operated nearly 19,000 kilometers of it, or around 82 percent.—Ed.]

[34. ]Compare Karl Menger, “Die Valutaregulierung in Österreich-Ungarn,” Jahrbücher für Nationalökonomie und Statistik, 3, p. 643.

[35. ]Compare Sten. Protokolle, p. 18; in addition, Lotz, Schmollers Jahrbuch 16, pp. 1255-56.

[36. ][Josef Kaizl (1854-1901) was appointed to a teaching position in 1879 at Charles University in Prague, and professor of political economy in 1883. He was a leader of the Young Czech movement that wanted greater Czech autonomy in the Austro-Hungarian Empire in the 1890s. He served as Austrian finance minister in 1898-99, the highest position ever held by a Czech in the Austrian government.—Ed.]

[37. ]Compare Berger, “Zur Währungs- und Valutaregulierungsfrage,” Monatsschrift für christliche Sozialreform 13 (1890): 117.

[38. ]Ibid., p. 118.

[39. ][Dr. Rudolf Meyer (1839-99), a German social historian and economist. He was forced to leave Germany because of a highly critical book against Bismarck and took refuge in Austria, where he soon became the inspirer of the Catholic party and the advocate of Catholic socialism. In 1881 he emigrated to the United States and then to Canada, but he returned to Austria in 1889. He had established personal contacts with Karl Marx, and in the last decade of his life he wrote for the Marxist newspaper Neue Zeit.—Ed.]

[40. ]See R. Meyer, Zur Valutafrage (Vienna, 1894); Der Kapitalismus fin de siècle (Vienna, Leipzig, 1894), pp. 357ff.

[41. ]See in particular Schober, Die Valutafrage (Vienna, 1888) Sonderausgabe desZentrallblatt für die Gewerbegenossenschaften Österreichs I; idem, Die Valutaregulierung in Österreich (Vienna, 1892); Mosser, Zur Torheit der Goldwährung und der Valutaregulierung (Triest, 1889); Neupauer, Die Schäden und Gefahren der Valutaregulierung für die Staatsfinanzen, die Volks wirtschaft und die Kriegsbereitschaft (Vienna, 1892); Gruber, Nationales oder internationales Geld. Die Quintessenz der Währungsfrage (Vienna, 1892); Schlesinger, Gefahr im Verzuge. Gewinn 100 Millionen Kronen auf Kosten des Volkes (Vienna, 1894); idem, Volksgeld, Befreiung der Völker und Staaten aus den Klauen der Hochfinanz (Vienna, 1896); idem, 1250 Millionen Kronen Volksgeschenk zur Erbauung von “k. k. Volksbahnen” (Vienna, 1900).

[42. ]See R. Meyer, Kapitalismus, p. 387.

[43. ][Prince Alois Liechtenstein (1850-1920), member of the Liechtenstein ruling family and radical member of the Austrian Christian social coalition. Served for a total of twenty years in the Austrian parliament as one of the leaders of the conservative clerical party and deputy of the peasants of Hartleb who above all demanded an abbreviation of compulsory school attendance.—Ed.]

[44. ]Session in the House of Representatives, July 15, 1892.

[45. ]See Schober, Valutaregulierung, p. 7.

[46. ][Chartalism called for a fiat, or paper, money system, under which new money is created through government spending. The word is derived from the Latin charta, meaning token or ticket.—Ed.]

[47. ]See Neupauer, Schäden and Gefahren, pp. 1, 3, 25-26.

[48. ][Josef Schlesinger (1831-1901) was an Austrian scientist, philosopher of science, and politician who championed paper money and its expansion as a means to prosperity.—Ed.]

[49. ]See also Helfferich, Geld und Banken (Leipzig, 1903), vol. 1, pp. 528ff.

[50. ][Robert Banks Jenkinson, Second Earl of Liverpool (1770-1828), served as British prime minister for thirty years, leading Britain into an era of unparalleled economic and national triumph. A follower of Adam Smith and steadfast defender of sound economic principles and a specie standard, Lord Liverpool strongly opposed the possibility of maintaining a paper money.—Ed.]

[51. ][Ludwig Bamberger (1823-99), a German economist and publicist, a leading authority on currency problems in Germany. Originally a radical, he became a moderate liberal in Bismarck’s Germany, and in 1871 he entered the Reichstag as a National Liberal. He advocated the standardization of the German coinage, adoption of the gold standard, and establishment of the Reichsbank. He supported Bismarck’s outlawing of the Socialist Party and attempts to nationalize the railways, but he opposed Bismarck’s policy of protective tariffs, state socialism, and colonial expansion.—Ed.]

[52. ][Adolf Soetbeer (1814-92), a German economist and a secretary of the Hamburg Chamber of Commerce, ranked as the leading defender of the pure gold standard, the adoption of which by Germany was brought about largely through his efforts. He wrote numerous monographs and pamphlets defending the cause of gold monometallism.—Ed.]

[53. ][Ernst von Plener (1841-1923), an Austrian statesman, a prominent member of the Constitutional party and one of the leaders of the German classical liberals. In 1893-95 served as Austrian minister of finance.—Ed.]

[54. ][The Leitha, a river in Central Europe that is approximately 180 km. long, was part of the Austrian-Hungarian border until 1921. “Beyond the Leitha” was the Viennese colloquial term for Hungary, while “on this side of the Leitha” meant the region around Vienna, that is, Austria.—Ed.]

[1. ]The present work was completed at the beginning of December 1908. [This article originally appeared in German in the Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft (Schmollers Jahrbuch), vol. 33, no. 3 (1909).—Ed.].

[2. ]About the course and the motives of the entire reform, see Spitzmüller, “Die österreichisch-ungarische Währungsreform,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 11, pp. 337ff., 496ff.; Mises, “The Political-Economic Motives of the Austrian Currency Reform,” Chapter 1 in this volume; Knapp, Staatliche Theorie des Geldes (Leipzig, 1905), pp. 377ff.

[3. ][See Chapter 1, “The Political-Economic Motives of the Austrian Currency Reform,” footnote 51.—Ed.]

[4. ]See Der österreichische Volkswirt, Oct. 31, 1908.

