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 3

Austrian Fiscal and Monetary Problems in the Postwar Period

CHAPTER 14

Monetary Devaluation and the National Budget1

There exists a close relationship between changes in the quantity of money and changes in the money prices of goods and services. If the quantity of money is increased while other conditions remain the same, then the prices of all goods and services will rise. Of course they will not all rise at the same time nor, as was long assumed, in the same proportion as the increase in the quantity of money; but they will rise, and no measure of economic policy is capable of stopping this from happening.

The rise in the prices of domestic goods and services and the rise of the foreign exchange rate are simply two sides of one and the same phenomenon. The foreign exchange rate is clearly determined by the domestic purchasing power of a country’s money. The exchange rate must be established at such a level that the purchasing power is the same regardless of whether I directly buy goods with an Austrian crown or if I first exchange the crown for Swiss francs and then proceed to buy goods with Swiss money.

In the long run, the foreign exchange rate cannot vary from the rate that reflects the relationship between that currency’s domestic purchasing power and that of a unit of foreign money. This rate of foreign exchange, therefore, can be designated the natural or static rate. As soon as the market exchange rate departs from it, it becomes profitable to buy up goods with that money which appears undervalued at its rate of exchange relative to its domestic purchasing power and to sell those goods for that money which at its rate of exchange is overvalued with respect to its purchasing power. Whenever such profit possibilities present themselves, buyers will appear on the foreign exchange market with a demand for the undervalued currency, and this will drive up its rate of exchange until it has reached its static or equilibrium rate.2

However, it should be noted that the changes in the purchasing power of a nation’s currency do not take place immediately and do not occur at the same time in regard to all goods. The rise in prices resulting from the increase in the money supply does not happen overnight; a certain time passes before they appear. The additional quantity of money appears somewhere in the economy, and then spreads out gradually. At first, it flows only into certain businesses and certain branches of production, raising the demand for only certain goods and services, and not all of them; later, the prices for other goods and services also start to rise.

The foreign exchange rate is, however, a speculative rate; that is, it arises from the transactions of businessmen who not only consider the current situation but also take into consideration possible future developments. As a result, the devaluation of the currency in the foreign exchange market occurs at a relatively early stage, or at least long before the prices for all goods and services have been fully affected by the inflation in the domestic economy. The market rate of foreign exchange races ahead of expected future price movements, just like every market rate.

The popular view, however, is mistaken that sees the cause for the unfavorable condition of the foreign exchange rate in the actions of speculators. It is true that both at home and abroad those with unclean hands are often the ones dealing in foreign currency and foreign exchange. But to no small degree this is due to government measures that are implemented to obstruct foreign exchange dealings.3

But one thing cannot be denied in regard to these speculators, namely, that they carry out their business in order to earn profits, and not to suffer losses. They can profit only if they have correctly foreseen the future value of a currency. If they have deluded themselves about the future state of the market, they will pay dearly for their mistake. The “bears” lose if they have underestimated the demand for a currency on the foreign exchange market, and the rate of exchange for that currency instead goes up. As was explained above, such an increase in demand must occur if there exists a divergence between the purchasing power of the crown with respect to goods in Austria and its value relative to a foreign currency.

It is also incorrect to try to explain the foreign exchange rate on the basis of the balance of payments rather than on the currency’s purchasing power. This view distinguishes between the devaluation of money on the foreign exchange and its declining value in terms of its domestic purchasing power. Between the two phenomena there supposedly exists only a distant or—as many maintain—no connection at all.

It is argued that a currency’s foreign exchange rate is a result of the current state of a country’s balance of payments. If the amount of payments to be made abroad rises without a corresponding increase in payments to be received from abroad, or if the level of payments from abroad decreases without an accompanying reduction in the payments to be made abroad, then the rates of exchange for foreign currency must rise.

The fundamental error with this theory is that it completely forgets that the amount of imports and exports depends, first of all, on prices. People do not import or export on the basis of a whim or from any “pleasure” just from doing business. They do so in order to make money from differences between prices, and that importing or exporting will continue until those price differentials have disappeared.

This theory overlooks the significance of prices in the international movement of goods. It incorrectly looks at the act of paying for goods rather than seeing the reason for the act of exchange. This is the consequence of that pseudocurrency doctrine which insists on looking at money only as a means of payment, and not as a general medium of exchange, a doctrine that has borne the most disastrous fruits for economic science, as well as for economic policy.

The buyer does not start worrying about how he will obtain the foreign currency to cover the cost of his transactions only when the payment comes due. A buyer who acts in this way will not be able to continue in business for very long. In his calculations, the buyer gives very careful consideration to currency relationships since he must always keep his eye on his selling price; whether he takes advantage of methods for insuring against changes in foreign exchange rates or bears the risk himself, he always keeps in mind expected fluctuations in the foreign exchange rate. The same thing applies also, mutatis mutandis, for those involved in the international travel and freight business.

For five years, government policy with respect to currency devaluation has been constructed on incorrect ideas concerning its cause. It is no wonder that this policy has completely failed. Domestic price controls have had no success. In spite of all the official countermeasures, the prices of all goods and services have been continuously rising. Likewise, the attempts to stabilize the rates of foreign exchange by preventing foreign currency dealings and to improve the balance of payments by limiting imports have led nowhere.

The official foreign currency regulations are not only useless; they are, in fact, directly harmful. For example, exporters are burdened with the obligation to sell their foreign exchange earnings to the central currency office at a price set below the day’s actual rate of exchange (for the central currency office’s rates of exchange always lag behind the actual rate). The currency office then sells that foreign currency to importers, again below the day’s actual exchange rate, so they can pay for those imports that the government wishes to promote.

The obligation imposed upon the exporters [to sell export earnings to the central currency office] hinders the exporting of goods; it works exactly like an export duty. Its effect is to reduce the total amount of exports and thereby to reduce the amount of foreign currency that is available to pay for imports. No other foreign exchange policy is so clearly harmful as this one. This interference with exports also interferes with the importing of the goods that the government wishes to promote. The importer, of course, appears to enjoy an apparent advantage because foreign currency is sold to him more cheaply than at the actual rate of exchange. But the total amount of foreign currency at his disposal to cover all import transactions is less by the corresponding amount by which exports have been reduced, and thus the total value of all imports is less than it might have been.

No less harmful is the requirement to sell exported goods only in exchange for foreign currency. That our exporters are forced to refuse payment in Austrian crowns from foreign buyers has a severely negative effect on the standing of our currency on the foreign exchange market. What are foreigners to think about a currency that the citizens of the country in which that currency circulates are not allowed to accept payment in by order of their own government?

The decline in the value of our currency cannot be stopped by monetary regulations. When the central currency office was set up, the Swiss franc in Zurich stood at 152 crowns; today it stands at 1,215 crowns! We must finally realize that the rise in the prices of goods and in the rate of foreign exchange for the crown will come to a halt only if the state renounces any further use of the monetary printing press by reestablishing balance in the national budget. The problem of putting the national budget in order is the most important problem in our economy. It is high time that it be solved. Otherwise, one day our currency will reach the point that the French assignats came to, namely, a monetary value of absolute zero.4 For our urban population that would be a catastrophe the extent of which one can hardly imagine.

CHAPTER 15

For the Reintroduction of Normal Stock Market Practices in Foreign Exchange Dealings1

Increasingly, goods are offered for sale with the stipulation that payments will be accepted only in foreign currency. Already a significant part of wholesale business and real estate transactions are being facilitated through the use of foreign money. The crown is starting to lose its standing even in retail business. It is clear what it would mean if this process were not halted as soon as possible. The decrees that our official economic policy makers love to implement have clearly achieved nothing. They have learned nothing other than to introduce prohibitions and commands.

Anyone nowadays purchasing either finished or unfinished goods from abroad on credit—even short-term credit—in order to sell them on the domestic market, runs a high risk of suffering a loss and a low probability of making a profit due to uncertainties on the foreign exchange market. Since 1914 many companies have sold goods for crowns that they bought with credit from abroad at the rate of foreign exchange that was then prevailing on the market. Great losses have been suffered on these transactions due to the progressive devaluation of our money.2 Today such experiences have made importers more cautious and no longer willing to engage in similar transactions. Of course, during the war the state persistently speculated in crowns, à la hausse,3 buying on credit foodstuffs and other goods from abroad and then selling them at home for crowns. It lost enormous sums at the time, and it still continues with the same policy today.

It is not the case that every merchant and industrialist speculates in attractive but risky foreign currency dealings. The businessman concerned with trade or manufacturing rightly fears that currency fluctuations will result in his losing everything his business brings him, and even more. But if he wishes to eliminate the unfavorable repercussions on his business enterprise due to foreign currency fluctuations, he has no choice other than to sell for foreign currency at home the goods he obtained from abroad, rather than accept payment in the domestic currency. The solution that is available in other countries with fluctuating foreign exchange rates is to “find cover” on the futures market. But this is not possible in Vienna because trading in foreign currency and foreign exchange has been abolished.

The only way to eliminate the dangers from exchange rate fluctuations caused by the existing regulations is to decontrol the trade in foreign exchange. The Foreign Exchange Agency4 must be suspended, and a real and proper stock market for futures transactions, as well as cash transactions in foreign currency and foreign exchange, must be reintroduced. It has been repeatedly and convincingly demonstrated in the court of public opinion that the foreign-currency policy that we have been following for years is misguided, and that restrictions on foreign-exchange transactions only produce outcomes the opposite of what was intended. If they are, nevertheless, maintained with great stubbornness, this can be solely attributed to the fact that they harmoniously fit into our whole current system of economic policies; it is feared that their elimination would constitute the first step toward dismantling the wartime and transitional economy leading to socialism.5

The introduction of a futures market in foreign exchange, however, is also particularly important for a second reason. A country like German-Austria6 that must import the greater part of its required supply of foodstuffs and raw materials can economically survive only if it exports industrial products. Right now, however, all those countries that can be considered as markets for our exports have currencies that are fluctuating in value. The entrepreneur who buys raw materials and semifabricated products from abroad in order to then sell his finished product abroad must be able to “protect” himself in terms of the foreign exchange in which he makes purchases as well as in the foreign exchange in which he makes sales.

Vienna has become an important trading center since the collapse of the old Austro-Hungarian state. All the governmental chicaneries have not been able to completely prevent this development. The principal competitors of Vienna—Budapest, Trieste, Lemberg, and all the formerly Russian cities—have been paralyzed by present conditions;7 and, on the other hand, there is a need, more than ever before, for an intermediary in the trade between the newly created national states.8 Today Vienna is really the place where East and West meet in order to exchange their goods; Vienna’s foreign currency and foreign exchange business is one of the most important in Europe.

Vienna suffers, however, under incomprehensible governmental burdens; due to these government restrictions, the business of dealing in foreign currency and foreign exchange has been taken out of the hands of the banks and shifted into those of a more dubious character.9 If the foreign exchange market were decontrolled it would again be taken up by the banks and on the stock market under the supervision of the public, and it would develop into an important factor for our mercantile and industrial organizations.

It will be argued against this suggestion that some other countries also pursue a policy similar to our own. Hardly anyone will dare to maintain that they have had any greater success with it than have we. The Czechoslovakians, if they continue on this path, will run their currency into the ground just exactly as we have done. Today, however, we are the nearest to the complete devaluation of our money, to the null-point of the currency’s value.10 Hence, we must also be the first to seize measures to avoid the catastrophe.