[5. ]See Kalkmann, Die Entwertung der österreichischen Valuta und ihre Ursachen (Freiburg i.B., 1899), pp. 1ff.; “Die Diskont- und Devisenpolitik der österreichisch-ungarischen Bank (1892-1902),” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 12, pp. 463ff.

[6. ][A speculative bubble in the Australian property market in the 1880s finally started to burst when the Federal Bank of Australia “failed” in January 1893. In May of that year, eleven commercial banks suspended trading, leading to a severe financial crisis.—Ed.]

[8. ]See Verhandlungen und Beschlüsse des Industrierates, issue 9, “Die Aufnahme der Barzahlungen” (Vienna, 1905), pp. 1ff.; Sitzungsberichte der Handels- und Gewerbekammer für das Erzherzogtum Österreich unter den Enns, 1903 (Sitzung vom 12. Mai 1903 und Beilage Nr. 6); Verhandlungen der Handels- und Gewerbekammer in Brünn (Beilage Nr. 2 zum Protokoll der Sitzung vom 9. November 1903).

[9. ]See Neue Freie Presse, July 18, 1907 (report about the explanations offered by the representatives of the German National Party, the Christian Social Party, and the Polish Club Party in the budget committee of the House of Representatives); about the position of the Social Democrats, see Arbeiter-Zeitung, October 23, 1907.

[10. ][Georg Friedrich Knapp (1842-1926) made his reputation as a statistician specializing in mortality problems. He also wrote on the history of German agriculture in the eastern territories. He was considered a leading member of a group known as the “Socialists of the Chair,” who advocated state socialism under imperial paternalism in Germany before the First World War. In 1905, Knapp published The State Theory of Money, in which he argued that the selection, use, and value of money were matters of government regulation, independent of the market. For a summary and an insightful critical analysis of Knapp’s argument, see Edwin Cannan’s review of The State Theory of Money in Economica (June 1925), pp. 212-16.—Ed.]

[11. ]See Die neuen Valuta- und Bankgesetze, edition and notes by Calligaris (Vienna, 1901), pp. 121ff., 324ff., 347f.

[12. ]See Jahresbericht der Wiener Börsenkammer für 1901 (Vienna, 1902), pp. 78f.

[14. ]See Beilagen 1718 zu den stenographischen Protokollen des Abgeordnetenhauses, 17th session, 1903, p. 4.

[15. ]See Bilinski, “On International Payments,” lecture in the special session of the 4th Polish judicial and political economics conference in Krakow on October 2, 1906, translated from the Polish, p. 6. (This important essay, which is not available in print, was made available to me by the secretary general of the Austro-Hungarian Bank in the most considerate manner.)

[16. ]See Claus, Das russische Bankwesen (Leipzig, 1908), pp. 41, 141.

[17. ]See Mecenseffy, Die Verwaltung der österreichisch-ungarischen Bank 1886-1895 (Vienna, 1896), p. 5.

[18. ][Peel’s Bank Act of July 1844 divided the Bank of England into two parts: a Note Issuing Department and a Banking Department. The Issuing Department was restricted in the quantity of banknotes it could issue on the basis of the government debt (a maximum of fourteen hundred pounds), and notes beyond this had to be fully covered on the basis of additional deposits of gold coin or gold or silver bullion.—Ed.]

[19. ]See Leonhardt, Die Verwaltung der österreichisch-ungarischen Bank 1878-1885 (Vienna, 1886), pp. 39, 74f.

[20. ]See Statistische Tabellen zur Währungsfrage der österreichisch-ungarischen Monarchie (Vienna, 1892), p. 128.

[21. ]See XV. regelmäßige Jahressitzung der Generalsammlung der österreichisch-ungarischen Bank am 25. Februar 1894 (Vienna, 1894), pp. xvii, xxi.

[22. ]See Zuckerkandl, op. cit., pp. 449ff.—Frankfurter Zeitung, May 17, 1908, names the different sources, in particular the financial journal Kompaß and the Tabellen zur Währungsstatistik published by the Royal and Imperial Finance Ministry.

[23. ]See Bilinski, op. cit., p. 7.

[26. ]See Bilinski, op. cit., pp. 8ff.; Zuckerkandl, op. cit., pp. 441ff.

[27. ]One actually has to designate the Austrian currency as a “limping” gold standard, because the silver florin is currently still the face-value coin. However, the Austro-Hungarian Bank never attempted to conduct a gold premium policy following the French, particularly since this amount will be reduced in the coming months by 28 million crowns by the further minting of five-crown coins.

[28. ]Because in the following pages, an “upper gold point” is repeatedly discussed, this requires a more detailed explication. As long as the Bank prevented the exporting of gold by issuing foreign exchange, the upper gold point had no practical meaning; this will not change even after the legal resumption of specie payments in gold, unless the Bank completely abandons the foreign exchange policy that it currently follows. Because a precise, theoretical determination of the upper gold point is difficult to establish, the Bank, which requires a guideline for issuing its foreign exchange, used as a rule of thumb to always issue foreign exchange at a price that was closer to parity, as this was defined by the variations in the exchange rates in Berlin and London. By following this rule, it developed that the fluctuations in the foreign exchange rates were milder in Vienna than in the countries with specie payments. See Landmann, “Die währungspolitischen Aufgaben der schweizerischen Nationalbank,” Schweizerische Blätter für Wirtschafts- und Sozialpolitik, vol. 15, pp. 307ff. A statistical review of the large amount of material available might provide interesting details; however, hardly anything would be changed as a result.

[29. ]See Neue Freie Presse, April 1, 1903.

[30. ]See Abendblatt der Neuen Freien Presse, April 2, 1903.

[31. ]See Tabellen zur Währungsstatistik, 2nd ed., pt. II, pp. 213ff.; Gruber, “Bericht betreffend eine Statistik der internationalen Zahlungbilanz,” Internationale statistische Institut X. Session (London, 1905); Fellner, Die Zahlungsbilanz Ungarns (Vienna, 1908), pp. 1ff.

[32. ]See Kalkmann, op. cit., pp. 42ff.; Herz, op. cit., pp. 493ff.

[33. ]The linguistic usage is quite fluid. Many understand the placement of gold coins in circulation beginning in 1901 to be part of the de facto system of specie payments. We hold ourselves to the designations applied in the best journalistic works about the Austrian currency.

[34. ]See “Barzahlungen und Währungspolitik,” Die Zeit, September 25, 1907; see, in addition, “Die Devisenpolitik der Bank,” Die Zeit, August 23, 1907; Riedl, “Fakultative oder obligatorische Barzahlung,” Neues Wiener Tageblatt, July 14, 1907; Müller, Die Frage der Barzahlungen im Lichte der Knappschen Geldtheorie (Vienna, 1908), pp. 41ff.; and finally, the texts cited on pages 37 and 38 in footnotes 7 and 8.

[35. ]See “Die Devisenpolitik der Bank.”

[36. ][Viscount Goschen, The Theory of the Foreign Exchange, 3rd ed. (London: Effingham Wilson, 1919). George Goschen, First Viscount Goschen (1831-1907), was a prominent British liberal who later switched to the Conservative Party. He served at various times as vice president of the Board of Trade, paymaster-general, president of the Poor Law Board, First Lord of the Admiralty, and as a director of the Bank of England. His book on the workings of the foreign exchange market is still considered a classic on the mechanisms of international exchange.—Ed.]

[37. ]See Bilinski, op. cit., p. 3.

[38. ]See Kalkmann, op. cit., p. 48.

[39. ][Wilhelm von Lucam (1820-1900) was the secretary general of the Austrian National Bank in the mid-1800s, at the time when the growth of joint-stock banks confronted the central bank with an increasingly difficult task: to secure sufficient liquidity and to prevent an inflationary expansion of the money supply with a limited range of policy instruments. The very close and personal contact between managers of the central bank and leading participants of the Viennese financial center made an informal agreement in critical situations easier. However, when disagreements among the managers of the central bank arose, it was occasionally necessary to push through resolutions that had not been agreed upon unanimously. The words of Wilhelm von Lucam exerted great influence in that small circle of businessmen who dominated the Viennese money and capital market.—Ed.]

[40. ]See Lucam, Die österreichische Nationalbank während der Dauer des dritten Privilegiums (Vienna, 1876), pp. 66ff.

[41. ]See Prion, Das deutsche Wechseldiskontgeschäft (Leipzig, 1907), pp. 62ff.

[42. ]See Weill, Die Solidarität der Geldmärkte (Frankfurt, 1903), pp. 26ff.

[43. ][“Exodromic” refers to policies meant to stabilize movements in exchange or exchange rates.—Ed.]

[44. ]See Knapp, Staatliche Theorie des Geldes, pp. 247ff.

[45. ][“Pantopolic” refers to all market activities relating to the balance of payments.—Ed.]

[46. ]See Müller, op. cit., pp. 14ff.

[47. ]See Heyn, “Kritische Erörterung des Projekts der Beseitigung des Goldagios in Spanien,” Jahrbücher für Nationalökonomie und Statistik, 3rd ser., vol. 25, pp. 756ff.

[48. ]See “Die Devisenpolitik der österreichisch-ungarischen Bank,” Frankfurter Zeitung, May 17, 1908.

[49. ][“Giro” refers to a form of bank transfer by a payer from his account to the person or business entity to which a sum of money is owed.—Ed.]

[50. ]See Schumacher, “Die deutsche Geldverfassung und ihre Reform,” Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft (Schmollers Jahrbuch) 32 (1908): 1344ff.

[51. ][The “Déak Compromise of 1867” refers to Ferenc Déak (1803-76), a leading Hungarian political figure of the nineteenth century, who proposed the establishment of a “Dual Monarchy” of Austria-Hungary to replace the former Austrian Empire. He argued, in opposition to those Hungarian nationalists who wanted to establish a completely independent Hungary, that the Magyar nation would financially and economically gain by maintaining a political union with Austria under the rule of the Habsburg Monarchy.—Ed.]

[52. ][The “national ideal of a Greater Austria” refers to what in the nineteenth and early twentieth centuries was sometimes called the “Austrian idea.” The vision was for a multinational empire under Habsburg rule in which each of the nine major linguistic and ethnic national groups who populated the Austro-Hungarian Empire would have equal rights, civil liberties, and local governing autonomy through which all of the member groups would gain by sharing a common political and economic “space” in Central Europe. Many Austrian classical liberals advocated it as the alternative to the growing nationalist antagonism and disunity within the Habsburg domain.—Ed.]

[53. ]According to Fellner, op. cit., pp. 151ff. For similarly unfavorable results arrived at by a different set of calculations, see Gärtner, “Der österreichisch-ungarische Ausgleich,” Archiv für Sozialwissenschaft und Sozialpolitik, vol. 25, pp. 391ff.

[54. ][The “land of St. Stephen’s crown” refers to the historical territory ruled according to “divine right” by the kings of Hungary. Tradition says that St. Stephen I held up the crown during his coronation in the year ad 1000 as an offering to the Virgin Mary to symbolize a “contract” between her and the holder of that royal office.—Ed.]

[55. ]See Spitzmüller, “Die staatsfinanzielle Vereinbarungen im österreichisch-ungarischen Ausgleich,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 17, p. 391.

[56. ]Ibid., pp. 392f.

[57. ]See Bunzel, “Die Bankformel,” Neue Freie Presse, November 28, 1907; November 27, 1907; December 19, 1907. The fact that the bank formula is not able to insure Austria completely from the results of a devaluation of the future autonomous currency is emphasized in particular by Reitler, “Die Bankfrage in Österreich-Hungarn,” Der Tag, October 15, 1908. See also “Die Bankfrage,” Das Vaterland, December 13, 1908.

[58. ]See the speech by the director of the Viennese Giro und Kassenvereins, Dr. Hammerschlag, in the meeting of the Viennese Chamber of Commerce on May 12, 1903 (minutes, ibid., p. 217).

[1. ][This article originally appeared in English in the Economic Journal (June 1909). See Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, [1940] 1978), pp. 43-44: “In the fall of 1908 Professor [Francis] Edgeworth asked Professor [Eugen von] Philippovich to contribute an article to the Economic Journal. Such an essay, to be no longer than ten pages, was to analyze for the English-speaking world the foreign exchange policy of the Austro-Hungarian Bank. Philippovich declined and recommended me to [Edgeworth]. I accepted.” The reader will see that part of the argument in this article is an abridged version of the longer analysis that Mises provided in his German-language article “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Chapter 2 in the present volume.—Ed.]