Of course, it goes without saying that all measures will clearly be of no avail so long as the inflation continues, so long as new notes continue to be pumped into circulation.

CHAPTER 16

On Carl Menger’s Eightieth Birthday1

Scientific development does not take place in a simultaneous and uninterrupted ascent; periods of great achievement are followed by periods of intellectual exhaustion; the masters are followed by the imitators, until men of genius again bring forth a new flowering. Around the middle of the nineteenth century economics had unquestionably reached a point of stagnation. The Classical system was felt to be unsatisfactory, but there was no way to go beyond it. In order to formulate the problems that needed to be solved there was a need for men who were not inferior to David Ricardo.2 Even John Stuart Mill, the most original of the economists of that time, was not the man for this task.3

The Frenchman Jules Dupuit4 and the Prussian assessor Hermann Gossen5 tried to follow the path that had to be traveled. Without being aware of these earlier writings (which had been forgotten), Carl Menger in Austria,6 Jevons in England,7 and Leon Walras in Switzerland8 each independently came forward around 1871. Their works show a remarkable agreement in all of the fundamentals.

Most exciting, however, is the grounding of the general theory of value on the basic idea of the subjective value of goods, as worked out by Menger. Menger’s slim volume Grundsätze der Volkswirtshaftslehre completely revolutionized economic science.9 Everything that has been achieved since then is built upon Menger’s works. In Austria, marginal utility theory found its most important representatives, besides Menger, in the contributions of Friedrich von Wieser10 and Eugen von Böhm-Bawerk (who departed from us at much too early an age).11 It is customary to unite these three under the designation “the Austrian School.” Under this name they gained a worldwide reputation. In Germany they were able to find some minimal recognition; their success was incomparably greater in England, Italy, the Netherlands, and the Scandinavian countries. Modern American economics is based on the works of the “Austrian School.”12

In 1883 Menger published his Untersuchungen über die Methode der Socialwissenschaften und der Politischen Oekonomie insbesondere.13 With this book, which was primarily intended as a critique of the relativism and historicism14 then reigning in Germany, he developed new approaches to the logic and epistemology of the social sciences. At first this, too, was little noticed; more than twenty years passed before its importance was fully recognized. Recent methodological works are definitely under the influence of this book.

Menger was not a prolific writer. In terms of quantity his publications take up only a little space. Moreover, he seldom took up his pen to contribute to the clarification of contemporary economic problems. Of the questions of the day, the currency problem attracted him most. His little treatise about the Austrian currency problem15 and his expositions at the Currency Inquiry of 1892 decisively influenced the reform of the Austrian monetary system. He also repeatedly dealt with the fundamental aspects of the theory of money, especially in his classic contribution to the Handwörterbuch der Staatswissenschaften.16

As already mentioned, Menger’s works were not appreciated for a long time; only later were they fully appreciated, as their reputation grew from year to year. Without exaggeration, it can be said today that the Austrian School of economics occupies a permanent place in the history of the social sciences. Carl Menger can look back on his life’s work with pride and satisfaction.17 May it yet be granted to him to bring to completion the great works with which he is still occupied.

CHAPTER 17

How Can Austria Be Saved?

An Economic Policy Program for Austria1

In spite of the wretched condition in which we find ourselves I consider our situation not to be an unfavorable one. Vienna and Austria would have a positive future ahead of them if we didn’t do everything to worsen our own situation. What is occurring is practically the opposite of what needs to be done. It is no wonder, therefore, that things are going badly for us. We are living today, and have been living for years, by devouring what several previous decades of freer economic policy had produced.

What makes me optimistic is the fact that, on the whole, in comparison to the prewar period, the raw materials and foodstuffs that we import from abroad have risen less in world-market price than the manufactured goods that we would be in a position to produce for export, and less than the commercial profits which Viennese business can generate. Indeed, our earnings from the sale of finished goods could be greater than they were in that earlier period.

The objective prerequisites for a flowering of Austria are given; unfortunately the subjective ones are not. Our fellow citizens have not grasped the realities of the moment and instead they chase after illusionary ideas. But, eventually, reasonableness must prevail.

Just a few days ago a politician asked me to draw up an economic policy program in a few short sentences. Here it is:

1. The progressive devaluation of the crown, which manifests itself in a rise in both the foreign exchange rate and in prices and wages, is a consequence of banknote inflation. It can be brought to a standstill only if we succeed in eliminating the government’s budget deficit.

2. The federal, provincial, and municipal budget deficits principally all spring from the same two sources: the inefficient management of public enterprises and of the food subsidy scheme. The goal should be to transfer the public enterprises into the hands of private businessmen and to dismantle the food subsidies. At the present time the very opposite is happening. The public enterprises are being expanded through nationalization; and the food subsidy scheme is being expanded, as represented by the fact that the difference between the buying price and the selling price for foodstuffs is being allowed to grow.2

3. If things continue to be managed in this way, then inevitably the time will come when the currency will collapse, that is, the crown will become completely worthless. Then there will be a frightful catastrophe. Suddenly the country will no longer be in a position to maintain these public enterprises or to sustain the food subsidies. If dismantling both of these occurs in time, then it will be possible to avoid such a collapse, and it will be possible to reduce the difficulties in making the transition to a normal economy.

4.The attempt must be made to stabilize the value of the currency with the establishment of a fixed rate of exchange between the crown and either gold or the dollar. The new parity should be set at a level which corresponds to the domestic purchasing power of the crown. To go beyond this parity would be injurious to the economy; any further rise in the foreign exchange value of the currency beyond this point would only hamper exports and stimulate imports, with severely harmful consequences, that is, unemployment. The catchphrase of a fall in prices is absurd. Those who are today most loudly demanding a reduction in prices would be hardest hit by such a fall in prices. We do not need decreasing prices, but incomes that are increasing. That, however, can only be achieved by a rise in industrial and business activity.

5. The peace treaty requires that the banknotes in circulation mustbe replaced with a new monetary unit within the foreseeable future. It would be unwise to associate this change in media of exchange with any activities associated with the slogans “stamping”3 and “compulsory loans.”4 The danger exists that the great mass of hoarded banknotes will be shaken loose from people’s pockets and will flow into the market for goods, where they would necessarily drive up prices. Banknotes that are hoarded are not harmful to the general public. Hoarded bank-notes do not affect prices. He who hoards banknotes grants the state an interest-free loan, so to speak.

6.Currency trading is to be decontrolled. Foreign trade has an incomparably greater importance for a small country [like Austria] than for a large one. Businesses should have the chance to free themselves from some of the speculative risks that are connected with foreign trade when there are large fluctuations in the values of currencies. A futures market in currencies and foreign exchange must be permitted on the Viennese stock exchange.

7.All import prohibitions are to be lifted. Such prohibitions are worthless for purposes of monetary policy. Moreover, they stimulate retaliatory measures by foreign countries, which only succeed in seriously hampering our exports and as a consequence paralyze our industry.

8.All impediments to exportation and transit are to be removed.

9. Austria can cover its need for raw materials and foodstuffs only by importing them. In order to pay for imports it must export finished products, on the basis of which businesses may earn profits. Austria needs free trade.

10. Government oversight of industrial production of manufactured goods and the use of raw materials is to be ended.

11.The government management of food supplies is to be abolished. For the indigent who are incapable of working, government financial support is to be introduced. This would cost incomparably less.

12.All obstacles to traffic within the Austrian federation are to be removed. If the provinces should resist, then nothing stands in the way of Vienna going first with lifting all entry and residency restrictions for citizens and foreigners. A city based on commerce and trade should not impede entry and the sojourning of visitors in any way.5

13.The prohibition against the importing and exporting of crowns from the country should be ended. It is only an illusion that such prohibitions succeed in raising the foreign exchange value of the crown. In reality it has depressed the crown’s exchange rate since foreign speculators no longer want to have anything to do with the crown. Besides, it does not matter if rather large amounts of crowns are purchased abroad for speculative purposes. Every request for crowns, even one for speculation, drives the exchange rate up.

14.The Central Foreign Exchange Office, the Central Office for Import, Export, and Transfers, and all offices that do not appear necessary for the carrying out of the above principles are to be abolished. The officials who are relieved of their duties are to be put on leave and, within a foreseeable time, dismissed. They will easily find a job in a thriving market.

15. It is impossible to attract foreign capital into the country as long as the illusionary profits arising from devaluation of the currency are subject to taxation. Stabilizing the value of the currency will provide the necessary remedy. In order not to waste time, tax breaks should be granted for new industrial plants (and for the extension of water power) based on surpluses on the balance sheet and of income as specified in the second and fourth chapters of the personal tax code; these calculations should be made in terms of dollar values.

I scarcely believe that there is a party in the country today that would be inclined to carry out this program. Nevertheless, I hope that that which is sensible and necessary will prevail.

CHAPTER 18

The Claims of Note Holders upon Liquidation of the Bank1

The notes issued by the Austro-Hungarian Bank from the beginning of the war were only pro forma banknotes; in reality, they were government notes. In order to avoid the unfavorable impression that issuing government notes would have made on the general public, the regime chose not to finance the war with its own notes, as it had done in 1866;2 instead, it inserted the Austro-Hungarian Bank as an intermediary between the issue of notes and the treasury. The notes made available by the Austro-Hungarian Bank to finance government expenditures were backed by nothing more than the various state securities that were the basis upon which the Bank directly and indirectly issued credit to the state.3

The only promise that the holders of these notes had by this procedure was that the state would redeem those securities by withdrawing from circulation a quantity of banknotes representing the equivalent of the value of the loans that had been granted to the state.

That the Bank was inserted as an intermediary into this process more for purposes of outward appearances than for any legitimate reasons was shown by the regulations that aimed at restricting the Bank’s profits from the issuance of these additional banknotes; instead, the proceeds were funneled back into the government treasury. A special tax was imposed on the Austro-Hungarian Bank on December 30, 1917, on top of those peacetime regulations that assured the state a large share of the proceeds from the Bank’s business.

It is clear, therefore, that the holders of the notes issued by the Austro-Hungarian Bank can make no claim against the Bank other than that the legal status of the notes may not be set aside or that the holders of these notes are offered the possibility of converting their notes into a new legal form of payment. To view the holders of the notes as “creditors” of the Bank who can claim a specific amount of metallic money at a fixed rate of exchange would involve a complete misunderstanding of how the current monetary policy developed.

It is true that it is written on the notes of the Austro-Hungarian Bank that the Bank is obliged to pay the bearer in legal metallic money. This wording has been on the notes in use in Austria-Hungary for decades, in spite of the fact that the Bank was exempt from redeeming its notes in metal. It was retained on the new notes issued after August 1, 1914, because of the desire not to change the customary appearance of the bills. Every note holder knew, however, that this promise had no real meaning. It is clear that no one would have thought that any note represented a claim to a specific amount of the gold supply held by the Bank.

If the note holders were to be given something more than what is due them by exchanging their existing notes at their current purchasing power for a new legal means of payment, they would be receiving something that increased the value of those notes above their current purchasing power. For the individual note holder who had acquired them without the expectation of receiving such an extra sum, this would mean nothing less than receiving an unanticipated gift.