[2. ]Staatliche Theorie des Geldes [The State Theory of Money] (Leipzig, 1905), pp. 249-52, 377-94.

[3. ][David Ricardo, “Proposals for an Economical and Secure Currency,” [1816] reprinted in Piero Sraffa, ed., The Works and Correspondence of David Ricardo, vol. 4, Pamphlets and Papers, 1815-1823 (Cambridge: Cambridge University Press, 1951), pp. 41-141.—Ed.]

[4. ]Nowadays kronen 20 notes may be given out at any time under the same conditions as k. 50, k. 100, and k. 1,000 notes; on the other hand, k. 10 notes may only be issued in the aggregate of 160 million kronen, and then if specially covered in full by gold.

[5. ]As such are considered first of all the State, the Crownlands, Corporations, then the large railway companies and mortgage banks.

[6. ]Bilinski, Über internationale Zahlungen, 1906, p. 3.

[7. ]“Lombard loans” are loans with securities pledged as collateral.

[8. ]Knapp, pp. 247-52.

[9. ]In 1907 the Bank’s profits of the foreign moneys and foreign bills was k. 5,732,672.

[1. ][This article originally appeared in German in the Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft (Schmollers Jahrbuch), vol. 34, no. 3-4 (1910).—Ed.]

[2. ][“The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Chapter 2 in the present volume.—Ed.]

[3. ][Walther Federn (1869-1949) was a prominent economic and financial commentator in Vienna before and after the First World War. In 1908 he founded The Austrian Economist magazine (modeled after The Economist in Great Britain), which he edited until 1934. He first immigrated to Sweden and finally came to the United States, where he lived until his death.—Ed.]

[4. ]I will not say anything further here about Mr. Federn’s remarks directed against my essay in the newspaper he publishes, Der österreichische Volkswirt (July 31, 1909), because he does not raise them again in the essay in this journal.

[5. ][The “unofficial market” was the private market on which gold was bought and sold; it was also the name for the Austro-Hungarian Bank policy after 1896 of de facto redemption of its banknotes for foreign exchange and then after 1901 for gold, though the Bank was still not legally required to do so.—Ed.]

[6. ][This refers to the period before the Austro-Prussian War of 1866, when Austria was expelled from the German Confederation as a result of Prussia’s victory in the conflict.—Ed.]

[7. ]Thus Kuranda, a Member of Parliament, explained just recently in a speech given for the Lower Austrian Trade Union, “For myself—and I know myself to be one of many—I firmly hold the conviction that the ‘splendid isolation’ of Austria’s interest rate policy must and will come to an end with the resumption of specie payments. At that moment when the Austro-Hungarian Bank will be obligated to unconditionally hand over for every note presented at its doors the equivalent in legal, metal money, the Bank’s treasury will become a capillary vessel into the system of international flow of money and gold. At a minimum, it will have to set its interest rate at the same level of that country which is momentarily most in need of the precious metals. The waves of the international economic situation will then pull our monetary and credit services into their maelstrom, regardless from whichever and however far away the center of the agitation may be from which it arises.” (See Fremdenblatt, November 6, 1909.) This argument was already refuted years ago in the writings from which I quoted in my original essay.

[8. ][Leon Ritter von Bilinski (1846-1923) was a leading Polish political figure and economist in the Austro-Hungarian Empire, who served at various times as general director of the Imperial Railway and Austrian finance minister, as well as governor of the Austro-Hungarian Bank. He also was a governor of Bosnia-Herzegovina. After the First World War, he briefly served as minister of finance in 1919 in the newly independent Poland.—Ed.]

[9. ]See von Bilinski, “Über Internationale Zahlungen” [On International Payments], lecture in the special session of the Fourth Polish Judicial and Political Economy Conference in Krakow on October 2, 1906.

[10. ]See Jahresbericht der Wiener Börsenkammer. Der Verkehr an der Wiener Börse und der Geldmarkt in Jahre 1907 [Annual Report of the Viennese Stock Market: Transactions on the Viennese Bourse and the Currency Market in 1907] (Vienna, 1908), p. 193.

[11. ]See ibid., pp. 200f.

[12. ][In 1878, Austria-Hungary occupied and obtained international recognition to administer the province of Bosnia-Herzegovina, which up until that time was under the control of the Ottoman (Turkish) Empire. On October 6, 1908, the Austro-Hungarian government announced the formal annexation of Bosnia-Herzegovina and precipitated an international crisis that threatened war between several of the leading European powers. In April 1909, an agreement was signed among the Great Powers recognizing Austria-Hungary’s annexation of the province.—Ed.]

[13. ]See “Der Compaß” Finanzielles Jahrbuch für Österreich-Ungarn [“The Compass” Financial Annual Journal for Austro-Hungary], vol. 43, no. 1 (Vienna, 1909), p. 92. For foreign exchange on the Paris market, the maximum rate amounted to 0.288 percent above parity during that six-month period: in the most critical month, March 1909, it was 0.078 percent above parity. On average, for the month of March 1909, foreign exchange in the German banking centers was posted at 0.436 percent above parity, foreign exchange in London at 0.119 percent above parity, and foreign exchange in Paris at .0137 percent below parity.

[1. ][This article originally was published in German in the Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 21 (1912).—Ed.]

[2. ]In addition to the numerous articles in the daily and professional press, see especially the parliamentary materials relating to the government bill, including a report on the reasons for the fourth privilege (No. 1043 of the supplements to the stenographic protocols of the House of Deputies, Session XX, 1910). A representative overview of the reform and a rich bibliographic list are contained in Zuckerkandl’s appendix to “Österreichisch-Ungarische Bank” in the Handwörterbuch der Staatswissenschaften, vol. 8, pp. 1186-91. [Robert Zuckerkandl, “The Austro-Hungarian Bank,” in Banking in Russia, Austria-Hungary, the Netherlands, and Japan (Washington, D.C.: Government Printing Office, 1911), pp. 55-118, but without the accompanying bibliography in the original German.—Ed.]

[3. ][The Ausgleich, or “Compromise,” of 1867 refers to the agreement under which the Austrian Empire was transformed into the Austro-Hungarian Empire. Hungary was recognized as a self-governing nation within the empire, with the two halves sharing a common defense, and a customs and monetary union under the authority of the Habsburg emperor, Francis Joseph. The “Compromise” was to be renewed every ten years.-Ed.]

[4. ]See my remarks in the Schmollerschen Jahrbuch, vols. 33 and 34. [See “The Problem of Legal Resumption of Specie Payments in Austria-Hungary” and “On the Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Chapters 2 and 4 in the present volume.—Ed.]

[5. ]See my remarks in the Schmollerschen Jahrbuch, vol. 33, pp. 1027-30. [See pp. 31-82, in this volume.—Ed.]

[6. ][Carl Menger (1840-1921) was the founder of the Austrian School of economics. After working as a journalist and civil servant in the Austrian Ministry of Prices, he was appointed a professor of political economy at the University of Vienna in 1873, a position that he held until his retirement in 1903. In 1876, he was tutor for Crown Prince Rudolph, the heir to the Austrian throne who later committed suicide. He also served on the Imperial Commission on Currency Reform in 1892, which resulted in Austro-Hungary’s moving toward establishment of a gold standard.—Ed.]

[7. ][William Stanley Jevons (1835-83) was one of the developers of the theory of marginal utility, which he formulated in his 1871 book The Theory of Political Economy. He also wrote extensively on monetary theory and reform, and a sunspot theory of business cycles. He was appointed to a chair in political economy at University College, London, in 1876. He died in a drowning accident.—Ed.]

[8. ][Leon Walras (1834-1910) formulated a version of the theory of marginal utility in his 1874 book Elements of Pure Economics. Walras is also recognized as one of the early developers of mathematical general equilibrium theory. Walras also was a prominent monetary theorist who developed a “cash balance” approach for the demand for money. He was appointed to a chair in political economy at the University of Lausanne in 1870, and stepped down from his position in 1892 following a nervous breakdown.—Ed.]

[9. ][Friedrich von Wieser (1851-1926) was one of the leading members of the Austrian School of economics in the period before and immediately after the First World War. His major contributions were to the theory of marginal utility, the concept of opportunity cost, and the theory of the determination of the value of the factors of production. After serving in the Austrian civil service from 1872 to 1883, he was appointed professor of political economy at the University of Prague in the Austrian province of Bohemia. He was appointed professor of political economy at the University of Vienna in 1903, following Carl Menger’s retirement. Wieser served as minister of commerce from 1917 to 1918 in the last government of the Austro-Hungarian Empire.—Ed.]

[10. ][James Laurence Laughlin (1850-1933) was appointed in 1892 to establish an economics department at the University of Chicago. He was well known as a monetary theorist and historian who wrote widely on the gold standard. He was also an outspoken advocate of laissez-faire at a time of growing interventionist sentiments in the United States.—Ed.]

[11. ][David Kinley (1861-1944) founded the economics department at the University of Illinois at Champaign-Urbana in 1895. He was the author of Money: A Study of the Theory of the Medium of Exchange (1904). He also wrote extensively on government regulation of business in American society.—Ed.]

[12. ]Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd rev. ed., [1924; 1951] 1981), pp. 384-86.

[13. ]Schmollerschen Jahrbuch, vol. 25, pp. 1379ff.

[14. ][In the Austrian part of the Dual Monarchy, the parliament was composed of an Upper House (Herrenhause) that included all of the archdukes in Austria; seventy nobles selected by the emperor; seventeen archbishops and bishops of princely rank; and 140 life members appointed by the emperor in recognition of their service to the state or the church. In the early years of the twentieth century, the Lower House (Abgeordnetenhause) consisted of 425 members serving for a six-year term, who represented five “classes of electors” in each province. Eighty-five were chosen by the large landowners; twenty-five were selected by the chambers of commerce and certain industrial corporations; 118 were elected by residents in urban districts who paid over fifty florins in direct taxation; 129 were elected by inhabitants of rural areas who also paid in direct taxes at least fifty florins; and 72 were chosen by all electors who did not belong to any of the other groups, but who had residency qualification for at least six months.—Ed.]

[15. ][“More recent law abrogates an inconsistent earlier law.”—Ed.]

[16. ]See Chapter 2, “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” footnote 18.

[17. ][The 1892 Austrian Currency Reform Act converted the old florin into a new crown at the ratio of two new crowns for one old florin. Hence the 200-million-florin quota on notes issued by the Austro-Hungarian Bank that were tax-exempt became 400 million of the new crowns.—Ed.]

[1. ][This article originally appeared in French in the Revue Économique Internationale, vol. 7, no. 4 (October 1910).—Ed.]

[2. ][Ernest von Koerber (1850-1919), a liberal Austrian statesman and prime minister of Austria in 1900-1904. A popular figure, he engaged in an ambitious economic expansion program for the Habsburg Monarchy, encouraged industry and commerce, and introduced laws guaranteeing individual rights. Nationality crises in Bohemia and Hungary caused his fall in 1904. During World War I he served as the joint Austro-Hungarian minister of finance.—Ed.]

[3. ][A Landtag (Diet) is a representative assembly or parliament in German-speaking countries with some legislative authority.—Ed.]

[4. ][The Austrian Parliament.—Ed.]

[5. ][Leon Ritter von Bilinski (1846-1923), a conservative Polish-Austrian statesman, who was highly favored by Emperor Francis Joseph. In 1912-15, he occupied dual posts of imperial finance minister and Bosnian governor.—Ed.]

[6. ][1 hectoliter (hl) = 100 liters = 26.42 gallons.—Ed.]

[7. ][The Heller or Häller was a German coin valued at half a pfennig (a penny) named after the city of Hall (today Schwäbisch Hall). The coin was produced beginning in the 13th century as a silver pfennig (Häller pfennig). Heller was also the term used in the Austrian half of the empire for 1/100 of the Austro-Hungarian crown (the other being fillér in the Hungarian half), the currency of Austria-Hungary from 1892 until after the demise of the empire.—Ed.]

[1. ][This article originally appeared in German in Archiv für Sozialwissenschaft und Sozialpolitik, vol. 37 (1913).—Ed.]