There is no doubt, of course, that holders of the notes of the Austro-Hungarian Bank were most severely harmed by the monetary policy of the last few years. With the value of those notes continuously falling during this period, note holders traded them away at a lower purchasing power than when they had acquired them. But this injustice inflicted on note holders over the years cannot be rectified now by giving them an “extra bonus.” Those who hold banknotes in their hands today are not the same people who had been harmed over the years by the constant gradual decline in the value of those notes.

On the contrary, today the banknotes are mainly in the hands of those who constantly gained from the process of currency devaluation, and therefore were in a position to increase their wealth (if not absolutely, then at least comparatively) during this time of general economic decline. Moreover, we must not forget that the damage that currency devaluation inflicted on people was not limited to their ownership of banknotes; besides the note holders, also harmed were those who had claims to lawful money and were therefore hurt by the decline in the rate of foreign exchange. These latter damages were far greater in extent than those that arose from the direct possession of banknotes, for these monetary claims play a far greater role in the modern economy than treasury securities.

Those who were harmed in this way by devaluation would not profit at all by any belated indemnification of present-day holders of banknotes.

Just as little could such a measure benefit those whose losses arose from the fact that, during the gradual overall decline in the purchasing power of the currency, the prices of the goods and services that they sold rose more slowly than the market prices of the goods and services that they found it necessary to buy. For these sectors (for example, public employees who have suffered because their income has not risen at the same speed as prices have increased) there would be no compensation if the supply of notes which they have in their hands were to increase right now.

The entire note-issuing activity of the Bank falls completely outside the framework of the other business that it conducted and represents an independent branch, which was only externally connected with its other activities. Those who accepted the notes of the Austro-Hungarian Bank asked only whether the Bank was more or less sound. They were fully aware that the gold supply of the Austro-Hungarian Bank covered only a vanishingly small part of the notes issued; they nevertheless accepted the notes because they regarded them as the currency in circulation, not because they cherished expectations regarding the assets of the Bank.

From the perspective of the preceding remarks, one can, in general, approve of points 1 to 7, 8, and 11 of Article 206 of the International Treaty of Saint-Germain4 concerning the liquidation of the Austro-Hungarian Bank. The governments of the successor states are required to convert the notes of the Austro-Hungarian Bank that are circulating in their territories into their own currency. The holders of those banknotes issued after October 27, 1918, are granted no other right than a claim to the debenture bonds on deposit with the Bank for the covering of those notes. This corresponds in its practical effects with the principles that were stated above, even if not the precise wording.

One should now expect that the same principles also apply to those banknotes that were in circulation before October 27, 1918. The holders of these notes received absolutely all to which they could make a claim through their conversion into the money of the country in which their notes were in circulation, in accordance with the regulation under point 4. The next step regarding these notes now must be that they are transferred to the Austro-Hungarian Bank by the successor government that took them out of circulation and replaced them in circulation with its own legal currency. Now, as an equivalent of transfer, the securities of the former Austro-Hungarian government that had been left with the Bank as cover for the banknotes that had been issued should be withdrawn and destroyed or refunded. The peace treaty provides for that too in point 4, even though it gives it a different name.

Even if in this way the debt of the former Austro-Hungarian state that arose from the issuing of notes is cancelled, there would still need to be an internal reckoning up among the successor states. This would involve evening out the difference between the amount of the securities represented by the delivery of the notes and the shares of the national debt of the former Austro-Hungarian state they would have to assume on the basis of agreement among each other.5

But no further rights would be granted to the holders of those bank-notes. Their claims against the Bank, as well as against the state that had taken those notes out of their hands and exchanged them for its own new currency, would be completely liquidated.

However, in the peace treaty, Article 206, point 96 has a provision that goes beyond this and grants to the note holders a special claim against the total assets of the Bank—“des droits égaux sur tout l’actif de la banque” [equal rights on all the assets of the Bank]; and, even though it is not said, the governments that have taken the notes out of circulation and then present them to the Reparations Commission appear as actual note holders. The character of the rights granted to the note holders in the form of an extra bonus becomes even clearer in that it is declared that the securities presented and deposited by the former and present governments of Austria and Hungary for the covering of various notes issued are not to be looked upon as components of those assets.

It is clear that the same provision that was intended under point 9 also could have been given to the holders of notes issued up to October 27, 1918; that is, an equal right to the entire assets of the Bank, in addition to a right to a part of the corresponding securities deposited for the coverage of the note issue.

How little the right that is granted under point 9 can be reconciled with the nature of the original claims of the note holders is clearly understood from the character of the notes as currency in circulation. It would have been impossible to award ownership to individual note holders. Any attempt to carry this out could only be done by conceding that same right to the successor state that presented the notes to the Bank. In that form, it turns out to be a sort of “war reparation” that is granted to the successor states—at the expense of the other creditors and the stockholders of the Austro-Hungarian Bank.

But even in this form the assertion of this claim by the note holders is extraordinarily problematic. For the claim they can make against the Bank arising from possession of the notes is, again, nothing more than payment in the form of legal currency. This demand, however, already has been satisfied by the exchange of those notes for the new notes that circulate only in the country where the old notes were being held.

What more these holders of Austro-Hungarian Bank notes should be able to demand in this situation is therefore not at all clear. The other creditors of the Austro-Hungarian Bank—disregarding here the holders of mortgage bonds, whose position is special—have a claim to a specific amount in legal money. These other creditors fall into two categories: first, those whose claims are for Austro-Hungarian Bank notes, for example, those who have giro credits to claim from the Bank.7 They are assigned Bank assets equal to the value of the notes to which they have a claim. It is clear to whom their claim goes.

But if possessors of banknotes that were issued before October 27, 1918, and who fulfill the conditions applying for liquidation according to point 9 of the peace treaty, have an equal right to raise claims against the total assets of the Bank, then it is immediately uncertain how these claims can be reconciled with the other claims that can be made against the Bank, as well. If the Austro-Hungarian Bank only had the creditors classified under point 9, and no others, it would be conceivable that (disregarding the rights of the stockholders) the liquidation could be carried out in such a way that the total assets of the Bank could be distributed in equal portions to the note holders designated under point 9. (And let us speak no further about the blatant injustice and violation this would be to the vested rights of the stockholders.)

But since there are still other creditors who have specific amounts to claim against these assets—namely, those who hold foreign exchange or legal currency of a successor state—this method of distribution is utterly unfeasible; for there is no numerical criterion by which to determine the claims of the note holders relative to those who are foreign exchange creditors of the Bank.

Therefore, if we do not wish to declare point 9 meaningless and unworkable, we can only grant it the meaning that is in conformity with the regulations under Article 206: a specific fund becomes available to distribute among the note holders who meet the conditions for liquidation. In this distribution, the holders of these notes do not compete with any other rightful claims against the Bank. Under the treaty such a fund can refer only to the net assets of the Bank—that is, those assets of the Austro-Hungarian Bank that remain after the settlement of all the other specific quantitative claims have been met.

If point 9 is interpreted in this way, then any difficulty disappears that might result from an alternative interpretation, namely that those who have a quantitatively determinable claim are in equal competition with those who have an aliquot portion to claim.

Regarding the claims that have suddenly been raised by the successor states against the gold stock of the Austro-Hungarian Bank, there is no foundation for it either in the peace treaty or in the older Austrian laws. As defined by the peace treaty, the Republic of Austria alone is entitled to levy any claims against the Bank to which the former Austrian state in association with the Hungarian state were entitled concerning a portion of the Bank’s profits and regarding delivery of that amount of the Bank’s gold stock that represents gold deposits made by the government.

Of course, the regulations under Article 206 could be understood to mean that after the liquidation had been carried out, governments of the successor states that had notes to present to the liquidation commission would be entitled to make those claims against the Bank in proportion to the quantity of notes which the earlier Austrian and Hungarian governments were entitled to make upon the Bank.

However, no basis can be found for this solution to the problem. It would technically be a possible solution, something that cannot be said about the above interpretation concerning the rights of the note holders in relation to liquidation of the Bank. It also would have the consequence that it would leave undamaged the rights of the stockholders, whom the peace treaty certainly did not intend to harm. But even if one wanted to take this viewpoint, the claims which the successor states are currently making against the gold stock of the Bank are by no means justified.

It is unnecessary to mention that enforcement of the regulations under Article 206 requires certain supplementary arrangements with regard to the difficulties of distinguishing between those banknotes that were issued before or after October 27, 1918, and those that were inside or outside the Austro-Hungarian Monarchy on June 15, 1919. However, this is a difficulty of implementation of Article 206 that is independent of the special difficulties arising from the provisions of point 9.

CHAPTER 19

The Austrian Currency Problem Thirty Years Ago and Today1

From March 8 to March 17, 1892, the government-convened Currency Inquiry Commission met in Vienna. The chairman was Finance Minister [Emil] Steinbach;2 beside him stood the memorable Eugen von Böhm-Bawerk3 as section head. Thirty-six experts appeared before the commission to answer five questions that were posed by the government.4 No Austrian was left off the list of participants at the inquiry who had anything of importance to say on currency matters. Along with Carl Menger, the founder of the Austrian School of economics,5 there was Wilhelm von Lucam, the highly honored longtime secretary general of the Austro-Hungarian Bank;6 Moriz Benedikt, the publisher of Neue Freie Presse [New Free Press];7 Theodor Thaussig, the spiritual leader of the Viennese banking world;8 and Theodor Hertzka, the well-known writer on monetary matters and social policy.9 The thick quarto volume that makes up the stenographic minutes of the inquiry remains today a source for the best ideas on all matters relating to monetary policy.

The problem that Austrian financial policy had to solve at that time was, of course, different from the one that we face today. At that time it had been more than a quarter of a century since the treasury’s last recourse to the note-printing press to cover its budget deficit. It had been decades since government paper notes had been issued and put into circulation, and the banknotes issued by the Austro-Hungarian Bank served strictly commercial purposes. A progressive devaluation of the currency was not the problem giving impetus for a new reform of the currency; instead the problem was a progressive increase in the value of the currency. The price for 100 gold guldens (250 gold francs) came to:

Reform was being demanded in order to put an end to any further increase in the value of the Austrian currency. That was not difficult. To prevent any further decline in the foreign exchange rate on the Viennese stock market it was sufficient to bring the paper florin into a legally fixed relationship with gold, and to oblige the Austro-Hungarian Bank to exchange its notes for any quantity of gold at this fixed rate. Legislation sanctioned this method. After August 11, 1892, the day when the currency law went into effect, the value of the Austrian florin (2 crowns according to the new denomination) essentially could not rise above the value of 2 francs, 10 centimes or 1 mark, 70.1 pfennig. A limit on any upward movement of the foreign exchange rate was implemented only some years later with the introduction of specie payments as part of the foreign exchange policy of the Austro-Hungarian Bank. From that moment, Austria-Hungary had a gold (or gold-“core”) standard—a “gold exchange standard”—similar to the one already in place in British India and many other countries, and one in accordance with the ideas developed by David Ricardo10 in his work “Proposals for an Economical and Secure Currency.”11

Today there are a great many difficulties for us to overcome before we can achieve a well-ordered currency situation. First of all, national budget deficits must be eliminated, or at least care must be taken to see to it that budgetary shortfalls are not covered through use of the note-printing press. Only then will it be possible to think about solving the currency problem. Any other procedure would inevitably result in failure. The experiences of the last several years certainly should have convinced even the most zealous policy proponents of artificially stabilized rates of exchange that all such attempts are completely futile.12

In 1892, the adherents of the light florin and the proponents of the heavy florin stood in opposition to each other. The former wanted to decrease the value of the currency before exchange rate stabilization, while the latter wanted to raise it. Moriz Benedikt, who, through the accident of the alphabet, was the second speaker to take the floor in the first session of the Inquiry Commission, rejected both proposals. “The best exchange rate after its public announcement will be the one that exerts the smallest influence on the current economic situation. The exchange rate, therefore, should be the one that comes closest to the actual conditions prevailing on the market.”