[2. ][This refers to the development of the theory of marginal utility, or subjective value, especially as formulated by the “Austrian economists.” See Carl Menger, Principles of Economics (New York: New York University Press, [1871] 1981); Eugen von Böhm-Bawerk, Capital and Interest, vol. 2, The Positive Theory of Capital (South Holland, Ill.: Libertarian Press, [1914] 1959), pp. 121-256. On the resistance of the German Historical School to the ideas and methods of the Austrian School, see Eugen von Böhm-Bawerk, “The Historical versus the Deductive Method in Political Economy,” (1891) reprinted in Israel M. Kirzner, ed., Classics in Austrian Economics: A Sampling in the History of a Tradition (London: William Pickering, 1994), pp. 109-29; and Ludwig von Mises, “The Historical Setting of the Austrian School of Economics,” [1969] reprinted in Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 53-76.

[3. ][On Mises’s recollections of his own confrontations with members of the German Historical School during the years before the First World War, see “Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923,” Chapter 29 in the present volume.—Ed.]

[4. ]Cf. my Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd rev. ed., [1924; 1951] 1981), pp. 146-77.

[5. ]Ibid., p. 154. [In The Theory of Money and Credit, pp. 63-67, 155-56, 393-404, and in Human Action: A Treatise on Economics (Indianapolis: Liberty Fund, [1949; 4th rev. ed. 1996] 2007), pp. 432-44, and his other writings on monetary theory and policy, Mises defined “money substitutes” as claims to a commodity money such as gold in the form of banknotes or checks that are readily and generally accepted in transactions and that are believed to be fully redeemable on demand at the banking institution that has issued them. Mises distinguished between money substitutes that are backed 100 percent by commodity money reserves at the issuing institution (“money certificates”) and those money substitutes issued by a bank that are less than fully backed (“fiduciary media”). Loans extended on the basis of 100 percent reserve backing were referred to as “commodity credit” and those loans extended on the basis of less than 100 percent reserve backing were called “circulation credit.” Mises argued that it was the extension of fiduciary media not covered by 100 percent reserves that was the source of business cycles, in that it created the illusion of more savings available in society (in the form of money loans extended through the banking system) to support and sustain investment and capital formation than really existed.—Ed.]

[6. ][See Ludwig von Mises, “The Position of Money Among Economic Goods,” (1932) in Richard M. Ebeling, ed., Money, Method, and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 55-69, especially 59-62.—Ed.]

[7. ][See Mises, The Theory of Money and Credit, pp. 215-23; also, Ludwig von Mises, “Monetary Stabilization and Cyclical Policy,” (1928) in Mises, The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 73-79; Mises, “The Suitability of Methods of Ascertaining Changes in Purchasing Power for the Guidance of International Currency and Banking Policy,” (1930) in Ebeling, ed., Money, Method, and the Market Proces s, pp. 78-95, and especially 86-90, and Human Action, pp. 219-23.—Ed.]

[8. ][Mises, The Theory of Money and Credit, pp. 377-404.—Ed.]

[9. ][Othmar Spann (1878-1950) was a prominent and highly popular professor at the University of Vienna during the period between the two world wars. He was an opponent of individualism, political and economic liberalism, Marxism, and materialism. He referred to individualism in all its forms as “the dragon-seed of evil.” Instead, he advocated what he called “universalism,” a conception of society as an organic whole or totality greater than the individuals of which it was composed. He proposed a corporativist structure to society, in which each sector of the economy would be organized in a hierarchy of guilds. He was greatly admired by many Austrian fascists, but was prevented from teaching by the new Nazi regime after the German annexation of Austria in 1938.—Ed.]

[10. ][The Physiocrats were a group of eighteenth-century French Enlightenment thinkers who often referred to themselves as “the Economists.” Opponents of mercantilism, they developed a theory of society’s “natural order” that emphasized the self-regulating patterns of the market.—Ed.]

[11. ]Cf. Spann, Theorie der Preisverschiebung als Grundlage zur Erklärung der Teuerungen [Theory of Price Change as Foundation for the Explanation of Inflations] (Vienna, 1913), pp. 3-5.

[12. ][See Mises, Human Action, pp. 201-03.—Ed.]

[13. ][See Mises, The Theory of Money and Credit, pp. 185-89.—Ed.]

[14. ][The idea of the “unevenness” or “nonneutral” effects on prices following an increase (or decrease) in the quantity of money has been a central theme in the Austrian School theory of money, especially in the writings of Ludwig von Mises. See Mises, The Theory of Money and Credit, pp. 160-68, 225-46; “Monetary Stabilization and Cyclical Policy,” pp. 80-88; Mises, “The Non-Neutrality of Money,” (1938) in Ebeling, ed., Money, Method, and the Market Process, pp. 68-77; and Human Action, pp. 398-432; also, Friedrich A. Hayek, Prices and Production (New York: Augustus M. Kelley, [1935] 1967), pp. 1-31, 129-31.—Ed.]

[15. ][Eugen von Böhm-Bawerk (1851-1914) was one of the leading members of the Austrian School of economics in the years before the First World War. His major contributions were to the theory of capital and interest, as well as the general theory of value and price. He was a professor of political economy at the University of Innsbruck from 1880 to 1889. He worked in the Austrian Ministry of Finance throughout the 1890s and served three times as minister of finance, the longest and last time from 1900 to 1904. Böhm-Bawerk returned to teaching as a full-time professor of political economy at the University of Vienna in 1905, a position that he held until his death.—Ed.]

[16. ][John Bates Clark (1847-1938) was a leading proponent of the marginalist approach in the United States. His 1899 volume, The Distribution of Wealth, developed the theory of marginal productivity to explain the allocation of income among the factors of production. He was professor of economics at Columbia University from 1895 to 1923.—Ed.]

[17. ]See Chapter 5, “The Fourth Issuing Right of the Austro-Hungarian Bank,” footnote 9.

[18. ][See Eugen von Böhm-Bawerk, “Control or Economic Law,” (1914) in Shorter Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian Press, 1962), pp. 139-99, for a detailed analysis of this argument by a leading member of the early Austrian School.—Ed.]

[19. ][A ca’ canny policy is a deliberate reduction in the working speed and production by workers to demonstrate their discontent with working conditions.—Ed.]

[20. ]Thus Bernhard, “Lohn und Löhnungsmethoden” [Wage and Payment Methods], in Handwörterbuch der Staatswissenschaften, vol. VI, p. 513.

[21. ][Here Mises is alluding to Böhm-Bawerk’s famous critique of Marx’s theory of surplus value and exploitation of workers under capitalism; see Böhm-Bawerk, Capital and Interest, vol. 1, History and Critique of Interest Theories (South Holland, Ill.: Libertarian Press, [1884] 1959), pp. 281-321; and Böhm-Bawerk, “The Unresolved Contradiction in the Marxian Economic System,” (1896) in Shorter Classics of Böhm-Bawerk, pp. 201-302.—Ed.]

[22. ][“Chartism” was a social and political reform movement in Great Britain in the middle of the nineteenth century dedicated to extending voting rights to the working class as a means of acquiring the power to influence social and economic policy in a more socialist direction. Chartists were willing to use physical violence in the form of strikes and political demonstrations to advance their goals.—Ed.]

[23. ]I find this expression in Vogelstein, “Das Ertragsgesetz der Industrie” [The Law of Profit of Industry], Archiv für Sozialwissenschaft und Sozialpolitik, vol. 34, p. 775.

[24. ]Cf. Eugen von Böhm-Bawerk, Einige strittige Fragen der Kapitalstheorie (Vienna, 1900), pp. 110ff.

[25. ]In the static state there are no unemployed.

[26. ]Cf. John A. Hobson, Gold, Prices, and Wages: With an Examination of the Quantity Theory (London: Meuthen & Co., 1913), pp. 94ff.

[27. ][An end to the general decline in prices and the rise in the general purchasing power of money.—Ed.]

[28. ]Cf. The Theory of Money and Credit, pp. 368-90.

[1. ][This essay was originally delivered in German as Ludwig von Mises’s inaugural lecture at the University of Vienna in February 1913, on the basis of which he received the status of Privatdozent [unsalaried lecturer]. It has not been previously published. From 1913 until the spring of 1934, Mises regularly taught a seminar almost every semester (except during the war years of 1914-1918, when he served in the Austrian Army) at the University of Vienna on a wide variety of topics in general economic theory, monetary and business cycle theory, economic policy and comparative economic systems, and methodology of the social sciences.—Ed.]

[2. ][See Chapter 7, “The General Rise in Prices in the Light of Economic Theory,” footnote 7.—Ed.]

[3. ][Also see Basset Jones, Horses and Apples: A Study in Index Numbers (New York: John Day, 1934), and Michael A. Heilperin, International Monetary Economics (London: Longmans, Green, 1939), the appendix “Note on the Use of Statistical Constructions,” pp. 259-70; also, Gottfried Haberler, The Different Meanings Attached to the Term “Fluctuations in the Purchasing Power of Gold” and the Best Instrument or Instruments for Measuring Such Fluctuations, Official No. F/Gold.74 (Geneva: League of Nations, 1931).—Ed.]

[4. ][Irving Fisher (1867-1947) was one of the most prominent American economists in the first half of the twentieth century. He formulated a widely used version of the quantity theory of money, utilizing the equation of exchange in The Purchasing Power of Money (1911). He advocated using a system of index numbers to vary the gold content of the dollar to maintain a stable purchasing power of the monetary unit.—Ed.]

[5. ][See “On the Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Chapter 4 in the present volume.—Ed.]

[6. ][Karl Helfferich (1872-1924) was a German economist, politician, and financier. His most important book on monetary themes was Money (New York: Augustus M. Kelley, [1903] 1969).—Ed.]

[7. ][See J. van Walre de Bordies, The Austrian Crown: Its Depreciation and Stabilization (London: P.S. King & Son, 1924), p. 37, for the amounts by which Austrian banknotes in circulation increased between 1909 and 1914.—Ed.]

[8. ][Lujo Brentano (1844-1931) was a German economist and social reformer. He was a founding member of the Verein für Sozialpolitik (Society for Social Policy) and a supporter of the social market economy, which rejected both socialism and laissez-faire capitalism, combining private enterprise with heavy government regulation and social welfare. In 1914, he signed the “Manifesto of the Ninety-Three,” which galvanized support for the war throughout German schools and universities. After the revolution of November 1918, he for a very short period served as people’s commissar (minister) of trade.—Ed.]

[9. ][Sidney Webb (1859-1947) was an early member of the British Fabian Society, which called for the achievement of socialism through incremental legislation. He was also a prominent intellectual force in the British Labor Party, having written in 1918 the famous “Clause Four” in the Labor Party program that called for the nationalization of the means of production. In 1935, he coauthored with his wife, Beatrice, Soviet Communism: A New Civilization ? in which he predicted that the Soviet system of central economic planning would eventually spread around the rest of the world. In 1929, he was granted the title Lord Passfield.—Ed.]

[10. ][The theory of imputation attempts to demonstrate the process by which the value of the finished product on the market is reflected back into the relative values of the factors of production utilized in its manufacture, thus determining the distribution of income among those factors. The theory was most systematically developed among the early Austrian economists by Friedrich von Wieser, Natural Value (New York: Augustus M. Kelley, [1889] 1971). See also F. A. Hayek, “Some Remarks on the Problem of Imputation,” (1926) in Money, Capital and Fluctuations: Early Essays (Chicago: University of Chicago Press, 1984), pp. 33-54; and Hans Mayer, “Imputation,” (1928) in Israel M. Kirzner, ed., Classics in Austrian Economics: A Sampling in the History of a Tradition (London: William Pickering, 1994), pp. 19-53. The more generally accepted answer to this problem is derived from the theory of marginal productivity developed by John Bates Clark, The Distribution of Wealth (New York: Augustus M. Kelley, [1899] 1965).—Ed.]

[11. ]See Chapter 7, “The General Rise in Prices in the Light of Economic Theory,” footnote 16.

[12. ][See Karl Marx, Value, Price and Profit (Chicago: Charles H. Kerr & Co., [1865] 1910).—Ed.]

[1. ][This article originally appeared in German in the Archiv für Sozialwissenschaft und Sozialpolitik, vol. 39 (1914/1915).—Ed.]