Carl Menger, the most distinguished among the members of the commission, endorsed this opinion. Menger stated that, with some reservations, he was in favor of the exchange rate at the moment of stabilization. Richard Lieben,13 also, was very decidedly in favor of the exchange rate existing at the moment of implementation. The arguments upon which these three men gave their viewpoints are today still worth reading and taking into consideration.

Just like today, many raised the question at the time whether there might not be an outflow of gold due to the unfavorable balance of payments. It was thought that Austria, as a country with foreign debts, would not be able to keep its currency system in order for very long. None of the questions that the government put before the commission directly made reference to this question. Yet hardly any expert failed to address it. Of all the issues that were treated in the sessions of the commission, this one has the greatest importance for the present. Even if the concrete situation of today may be quite different from that of that earlier time, the fundamental solution of the problem remains the same under the conditions prevailing in the new Austria. An unfavorable balance of payments does not push up the rate of exchange for foreign money; instead, it is the effect of those interrelationships described by Gresham’s well-known law.14 Nothing other than inflation can endanger the stability of the value of money.

If the world had not departed from the principles followed by Bamberger,15 Michaelis,16 and Soetbeer17 in the creation of the German gold standard, and if it had taken to heart the teachings presented in the arguments of the Austrian Currency Inquiry Commission, the monetary system would look a lot different today. The great monetary chaos through which we are passing confirms anew the correctness of the teachings of the pioneers of “sound currency” and shows where inflationism has to lead.

CHAPTER 20

The Restoration of Austria’s Economic Situation1

The current economic situation is the most dangerous facing the Austrian state and its people since the crisis began with the overthrow and economic partition of the former Austro-Hungarian Monarchy. The possibility for an immediate catastrophe confronts us. The continued depreciation of the Austrian crown destroys all prospects for reestablishing the state budget until a new bank of issue has been founded. It is not an improbable assumption that the state will be compelled to suspend all payments once it has become impossible to increase the circulation of banknotes—a possibility that entails almost unthinkable social consequences.

In this perilous situation, the Vienna Chamber of Commerce deems it necessary to make an appeal to the lawfully qualified representatives of Austrian economic life—the Chambers of Commerce and the Boards of Workers and Employees—to cooperate in working out, on a purely economic basis and free from all party influences, a program that can tide us over the current situation without a social collapse. We must not allow ourselves to once again design a plan for economic reconstruction that is founded primarily on catchwords and purely party points of view, and which is taken to be “the only one possible” due to a lack of necessary preparation and adequate counter-proposals. To the contrary, the political parties should be compelled to acquire a full mastery of the perspectives of the economically productive classes—both workers and employers, equally.

In what follows, we propose to outline the foundations for such a program for the transition period. Our sole aim is to point out the essentials for a discussion. We do not wish to assert that our ideas are the only correct or authoritative ones. Indeed, the discovery of the latter will be the purpose of the discussions.

Above all, no further time should be lost in discussing whether or not the Austrian state can have a viable independent existence; all discussion of this subject must remain academic. Only a long period of experience under normal conditions of economic life can provide an answer to this question. Similarly, pointing to the current idleness of our industry proves nothing about the viability of Austria, insomuch as this idleness can be brought to an end through appropriate shifts in production and reallocations of the workforce. A private enterprise may show a deficit for several consecutive years without proving its inability to survive. Only if a cure for the problem is impossible would there be such a proof. For the present, therefore, valuable time should not be wasted on this question.

Our point of view is a purely practical one. The greater part of the state’s expenditures automatically increase on the basis of a cost-of-living index number. If the expenditures of the state are regulated by an index number, its receipts must be similarly regulated. In other words, the state must obtain a large proportion of its receipts in terms of a stable medium of exchange that is independent of the crown. Gold is such a medium. Receipts in gold, therefore, must be obtained in order to cover the given expenditures that are determined by this index number.

The railroads and the postal and telegraph services could be the first to supply receipts in gold. The charges for these state enterprises would be fixed in gold, and the equivalent in paper crowns calculated on the basis of the rate of exchange that is published weekly. It must be pointed out that the present tariffs for these services are far below their prewar level (calculated in gold); therefore, the entire transition to the new postwar level could only be brought about gradually over about a year’s time.

Considerable reductions in transport charges would have to be granted for the shipment of foodstuffs, essential raw materials, and coal. Also, efforts should be undertaken to alter those provisions in the peace treaty that require the same rates to be charged for foreign goods in transit as those charged for goods destined for Austria. It is entirely unjust that Austria, as a leading transit country, should have to renounce all profits we might earn from the transport of coal and foodstuffs through our country.

If receipts from the railways and the postal and telegraph services were in gold, then the wages and salaries of the workmen and employees in these enterprises would no longer be paid on the basis of the current index number system; they too would be calculated in amounts of gold. For the present, these wages and salaries could not be as high as in the prewar period; nevertheless, it would guarantee to the employees a more acceptable standard of living than the current paper money payments, which only exercise a corrupting influence and undermine the spirit of sound administration. At the same time, thought must be given to bringing the number of workmen and employees in these enterprises down to their prewar levels, and wherever possible to reduce it even further.

The purpose of these measures is to prevent bankruptcy of the state’s essential means of communication, the collapse of which would mean catastrophe. Of course, it would be necessary to bind the state by law to use all such receipts for the maintenance of these transportation and communication enterprises, and for the paying of salaries of all those employed by them.

Furthermore, the prices of all articles sold by state monopolies must be fixed in gold, especially tobacco, which is a nonessential luxury.

On the other hand, all taxes that yield low returns and entail high administrative expenditures should be abolished. The number of taxes must be decreased, the tax collection system simplified, and the yield from individual taxes increased as far as possible.

An important cause behind the idleness of our industry is admittedly the excessive importation of alcoholic beverages; we are powerless to prevent this, since we are forced to import them by neighboring states—especially Hungary and Italy—that otherwise would not have concluded commercial treaties with us. If, then, we cannot significantly reduce their importation by prohibitions or restrictions, we can at least obtain a source of gold for the state by imposing a consumption tax on these luxury items, payable in gold.

In all countries, customs duties constitute an important source of gold receipts for the state. Efforts should be made, therefore, for an early introduction of the new tariff system that has already been drawn up. However, it must be borne in mind from the start that Austria’s future depends on free trade, and provision should be made for the gradual abolition of the whole system of import duties.

It must not be forgotten, of course, that the result of such a general increase in government revenues will be to place a horribly heavy cost on all social classes, and inevitably there will occur a very noticeable stagnation. Undoubtedly, many financially insecure enterprises will be ruined by this additional tax burden. It must be kept in mind, however, that any recovery of the Austrian economy cannot be successful without sacrifice; there are many enterprises that came into existence in the last few years that do not possess the necessary capital to survive under normal conditions. Furthermore, there are many recently founded enterprises in Austria whose existence is entirely due to the situation created by the depreciation of the currency and the general economic decline. All these enterprises will have to be sacrificed as part of the recovery process. It is quite impossible to save them. There need be no doubt, however, that the vigorous spirit of enterprise among the people who control such enterprises will find other fields of activity more conducive to the public good.

So far, we have primarily considered the question of getting the revenues of the state on a proper footing. Now we will make a few proposals for fighting the general poverty of the country. The impoverishment of the Austrian economy has been brought about primarily by the delusion that the crown possesses a stable value. This created erroneous ideas about how to evaluate the rise in prices under the current system of price controls. It has resulted in the greater part of Austria’s savings and industrial capital being eaten up in the course of the last few years. Price controls are inconsistent with liberal economic principles; however, they are not unbearable under a stable currency.

No respectable businessman desires to earn profits that are “usurious.” It would not be necessary to entirely abandon the system of price controls as long as sale prices are calculated in gold. The clearly false assumption that the crown is of stable value must be eliminated in the implementation of the law. It is a mistake to think that the consumption of capital is harmful only for the owners of capital. It constitutes a far greater injury for the society as a whole. The capital within a country, regardless of who the owners are, earns interest, provides work, and enriches industry. A law that necessarily results in the consumption of capital is antisocial to the highest degree and, as present conditions in Austrian industry show, causes unemployment, indebtedness, and scarcity. It must be strongly demanded, therefore, that the basis for calculating sale prices should be the value of those goods in terms of gold.

But it is not only the price increases permitted under price controls that is the problem; it is also the problem of economic calculation in general with a depreciating paper money. Such calculations make it appear that profits are earned when in fact capital losses are experienced. It exhausts the working capital in the country, and harms our foreign trade. Moreover, due to these false calculations, we suffer from the full force of antidumping regulations. The full extent of the harm done by these false economic calculations may be deduced from the fact that hardly any merchant is in the position to fill warehouses to the usual extent; nearly all warehouses today are but a vestige of their prewar circumstances. Currently, nearly every merchant and every industrial enterprise is obliged to resort to bank loans in order to carry on business. Many industries are forced to limit their output, not owing to lack of orders, but due to a lack of capital.2

On the other hand, the loan market represents a continual source of losses to the banks.

Even the highest rate of interest cannot make good the loss incurred through currency depreciation. The banks are certainly heavily hit by the currency depreciation. Their capital resources have in general been overestimated. All large enterprises, therefore, find it difficult to raise sufficient funds to maintain their capital. Loans must be allowed to be calculated in terms of gold, also, so that the real cost of capital may be more correctly estimated. And interest must be calculated in gold as well, to enable banks to earn a sufficient sum to gain back what they have lent and have the incentive to extend and continue lending to profitable enterprises.

A measure that would considerably contribute toward decreasing general social unrest would be to fix wages concluded in collective bargaining contracts in terms of gold; both employer and employee would have a more secure basis for economic calculation. Of course, even under this arrangement, the prewar level of wages will not be possible. For Austria, the wage standard should be that in neighboring competitive countries (the successor states and Germany).

English and American wage standards cannot be used as a basis of comparison. Wages in Austria that are calculated in gold will be lower because her goods are produced from raw materials and coal that are more costly to procure than in other places; moreover, Austria’s goods encounter high customs barriers in the areas to which it exports. The conditions of production in the new Austria are not as favorable as in the old state, and even then they were always more unfavorable than in other countries. If Austrian goods are to be able to compete abroad, wages calculated in gold will remain relatively far below their prewar level. Nevertheless, such a system of calculation on the basis of gold will be a considerable advance for both workmen and employers.

In order to prevent the hoarding of foreign securities and bills of exchange, for which there is presently an enormous demand in Austria and which results in a steady increase in their value, it is imperative that the Austrian Bank issue a banknote valued in gold. The bank will have to ensure the uninterrupted maintenance of the gold value of this note, and it must be accepted by the government as well as everyone in the country as being equivalent to gold. A necessary condition for this, of course, is for the state to have no influence whatsoever over the bank of issue.

The foregoing is a brief and of course incomplete outline of a transitional plan. Its main purpose is not to save the crown—that is impossible—but to initiate a new policy on a solid foundation. It has the further advantage of enabling the essential government departments and their staffs to get over this time of crisis, and, in time, of reestablishing the state’s budget on a solid gold basis. When this is achieved, it will be seen that Austria’s public debt is not so formidable after all. And the administrative machinery of the state, not being encumbered by armament expenditures, perhaps can rest on a more solid foundation than other countries that are considered to be far wealthier.

Compulsory measures, such as government controls on bills of exchange and securities, import and export prohibitions, and so on, have been purposely left out of the plan. Experience shows that all forms of government control are detrimental, and are wholly incapable of preventing unfavorable developments. The first consequence of government compulsory measures is corruption, which is prejudicial to the authority of the state.

It is a fact that the power of our government is but slight, and scarcely makes itself felt outside Vienna. The government only discredits itself by introducing compulsory measures, the enforcement of which requires a powerful government machine. The recent reimplementation of government regulation over bills of exchange has clearly shown how futile such attempts must always remain. The supply of foreign securities and bills of exchange has now entirely ceased. Austrian owners of foreign securities avoid putting them on the market as best they can; and businessmen who can dispose of foreign money keep it out of Austria for as long as possible.

Furthermore, in more remote districts the government’s compulsory measures are entirely ignored. Experience amply shows that, for the time being, no positive results can be expected in Austria from compulsory measures. A return to a well-founded administrative policy, capable of inspiring confidence, will do more to improve the situation than any legislation or threats of punishment, however severe they may be. We must make up our minds to return from the extravagant intoxication of spending “billions” to the sober, more modest financial figures of a smaller state. The object of the proposed plan is to avoid a sudden and disastrous collapse.

CHAPTER 21

The Austrian Problem1

In his recently published book The Suicide of a Nation, Dr. Siegfried Strakosch undertakes a thorough investigation of the problems facing the Austrian economy. Dr. Strakosch, who is active in industry and agriculture, and who, as a writer on agricultural policy, has earned a reputation that extends far beyond the borders of the German-speaking world, is more qualified than almost anyone else to deal with this difficult and complicated question.2 He untangles the problem as best it is possible to do today. Those who come later will be able to gather more material and include many more details; but they will not be able to surpass him in his grasp of the deeper connections and his understanding of the basic problem.

Austria is suffering from a fundamental problem: the dominance of socialist ideas in the country. The rule of the Social Democratic Party is unrestrained even though it does not have a majority among the population or in parliament; formally it is in the opposition. “The bourgeois parties stand fragmented and weak against the Social Democrats, unable to draw any advantage from their impressive numerical superiority,” Strakosch points out. The Social Democrats rule because they have armed forces behind them, and because at every moment they can impose their will upon the populace by shutting down the transport facilities and the power stations. As long as their unbroken dominance continues, every attempt to put the country back on its feet must fail.

The national budget cannot be balanced if the numerous public enterprises are not closed; with their billions in deficits, they frustrate every attempt to put the public budget in order. Yet the Social Democrats do not allow the railroads, the tobacco factories, any of the municipal enterprises, or the cooperative institutions to be handed over to the private sector. The eight-hour day cannot be touched, even though it is clear that Austrian industry cannot become competitive as long as it remains in effect.

All that the economic policy of the socialist parties achieves is the taxing away of capital, which is converted into consumer goods and therefore eaten up. The only remedy recommended by the “fiscal policy” of the Social Democrats is the confiscation of physical wealth of all sorts, as well as the confiscation of currency, foreign credits, and securities. Consume and destroy, that is the final end to their wisdom. “We hand out not only the people’s income, but far more,” says Strakosch. “We consume not only income but wealth. What is falsely represented to us as national income, is only the smaller part of national income; the greater part is destroyed productive capital, the legacy of more industrious and less demanding times.”

The demagogue thinks only about today, and not about the future. Almost forty years ago René Stourm, the historian of the French Revolution, masterfully characterized the principles behind the fiscal policy of the Jacobins.

One cannot read Stourm’s description of capital levies and forced loans, of measures against the stock market and against currency speculation, of regulations concerning profiteering and food rationing without thinking of the policy that Austria has been practicing to its own detriment for ten years now. The dismal picture that Strakosch sketches is, unfortunately, only too true.

CHAPTER 22

The Gold-Exchange Standard1

The Bismarck-Bamberger coinage reform of 1871-73 put an end to the fragmentation of the German currency and at the same time shifted the German currency system from one based on silver to one based on gold. The idea behind it was the view that in everyday commercial transactions wider scope needed to be assigned to the use of gold coins.

The practice in England served as a model. In Germany things were never carried as far as in England, where all banknote denominations under five pounds were suppressed. Nevertheless, all regulations concerning banknote denominations and German Imperial Treasury certificates were clearly based on the idea that paper-money substitutes did not belong in the hands of the farmer, the worker, the craftsman, and the subordinate. It was considered an important task of the new German imperial monetary policy to “satisfy” the demand for gold, for which a not inconsiderable material sacrifice was made.

German sales of silver [to buy the gold needed to back the currency under the reform] were the impetus if not the primary cause for the decline in the price of silver. This, and the fact that the action of Imperial Germany decided the controversy over the currency question in favor of gold, compelled India also to shift from the silver standard to the gold standard in the last decade of the nineteenth century.

The Indian government was not inclined to follow the German example in the technical details of carrying out the currency reform. Neither did the Indian government want to bear the great financial sacrifice that supplying the economy with a large stock of gold would entail, including the selling off of a large amount of silver at what likely would be a falling price. It did not want to force the Indian population to give up the ancient, inherited use of silver money and accept unaccustomed gold money.

But above all else, it feared the reaction that such policy measures would have on the movement of international gold prices. Such large purchases of gold to cover Indian financial requirements would have driven the price of gold significantly higher and exacerbated the general decline in the prices of goods. In the first half of the 1890s, this decline in prices was still, at this time, the leading concern of statesmen in all the countries of the world.

Instead, India seized upon the expedient of having a gold standard without creating a circulation of gold in domestic transactions. The free coinage of silver was suspended; and after the accumulation of a currency reserve fund, the silver rupee was converted into a sort of silver banknote. Rupees were exchanged for gold and gold for rupees at a fixed rate. Thus the rupee was brought into a fixed relation to gold; if previously it had been the unit of a silver currency system, it now became a money substitute for a gold standard. The monetary policy goal behind the Indian currency reform was achieved.2

In the last decades before the war, the currency question was resolved in a whole series of Asian and American silver- and paper-currency countries in a way similar to the reform in India. This new system also found its way into Europe. For example, Austria-Hungary began to create a gold standard following the German model without the actual circulation of gold. What was finally achieved—from around 1900—was a gold standard without gold in circulation.

David Ricardo3 was the intellectual father of this new system, which bears the name “the gold-exchange standard,” or the gold-“core” currency. In a paper that was published in 1816 under the title “Proposals for an Economical and Secure Currency,” he recommended a metallic currency as the best and least costly currency system—a currency based on a noble metal (gold or silver)—but without the noble metal in actual circulation.4 In a conscious imitation of Ricardo’s forgotten proposals, Lindsey and Probyn recommended the gold-core standard as the best way out of India’s currency difficulty.

The advantage offered by the gold-core standard, and what has made it attractive to finance ministers, is to be exclusively found in the fact that it reduces the higher costs connected with the actual use of gold in daily monetary transactions. Since this reduces the need for gold, the gold-core currency must be considered responsible for the fall in the price of gold, that is, for the general increase in the prices of goods.

As was mentioned earlier, the economizing on the use of gold was considered a singular advantage to the system. Perhaps if this causal connection between the lower demand for gold and the general rise in prices was clearly recognized, people would be more inclined to see it as a disadvantage.

The gold-core currency, however, is now practiced in such a way that a part of the currency reserve, and in many countries the entire reserve, is held as claims to gold in a gold-standard country in the form of gold-backed foreign exchange—and not in the form of actual gold (ingot or coins) in the domestic economy. The benefit from investing the reserve currency in this way is clear: the gold-backed foreign exchange earns interest, while the stock of gold lies “unproductively” in the vaults of the national central bank.

The gold-core standard, however, has reached a critical turning point with this arrangement. It is clear, of course, that the investment of currency reserve funds in gold-backed foreign exchange cannot become the general norm for all the countries of the world. At least one country must remain on an actual gold standard of the old type, or at least retain a gold-core standard with real metal, otherwise there would remain no place in the world where gold was used as a monetary metal.

After the great inflationary episode of the last several years, all the countries of the world have or are trying to put their monetary systems back in order on the basis of a gold-core standard with currency reserves invested in gold-backed foreign exchange. This can happen only for as long as a few countries are willing to absorb all this gold, especially the United States of America. It is doubtful, however, that in the long run the United States will be willing to bear this heavy burden.

It is highly unlikely that the United States will seriously give a hearing to the proposals recommending that country “break away” from gold and shift to an Indian-type currency. The serious drawbacks that speak against the occasional proposals of Irving Fisher and John Maynard Keynes are too great.5 However, the demand might be made that at least the richer and economically more powerful states of the world should either move back from the gold-core standard to the gold standard with actual gold in circulation, or at least commit themselves to the holding of a certain actual gold reserve.

The problems brought about by the recent development of the gold-core standard so far have been treated in a stepmother-like fashion in the economics literature. Up to now, and especially in Germany and Austria, the gold-core standard has not been given the attention which it deserves; probably there are many for whom it is not clear that Germany’s new currency is also a gold-core currency. There still prevail in public opinion many misunderstandings about the gold-core standard that have been spread through the writings of Heyn and Knapp.6

For this reason, we welcome with particular satisfaction the fact that Dr. Fritz Machlup7 has undertaken to explain the gold-core standard in a monograph.8 Especially to be appreciated is an appendix with Ricardo’s currency proposal of 1816 translated and made available for the first time in the German language. In various particulars and even in many fundamental questions one may be of a different opinion than those of the thoroughly expert and well-read author of this monograph.

One cannot contest, however, that we have here a sound work that deals with the whole sphere of problems in a comprehensive way, which covers the core questions with great skill, and seeks intelligently to prepare the way for their solution. Until now, a book of this kind has been lacking from our monetary literature. Everyone who proposes to deal in a serious way with the question of monetary systems—especially the German system-should not merely look over this work but study it thoroughly. It offers the best foundation for the discussion of the further development of the German and the European monetary system.

CHAPTER 23

The Social Democratic Agrarian Program1

In spite of the collapse of the ideology of socialism, and the failure of its prescriptions for universal happiness, the Social Democratic Party has not disappeared from the scene. It continues to exist, even after renouncing its original program. And although it will not admit it, its new program now means: devour the wealth that has been accumulated by capitalism.

In the Austrian Social Democratic Party’s agrarian program, this goal is presented to us in a more unmasked and open way than in the past. Large-scale agricultural enterprises operate far more efficiently than the individual farmer on a small plot of land. The Social Democrat’s agricultural program cannot deny this. But its program demands the expropriation of the large agricultural estates, and their transfer to government ownership—even though everyone knows that all such federal undertakings end up operating at a loss.