[2. ]Two official publications contain information about the crisis of 1912/13:

• 1.Bericht über die wirtschaftliche Lage Oesterreichs in den Jahren 1912/13 [Report on the Economic State of Austria in 1912/13], 4th ed. Communications by the Commercial Center of the United Chambers of Commerce and Manufacturing, and the Central Organization of Industry in Austria, no. 127 (Vienna, 1914). 104 pages.
• 2.Wirtschaftsstatistische Chronik. Rückblich auf das Jahr 1913 [Statistical Economic Chronicle. A Look Back at 1913], 8th ed. Special Publication of the Statistical Journal in 1914 (Brünn, 1914). 41 pages.

[3. ]See Feiler, Die Konjunkturperiode 1907-1913 in Deutschland [The Economic Cycle 1907-1913 in Germany] (Jena, 1914), pp. 129ff.

[4. ][The Balkan conflict was the cause of two wars in Southeastern Europe in 1912-13 in the course of which the Balkan League (Bulgaria, Montenegro, Greece, and Serbia) first conquered Ottoman-held Macedonia, Albania, and most of Thrace and then fell out over the division of the spoils. As the result of the First Balkan War (October 1912-May 1913), almost all remaining European territories of the Ottoman Empire were captured and partitioned among the members of the Balkan League, and an independent Albanian state set up. Despite their success, the Balkan states were unsatisfied with the peace settlement, which brought about the Second Balkan War (1913) between Bulgaria and its former allies Serbia, Greece, and Montenegro, with Romania and the Ottoman Empire also intervening against Bulgaria. The outcome turned Serbia, an ally of the Russian Empire, into an important regional power, alarming Austria-Hungary and thereby indirectly providing an important cause for World War I.—Ed.]

[5. ]For three decades, from 1875 to 1906, the Austro-Hungarian Monarchy’s balance of trade had been uninterruptedly positive. In 1907, the balance of trade became negative again for the first time, and indeed to the amount of 45 million crowns; in the following years, the liabilities in the balance of trade increased (by millions of crowns) to 427, 434, 787, and 823 million crowns. In 1913, it sank to 631 million crowns. It has increased again since that time. In the first quarter of 1914, liabilities amounted to 230 million crowns, in contrast to 169 million crowns in the first quarter of 1913, 268 million crowns in the first quarter of 1912, and 184 million crowns in the first quarter of 1911.

[6. ]See Böhm-Bawerk, “Unsere passive Handelsbilanz” [Our Negative Balance of Trade], Neue Freie Presse, January 6, 8, and 9, 1914.

[7. ]See Pertz, Das Leben des Ministers Freiherrn von Stein [The Life of the Minister Freiherr von Stein] (Berlin, 1850), vol. II, pp. 433f. [Heinrich Friedrich Karl Freiherr von Stein (1757-1831) was a Prussian officer, statesman, and reformer who served as Prussian minister of economics and finance during the Napoleonic period.—Ed.]

[8. ]See Studien über die Reform der inneren Verwaltung [Studies on the Reformation of the Domestic Administration], p. 21. This exposé published by the Körber administration in 1904 renders a scathing verdict on the abilities of the Austrian government. See also Enquete der Kommission zur Förderung der Verwaltungsreform. Veranstaltet in der Zeit vom 21. Oktober bis 9. November 1912 zur Feststellung der Wünsche der beteiligten Kreise der Bevölkerung in bezug auf die Reform der inneren und Finanz-Verwaltung [Inquiry of the Commission for the Promotion of Administrative Reform] (Vienna, 1913). Additionally, Bericht des Mitgliedes der Kommission zur Förderung der Verwaltungsreform Professor Dr. Josef Redlich über die Entwicklung und den gegenwärtigen Stand der österreichischen Finanzverwaltung sowie Vorschläge der Kommission zur Reform dieser Verwaltung [Report by the Member of the Commission for the Promotion of Administrative Reform, Prof. Dr. Josef Redlich, About the Development and Present State of the Austrian Financial Administration and also Proposals by the Commission for Reforming This Administration] (Vienna, 1913).

[9. ]See Günther, Die Gebarung der österreichischen Staatsbahnen [The Financial Policy of the Austrian State Railroad] (Vienna, 1914). Günther’s remarks were subjected to a very sharp criticism by one of the top officials of the Austrian Railway Ministry in a public speech. See Burger, Die Gebahnung [sic] der österreichischen Staatsbahnen und andere Bahnverwaltungen [The Financial Management of the Austrian State Railroad and Other Rail Managements] (Vienna, 1914).

[10. ][A hectare is a metric unit commonly used for measuring land area. It is equal to 10,000 square meters, about 107,639.1 square feet, 2.47 acres, and 0.00386 square miles.—Ed.]

[11. ]See no. 113 of the supplements to the stenographic protocols of the House of Lords, 21, session 1912, p. 17.

[12. ]In 1911.

[13. ]See Studien über die Reform der inneren Verwaltung [Studies About the Reform of the Domestic Administration], cited above, p. 7.

[14. ]See no. 113 of the documents cited above, p. 3.

[15. ]Among the institutions that guarantee consumer credit to civil servants, the Erste österreichische Beamten-Kreditanstalt [First Austrian Civil Servants’ Credit Institution] in Vienna, founded in 1908 with a fully paid capital stock of 1,500,000 crowns, appears of particular interest. This institution extended loans to employees with fixed annual salaries, and also to retired public officials having fixed annual pensions, and other state civil servants (either from one of the kingdoms or provinces represented in the Reichsrat, or local officials), against cession of their official emoluments for the collection of payments authorized to this public corporation. The performance of these loans, including interest and ancillary charges, was secured by nationally or provincially guaranteed insurance on the borrowers against their demise, as well as against their inability to repay while still alive. The province of Lower Austria assumed subsidiary liability. The bank bonds based on these lending activities, offered at 4.5 percent and amounting to a face value of 30 million crowns, were declared to be gilt-edged securities.

[16. ][The term Vormärz (pre-March) Years (1815-48) refers to the political situation prior to the 1848 revolution during the rule of the Austrian Chancellor Prince Clemens von Metternich. He strongly believed that maintaining social order within the multiethnic composition of the Austrian Empire required comprehensive suppression of national movements at home and within other nation-states.—Ed.]