Twelve percent of the forest land in Austria is administered by the federal government, and its annual deficit swallows up a million schillings in tax money. In comparison, private owners of forest lands all operate at a profit. Nevertheless, the Social Democrat’s agricultural program insists on the expropriation and nationalization of all large forest lands that are held in private hands.

These socialist forests, the program says, should be administered “not as capitalist for-profit forests, but as socialist welfare woods.” This last phrase was certainly superfluous, since all nationalized enterprises that we have had the “opportunity” to experience have freed us from any fear that operations managed by government, or by cooperative enterprises, could ever yield a profit!

In essence, the goal of the Social Democratic agricultural program is the transformation of a large part of the farming and forestry economy into a government-subsidized undertaking. Forests and products produced on the land would no longer be expected to yield any net profits. Those assigned to oversee the management of these lands are to be supported by funds supplied from other sources. Almost every paragraph in this agrarian program speaks of expenditures from the public coffers for the benefit of agriculture.

For example, combined associations of cottagers and small farmers are to be “promoted from public means.” Expenditures from federal and regional funds also will be required to facilitate the provisioning of quality seeds, chemical fertilizers, good breeding stock, and for the setting up of agricultural machine stations and so on.

Where the financial means to cover these expenditures are supposed to come from is, of course, never explained in this Social Democratic program. On the other hand, it is proposed to eliminate various presently existing taxes, for example, the taxes on sugar and wine. Doing away with the tax on wine would promote alcoholism! But such factual considerations seem not to have bothered the authors of this new Social Democratic agricultural program. There is precisely only one motive that has guided the composition of this program: its effect on the voters.

Up until now the Social Democratic Party, in all questions relating to agriculture, has exclusively “represented” the viewpoint of urban consumers. Right now, however, the party also needs the votes of the rural constituencies if it is to achieve political power; it therefore offers an agricultural program full of enticing promises. Will the farmers let themselves be deceived by this program? Will they realize that in the long run it will not be possible for the Social Democrats to impose financial burdens on the urban population for the benefit of agriculture? Won’t this sudden awakening of “interest” in agricultural matters by the Social Democratic Party seem suspicious?

Dr. Siegfried Strakosch, our most successful agriculturalist, who is at the same time a prominent natural scientist and a writer on economics, has undertaken the task of examining the Social Democratic agricultural program in detail. When Dr. Strakosch speaks about agricultural policy, everyone in Austria can learn something, even if one may not completely agree with him on many economic issues.2

The sober objectivity of his analysis will not fail to have its effect. Let us hope that it will open the eyes of many about the magnitude of the danger that carrying out of any part of the Social Democratic agricultural program would create in our country.

CHAPTER 24

America and the Reconstruction of the European Economy1

Politically, Europe can expect no help from America for the solving of its own problems. Even in purely economic policy matters it is a fantasy to expect a remedy from the United States for the plight of Europe.

Until the final decade of the last century the United States was principally a supplier of raw materials and an importer of manufactured goods. For decades Europe constantly invested capital in the United States. The big factories that developed the wealth of the American economy had been financed by European capital. A generation ago three-fifths of all American railroads were controlled by London.

Although in the last years of the nineteenth century America had already begun to buy back occasional parcels of American securities from Europe, the debt of the United States to Europe rose constantly until the outbreak of the World War. Even conservative estimates calculated that at the outbreak of the World War the debt of the United States to Europe amounted to more than five billion dollars.2 While England and the capitalist states of the West were in first place among the securities holders, even Austria participated, although with modest amounts. The United States paid the interest on these debts by its enormous, yearly rising balance-of-trade surplus, which no longer only resulted from the export of raw materials but also, now, in large part from the export of staple commodities and manufactured goods.

Even if the World War had not intervened, no doubt in the course of a number of years the rising surplus of the American balance of trade would have enabled the United States to pay off its debt to Europe and to change from the role of a capital-importing to that of a capital-exporting country. The war enormously accelerated this development. Within a few years—almost overnight, one could say—America became the great banker of the world.

At the end of 1925 American capital investment abroad was estimated by the Department of Commerce to be $10.5 billion, in comparison to about $3 billion of foreign capital investments in the United States. This does not include, however, the debts among the Allies. The trade balance from interest and capital gains is put at $355 million by the U.S. Commerce Department, to which $160 million in interest on debt owed by the Allies must be added. If one includes the surplus trade balance of $660 million plus film rental charges of $75 million, it comes to a total of $1.424 billion on the credit side of the ledger. The counter-entries in the American balance of payments are the expenditures of travelers in the amount of $560 million, $310 million sent back home by immigrants, and some smaller items coming to $63 million, adding up to a total of $922 million. The difference of about a half billion dollars is covered by the surplus of new investments of American capital abroad beyond the sum of the repayments of debts and the purchase of American securities by foreigners.

It is estimated that in recent years new capital formation in the United States has amounted to about $10 billion, of which one to two billion are available for investment abroad. These are large amounts; they cannot, however, be fully counted upon. Against them one must put the mentioned repayments and purchases by foreigners. One must further consider that the limitation on immigration into America will finally bring about a reduction in the remittances of immigrants, since naturally the immigrants who have already been living in the United States for a long time and who have established families there hardly come into consideration in regard to money sent back home. The immigrants who go to America only for a short time and then return to Europe with their savings are basically not worth considering in the present circumstances.

With the rising standard of living in the United States and the organization of transoceanic steamship traffic, the number of Americans traveling abroad will grow, as will the sums they spend while visiting abroad. On the other hand—and this is perhaps most important—it is to be expected that America’s trade balance surplus will decrease. The assumption that the American balance of trade must soon become negative is no doubt exaggerated. It is, of course, true that in the first eight months of 1926 there occurred an excess of $84 million in imports over exports; but that the inferences drawn from this were too hasty is shown by the fact that in September the American balance of trade had a surplus of $105 million.

Moreover, it would only be natural for America, as a creditor nation, to have a negative trade balance. The debtors to America really have no way to pay the interest and dividends they owe other than by the supplying of goods. American economic policy, which seeks to keep out foreign goods by an extremely high tariff system, must, in the end, collide with its investment activities abroad.3 All reasonable Americans admit that its high-protective-tariff policy is inconsistent with the desire of the United States for the Allies to be able to pay the interest on and amortize their debts.

Nevertheless, the idea of a protective tariff is still extraordinarily popular in the United States today. It has support in those industries that demand duties to compensate for the difference in costs of production between the United States and other countries. The literal fulfilling of this desire would make any importation to the United States impossible, since, logically, only those goods can be imported into the United States for which the costs of production are lower abroad. The same goes for the demand by labor that all those goods be excluded from being imported into the United States that are produced abroad at lower wages. Since, as a consequence of the ban on immigration, wages are necessarily higher in America than anywhere else (with the exception of Australia), this too would mean a complete prohibition of imports. Essentially even the demand for allegedly more “reasonable” tariffs amounts to the same thing, because a “reasonable” tariff is generally understood to mean one that makes it possible for domestic goods to compete successfully against foreign goods.

Even the farmers are partly in the camp of the protectionists insofar as they produce products that are in competition with foreign goods exported to the United States. The majority of American farmers realize, of course, that as an interest group concerned with exporting a part of their produce, they cannot benefit from a protective tariff. They suffer from the fact that labor is made more expensive by the laws restricting immigration. At the same time, the prices for industrial products are raised due to the high protective tariff,4 while the farmers have been seriously affected by the fact that agricultural products have suffered a severe decline in price. It is the farmers who insist that the United States work toward a solution of the political conditions in Europe in order to strengthen European consumption demand for American goods.

In terms of America’s domestic economic policy, it is becoming a more and more prevalent idea that the government should control the economy.5 As a capital-exporting country, the United States understandably—but not logically—disapproves when other countries follow the same foreign economic policy that it practices toward other nations. The United States forcefully opposes efforts by Mexico to bring production under the controls of the state. As a creditor nation, America must act against the attempts to nationalize and expropriate foreign-owned property; and in the case of Mexico, U.S. resistance goes so far that bellicose developments are not beyond the realm of possibility.6

America’s bad experiences with debtors’ unwillingness to pay, on the one hand, and the reduction in its balance of payments surplus, on the other hand, could result in the United States economically withdrawing into its own territory to a far greater degree than is the case today. American industries that have enormously increased their production capacity, partly in the expectation of finding more favorable opportunities for the sale of mass-produced articles on the world market, will have to make adjustments. This will mean the United States will both import less and export less, and especially invest less capital abroad.

Only an end to the general opposition to international trade can prevent such a development. There would have to be a general elimination of tariff restrictions, as well as debtor nations renouncing, under whatever name, those policies that threaten foreign capital invested within their borders and therefore limit new capital investments.

Nevertheless, the United States is still rich enough to make significant financial sums available for the economic reconstruction of Europe. But America is not prepared to furnish the political, economic, or ideological leadership for this reconstruction. It is a mistake to assume that the United States can contribute anything for the economic rebuilding of Europe other than financial capital, for which profitable investment possibilities should be exploited.

CHAPTER 25

The Currency and Finances of the Federal State of Austria1

The basic ideas of the reconstruction plan that federal Chancellor Dr. Seipel decided to carry out when he assumed his duties in summer 1922 were extremely clear and simple: the rejection of any further use of the printing press to fund state finances, restoration of a balanced budget, and fixing the gold value of the crown.2 It was a complete repudiation of the inflationary and capital-consuming policies that were implemented in the first days of the war, and which the postwar government—being dependent as it was on the destructionist mood of the masses—had carried to an extreme.

The difference between Seipel’s policies and the policies inaugurated by the Social Democratic Chancellor Renner3 in 1918 is seen most clearly with the use they respectively made of foreign loans. The relief credits that foreign governments granted to Renner and his successors, and against which they pledged Austria’s national property, were in the form of foodstuffs; their price was debited against the Austrian state. The government sold these provisions to the populace at prices below their cost of production. The proceeds from their sale were used to finance current government expenditures, not to repay the debt. The state loans received by Seipel, by contrast, were used for investments.4

The stabilization of the gold value of the Austrian crown was completely successful. The rate of exchange was stabilized at 14,400 paper crowns = 1 gold crown. Under the law of December 20, 1924, the official designation schilling was introduced for 10,000 paper crowns and the designation groschen for the hundredth part of a schilling. The Austrian National Bank is holding strictly to the regulations of the Bank Law. There is absolutely no use of the Bank, indirectly or directly, for the purposes of fiscal management.

The Austrian National Bank, which began its activity in January 1923, is obligated to cover the entire quantity of banknotes in circulation and those liabilities immediately payable on demand (minus the debt of the federal government) with its specie reserves; both currency and foreign exchange may be included for this purpose, at the rate of 20 percent during the first five years, 24 percent during the following five years, and at one-third thereafter. At the end of 1927, in fact, there were quantities of precious metals and foreign exchange worth about 830 million schillings at the discretionary possession of the Austrian National Bank, meaning that 80 percent of the notes in circulation and giro obligations were fully covered.

The Austrian National Bank actually is not required to redeem its notes in specie. It has the obligation to make sure, by all means at its command, that until the redemption of the banknotes in metal becomes legally required, there should be no decline in the gold value of its notes. Obviously, it can fulfill this obligation in no other way than by actually exchanging its banknotes for foreign exchange at the legal, stabilized rate of exchange (one dollar = 7.10 schillings or one kilogram of fine gold = 4723.20 schillings), and from which parity it does not deviate by more than the gold points beyond which it would be profitable to import or export gold. In order to fulfill this obligation the Austrian National Bank follows the policy that, decades ago, Wilhelm von Lucam5 called the fundamental rule for the conduct of a note-issuing bank that does not redeem in specie, but which is determined to maintain the stability of the metal value of its notes: Do everything that a specie-paying bank would do and not do anything that a specie-paying bank would not do.

The success of this stabilization policy can be seen in the fact that no one any longer talks about an Austrian currency problem.

As has already been mentioned, the precondition for this currency policy was the government’s renunciation of any further indirect or direct use of the note press for the purposes of fiscal management.

The federal budget estimated for 1928 is given below: The current budget, therefore, shows surpluses. A deficit arises only because of investments.

The total income of the federal government from public taxes is estimated at 934.8 million schillings. Of that amount only 698.4 million is left for the federation since 236.4 million is transferred to the provinces and municipalities. The proceeds from direct taxes are estimated at 285 million schillings, of which 147 million schillings are attributable to the income tax, 52 million schillings to the general profit tax (i.e., the profit tax of those enterprises that are not obligated to tender public accounts), and 58 million schillings due to the corporate tax (i.e., the profit tax of enterprises that are obliged to render public accounts). The proceeds from customs duties are estimated at 227 million schillings, and the proceeds from excise taxes at 85.7 million schillings. These direct taxes are clearly excessively oppressive, and it will be necessary to reduce them as soon as possible.

Compensation could easily be found in an increase in excise taxes since these have not yet reached their prewar level. This is especially blatant in the case of sugar. Sugar is taxed at 14.40 schillings per 100 kg as against 38 crowns before the war; hence the prewar tax was 3.8 times as high as the present tax. The proceeds from the stamp taxes and legal fees (including inheritance and gift taxes) are estimated at 102.3 million schillings. Of very special importance is the sales tax on goods, the proceeds of which are estimated to come to 215 million schillings. The tobacco monopoly is calculated to produce a net profit of 183.1 million

schillings, the salt monopoly some 13.3 million schillings, the national lottery some 10.3 million schillings, and the monopoly for gunpowder and explosives about 0.8 million schillings.

The conditions of federal public enterprises are hardly satisfactory. It is true that the post-and-telegraph office is calculated to have a cash surplus of 0.6 million schillings, but the facilities have not been appropriately depreciated, and no doubt a considerable depreciation needs to be recorded; there is also an excess in personnel and inefficient management, which is characteristic of public enterprises. Similarly unfavorable are the conditions of the federation’s abundant possession of forests; and even more unfavorable is the situation of the (fortunately not very extensive) national coal and steel enterprises.

The situation of the federal railroads is also extraordinarily unfavorable. The federal railroads were established as an “independent economic body,” so that their activities do not appear in the national budget. The figures concerning the railroads and the postal system given in the above summary of the federal pre-estimate include only the part of the departments which the tangled and artificial structure allows to go through in the national general accounts.

Whoever wants to be informed about the condition of the railroads must examine the business report of the “Austrian Federal Railroads” for the year 1927. The details of this report cannot be gone into within the framework of a short article. Anyone who evaluates the condition of the federal railroads from the viewpoint of national finances will be less interested in confirmation of the universally known fact of their unprofitability; the real problem is how, or even whether, there can be any improvement in this situation as long as they remain public enterprises. The great expectations over the electrification of the federal railroads seem not to have been fulfilled, even though there are still differences of opinion among the experts; moreover, it should be pointed out that the financial condition of the federal railroads will become even more unfavorable to the extent to which the highway network (which today is no longer adequate to meet modern demands) will be organized in such a way that motor transportation in Austria will acquire the same place in the modern system of transportation that it has elsewhere.

Let just one fact be highlighted from the federal railway report. The total business expenses of the federal rail system came to 550.5 million schillings in 1927. Of this amount 57 percent went to pay the wages of the current personnel and 17.4 percent to cover retirement pensions; hence the combined outlays for personnel constitute three-quarters of total business expenses.

The financial condition of the Austrian Federation would be far more favorable if the federation were not burdened with the ownership and operation of the railroads, the post and telegraph system, the national forests, and the mines.

Moreover, the national administration is much too expensive. Austria consists of nine federal states. Five of these have fewer than 400,000 inhabitants and seven have fewer than 1,000,000. The smallest federal state, Vorarlberg, numbers only 140,000. The constitutional right of autonomy that was granted to the provinces has led to their setting up an excessively large administrative apparatus, which not only is exorbitantly expensive but does not even work very well and, above all, only puts impediments in the way of economic activity. But the worst is that in the provinces and in the towns those who must raise the revenues do not decide on the expenditures.

We have already spoken about the remittances of the federation to the provinces, which represents more than a quarter of the provincial revenues. In the provincial diets there predominates among the elected representatives a rural or petty bourgeois mentality, which sees industrial enterprises and especially banks as objects for unlimited taxation. It is even worse in the municipal chambers. The situation here is basically no different than in Germany; but it must be kept in mind that the Austrian economy is even less in a position to afford the luxury of a costly administration, along with superfluous provincial and local socialistic experiments. The leading fiscal policy problem in Austria is the financial regulation of the autonomous entities. The extent of the fiscal problem is clearly seen by the fact that the provincial and municipal budgets account for about six-tenths of the total budget of the federation.

Vienna, which constitutionally is both a province and a municipality at the same time, is in a far more favorable situation than the one prevailing in the other provinces. In the period before the war the Christian Social Party developed a vigorous municipal socialistic system that monopolized the streetcars and the provision of electricity and gas, and set up various other economic operations. All these investments were financed through loans, the burden of which was reduced to almost zero by the inflation. The Social Democratic Party, which rules Vienna today, consequently has taken over a rich inheritance. Moreover, Vienna succeeded in coming out extraordinarily well in its financial arrangement with the federation.

Finally, the Social Democratic municipal administration exploits its taxing authority without any regard for the city’s economic capacity to pay.6 The municipal socialistic activity of the Vienna government very severely harms the development of the city. Vienna’s most important means of urban transportation is still the streetcar. The municipal government thwarts the development of modern autobus traffic in order not to endanger its revenues from the streetcars and the metropolitan railway (the latter was turned over to the municipality gratis by the federal government and was electrified in a way that was far too expensive). Vienna has no subway since the municipality shrinks from this sort of enterprise, which might well make no profit under city management; on the other hand, private entrepreneurs are not allowed to set up a subway system due to the reigning socialistic bent of the city.

The development of an urban transportation system would be a far more beneficial influence on the housing situation in Vienna than the construction of rental apartments. The Social Democratic thesis is that the housing shortage (in a city whose population of 2.2 million in 1914 declined by 335,000 to 1.86 million in 1923) is not due to rent controls but merely the scarcity of housing.7 The municipal government in Vienna undertook a brisk construction activity in the last few years. The city government spent on these projects 117 million schillings in 1926; for 1927, 118 million schillings are projected for the same purpose and 76 million schillings for 1928.

To pay for these expenditures a special-purpose tax was imposed, but it covered only a part of the outlays. For 1927 the yield from this special tax is estimated to be 35.3 million schillings, not even a third of the amount spent on housing construction. In reality it is financial transfers from the federation that make building activity possible for the municipalities. In 1926, the last year for which the figures have already been published, the proportion of general federal revenue transferred from the federation to Vienna amounted to 118.2 million schillings, which approximately equaled the expenditure by the City of Vienna for residential building and housing-project construction.

Austria’s future fiscal policy, first of all, must be directed toward cutting back on the direct taxes that impose a heavy burden on industry. This is necessary in order to stimulate investment activity, attract foreign capital, and strengthen the competitiveness of our industry on the world market. It must be acknowledged that much has been done in this area in recent years. The corporate tax rate has been lowered from 36 percent to 25 percent; some oppressive regulations connected with the pension tax have been eliminated; some tax encouragements for investment have been created; and the regulations relating to the personal tax law have been moderated.

All this, however, is still far from enough. It will not be possible to avoid radical reforms in the area of provincial and local taxes, especially in Vienna. This is true in the first place in reference to the hotel tax, which hampers the development of the tourist industry and has far more importance for Austria than it has for Germany. To carry out these reforms it will be necessary to simplify the administrative apparatus, especially in the provinces and municipalities, and to eliminate superfluous expenses. The crucial problem, however, relates to the public enterprises, above all the national railways.

One can see, then, that the financial problems that Austrian fiscal policy is confronted with are basically the same fiscal policy problems that other European states have to solve. For the present, Austria’s financial situation is by no means disadvantageous; the treasury holdings of the federal finance administration are very considerable, the balance of the federal budget is not endangered, and the financial difficulties of a number of provinces and municipalities could be sorted out with a bit of good will. Hence the task of reconstruction that Seipel tackled in 1922 has unquestionably succeeded.

Today, Austria’s fiscal policy problem is a problem of production. Not all the factors affecting costs of production in the Austrian economy can be influenced by domestic economic policy measures. The raw materials and semimanufactured goods that Austria has to import from abroad must be paid for at world-market prices. As a capital-poor country, Austria must have recourse to foreign capital; it follows that profit and interest rates have to be higher in Austria than in the majority of the industrial states that compete with her. The labor unions use all the means at their disposal to resist a lowering of wages.

A reduction in costs of production, which is an unavoidable precondition for an increase in Austrian exports and a decrease in imports, therefore, must be attempted, first of all, through a reduction in the taxes that burden industry.

CHAPTER 26

The Economic Crisis and Lessons for Banking Policy1

The events of the last few weeks have made obvious to everyone the defects in the German and Austrian banking systems, which previously were recognized by only a few.

At least until very recently, English and American banks have acted, in principle, purely as bankers in the classical sense of the term. That is, they have viewed their primary business to be the lending of money. The development of German banking activity made them not merely banks but also put them in the business of being industrial holding companies and investment trusts. This development did not occur through any logical process. In the beginning, German banks also limited themselves to the granting of credit. They ended up becoming partners in the businesses to which they had granted credit because they lent too much to these enterprises in proportion to their own capital. These banks were plunged into difficulties when there were attempts for immediate conversion of those enterprises’ stocks and debentures into cash.

Gradually, banks were pushed out of the role of creditor into the role of the chief interested party. As a result, these banks no longer faced those enterprises with the critical eye of a banker who carefully judges the businesses’ prospects as debtors, and who constantly evaluates the borrower’s creditworthiness in order to limit or withdraw lines of credit if changing circumstances warrant it. These banks no longer looked at businesses’ activities from the standpoint of a lender but from the viewpoint of the borrower. When the monitoring function that the lending institution normally exercises over businesses fell by the wayside, an essential regulator of the money market disappeared in fact if not in name.

The news media would appropriately offer strong criticisms of any combination of the banking business with production and trading activities, when individual enterprises and business firms made attempts to publicly raise investment money. But it was overlooked that at many respected banks that had readily put money into risky ventures (including three major banks in Vienna and Berlin that have recently failed) conditions were no better.2 The independence of these banks from industrial enterprises was in many cases purely formal in the legal sense.

The representatives of the banks who had to decide on the granting of credit were, unfortunately, in many instances, identical with the representatives of the debtors who appealed for loans and credit expansion. When writers on the economy spoke out against this combining of banking and industry, those in banking labeled them ivory-tower theoreticians. Modern conditions, it was said, absolutely demand the amalgamation of banking and industry. The failure of this system clearly proves who was right. The more cautious the bank was in the establishment of its associations, the better off it is today.

The most pressing reform that must be pushed for is the elimination of the existing close ties between the banks and industrial combinations. Everyone agrees with this. Of course, this goal can be only slowly achieved. It will be years before it will be possible to transfer the large debts of many enterprises from the banks to the public through the issuing of stocks and bonds. Recent experience has caused severe mistrust of stocks and bonds issued by industry, and this mistrust will not be quickly overcome. But the distrust is even stronger against stocks issued by banks, due to the serious doubts about their connections with industry.

This situation will necessarily lead these banks to loosen their ties with industry, or in any case to structure them so transparently that, at least to some extent, an outsider will be able to evaluate the relationship. Banks will, no doubt, be pushed in this direction due to the greater carefulness that American, English, and Dutch banks will practice in extending credit in the future. It may be expected that bankers in these foreign countries will want to see their debtors carry out that highly valued system of division of labor in the banking industry.

The intimate connection between banking and industry resulted in banks investing in industrial undertakings from which it was impossible to quickly withdraw the money invested, while they were committed to pay back money in the short term to their depositors. The well-known golden rule of banking, that a bank should never extend credit in the form of gold-backed banknotes and checkable deposits for a period longer than it receives funds from its depositors, is, of course, not possible for banks that issue currency and fiduciary media. But it should be strictly followed in all other banking matters. It is unnecessary to emphasize that it is not very wise to take in hundreds of millions under the obligation to pay on demand or at short notice, and to use an equivalent sum of money to buy industrial stocks or lend to enterprises that use the borrowed funds for longer-term capital investments.

Concerning interest rates, a clearer distinction will have to be made than in the past between deposits that are payable on demand or on short notice and deposits that are left on deposit for longer periods of time. Particular care must be taken that the savings of the general public are deposited only on a long-term basis to minimize the danger of bank runs. But it must also be insisted that in their regular reports banks should provide precise information about the dates when money they have lent will be repaid in relation to their outstanding deposit obligations.3

Secret dealings have turned out to be especially harmful for the banks. It has been discovered that often there were reasons for the taciturnity in bank reports as a means of covering up the losses being suffered. Oversight by the general public is an indispensible element in maintaining the soundness of our banking institutions.

[1. ][This article originally was published in German in the Neues Wiener Tagblatt (October 5, 1919).—Ed.]

[2. ][Mises was one of the formulators of the modern purchasing power parity theory of foreign exchange rates; see Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd rev. ed., [1924; 1952] 1981), pp. 205-24; and Human Action, A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 452-58. Also see Joseph T. Salerno, “International Monetary Theory,” in Peter J. Boettke, ed., The Elgar Companion to Austrian Economics (Brookfield, Vt.: Edward Elgar, 1994), pp. 249-57, for an exposition of the “Austrian” theory of foreign exchange rates along the lines developed by Mises.—Ed.]

[3. ][Mises is referring to the development of a large black market trade in foreign exchange as a result of the Austrian government’s imposition of foreign exchange controls on all foreign currency dealings.—Ed.]

[4. ][The assignats were the paper money issued by the Revolutionary government in France between March 1790 and December 1795, during which time they generated an extremely destructive inflation, resulting in the imposition of wage and price controls that disrupted the French economy even more. See Richard M. Ebeling, “Inflation and Controls in Revolutionary France: The Political Economy of the French Revolution,” in Stephen J. Tonsor, ed., Reflections on the French Revolution (Washington, D.C.: Regnery Gateway, 1990), pp. 138-56; also Richard M. Ebeling, “The Great French Inflation,” The Freeman: Ideas on Liberty (July/August 2007), pp. 2-3.—Ed.]

[1. ][This article originally appeared in German in the Neue Freie Presse, no. 19872 (December 23, 1919).—Ed.]

[2. ][In January 1919, one dollar could purchase 16.1 crowns. In December 1919, when Mises wrote this article, one dollar traded for 31 crowns, for a 48 percent drop in the exchange value of the crown in one year. By May 1923, when the Austrian inflation had finally come to an end, one dollar bought 70,800 crowns on the Vienna foreign exchange market.—Ed.]

[3. ][“On a rise,” i.e., on the expectation of an increase in the price.—Ed.]

[4. ][In the face of large outflows of gold and foreign exchange from the Austrian central bank during the First World War, the Austrian government established a Foreign Exchange Agency on February 22, 1916. All foreign exchange received by exporters was to be sold to the central bank at the official rate of exchange. All importers requiring foreign exchange for purchase of goods from abroad were to receive permission and an allotment of foreign currencies from the Foreign Exchange Agency at the fixed rate of exchange. The foreign exchange control remained in place following the end of the war in November 1918, and was not officially lifted until November 1920, about a year after this article by Mises was published.—Ed.]

[5. ][At the time this article was written, a coalition government made up of the Social Democratic Party and the Christian Social Party governed Austria. They instituted a variety of “social” programs, including a large unemployment and welfare payment system, as well as price controls on food supplies that were supplemented with government rationing and subsidies for food purchases. These programs were increasingly funded through monetary expansion that was causing the depreciation of the crown and explosion in rising prices.—Ed.]

[6. ][With the dissolution of the Austro-Hungarian Empire in November 1918, the part that became the new Austrian Republic was often referred to as “German-Austria,” in anticipation that the predominantly German-speaking area of the former empire would be politically united with the new German Republic in the aftermath of the First World War.—Ed.]

[7. ][Political chaos reigned in many parts of Central and Eastern Europe in the years after the First World War. When Mises wrote this article, Hungary was in the grip of a brutal counter-revolutionary “White Terror” in the wake of a “Red Terror” during a short-lived Soviet-type dictatorship in Budapest from March to August 1919. Russia and cities such as Lemberg (in the former Austro-Hungarian province of Galicia) were caught up in the Russian Civil War and later a war between Soviet Russia and Poland. The former Austrian port of Trieste on the Adriatic Sea was the center of a violent dispute between Italy and the newly constituted Yugoslavia.—Ed.]

[8. ][Following the dissolution of Austria-Hungary, the various parts of the former Habsburg Empire splintered into a much smaller Austrian Republic, an independent Hungary, an enlarged Romania, a new Czechoslovakia, a reconstituted Poland, a Serb-dominated Yugoslavia, and a slightly bigger Italy.—Ed.]

[9. ][Foreign exchange and foreign currency dealings were increasingly being handled by a huge and pervasive black market.—Ed.]

[10. ][Between March and December 1919, the paper money supply of crowns had increased from 831.6 million to 12.1 billion. By 1923, it had grown to 7.1 trillion. A cost-of-living index, excluding housing (with July 1914 = 1), stood at 28.37 in January 1919, and had risen to 49.22 by January 1920. By January 1923 it had exploded to 11,836.—Ed.]

[1. ][This article originally appeared in German in the Neues Wiener Tagblatt, no. 52 (February 22, 1920).—Ed.]

[2. ][David Ricardo (1772-1823) was one of the fountainheads of British Classical economics in the first half of the nineteenth century. His Principles of Political Economy and Taxation (1817) set the tone and direction for much of Classical economics for the next half century.—Ed.]

[3. ][John Stuart Mill (1806-73) was one of the leading members among the British Classical economists, with his most important work being Principles of Political Economy, with Applications to Social Philosophy (1848). In this work, Mill had argued that there was nothing further to develop in the essentials of the theory of value, based on the idea that some measure of the quantity of labor devoted to the production of goods determined relative prices in the market.—Ed.]

[4. ][Jules Dupuit (1804-66) first presented an exposition of the concept of diminishing marginal utility in an 1844 article on optimum pricing for a toll bridge. From a curve for the diminishing marginal utility for the consumption of a good, he derived the explanation for a downward-sloping demand curve.—Ed.]

[5. ][Hermann Heinrich Gossen (1810-58) developed a systematic theory of economic relationships based on the concept of marginal utility in his 1854 work The Law of Economic Relations, and the Rule of Human Action Derived Therefrom. The book was totally ignored following its publication until rediscovered by William Stanley Jevons in the 1870s after the publication of his own version of the marginalist concept. Gossen worked in the Prussian civil service but was constantly criticized by superiors for living a life of drinking, gambling, and “bad company.”—Ed.]

[6. ][Carl Menger (1840-1921) was the founder of the Austrian School of economics. In later life he said that he came to the theory of marginal utility (though in his own exposition in 1871 he explained the concept without giving it a name) while he was working for the Austrian Ministry of Prices, and concluded that the labor theory of value could not successfully explain the formation of prices on the market.—Ed.]

[7. ][William Stanley Jevons (1835-83) developed the theory of marginal utility in his 1871 volume The Theory of Political Economy, building on the utilitarian conception that human action is guided by the pursuit of “pleasure” and the avoidance of “pain.”—Ed.]

[8. ]See Chapter 5, “The Fourth Issuing Right of the Austro-Hungarian Bank,” footnote 8.

[9. ][Carl Menger, Principles of Economics (New York: New York University Press, [1871] 1981). The Principles was meant to be the first of four volumes on most of the basic themes in economic theory and policy. In the introduction to the German-language 1923 reprint of his father’s Principles, Karl Menger Jr. described the unpublished remaining three volumes thus: vol. 2: Interest, Wages, Rent, Income, Credit, and Paper Money; vol. 3: The Theory of Production and Commerce; the Technological Requirements for Production; the Economic Conditions for Production; Commerce: The Theory of the Techniques of Commerce, Speculation, Arbitrage; Retail Trade; and vol. 4: Critique of the Contemporary Economy and Proposals for Social Reform.—Ed.]

[10. ][Friedrich von Wieser (1851-1926) was one of the leading members of the Austrian School 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 imputation, i.e., the determination of the value of the factors of production. His most widely read works on these themes were Natural Value (1889) and Social Economics (1914), the latter being the only systematic treatise on economic theory by a member of the Austrian School before the First World War.—Ed.]

[11. ][Eugen von Böhm-Bawerk (1851-1914) was one of the leading members of the Austrian School before the First World War. His major contributions were to the theory of capital and interest, as well as the general theory of value, price, and cost. He developed these themes in Capital and Interest: A History and Critique of Interest Theories (1884) and The Positive Theory of Capital (1889). He also applied his “Austrian” theory of value and interest to challenge Karl Marx’s labor theory of value and theory of exploitation in his famous 1896 monograph Karl Marx and the Close of His System. For a short appreciation of Böhm-Bawerk and his contributions to economics, see Ludwig von Mises, “Eugen von Böhm-Bawerk: In Memory of the Tenth Anniversary of His Death,” (1924) in Selected Writings of Ludwig von Mises, vol. 2 (Indianapolis: Liberty Fund, 2002), pp. 329-32.—Ed.]

[12. ][See 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.—Ed.]

[13. ][Carl Menger, Investigations into the Method of the Social Sciences with Special Reference to Economics (New York: New York University Press, [1883] 1985). This work ignited what became known as the Methodenstreit, or “struggle over methods,” between members of the Austrian School and the German Historical School. It was rudely reviewed by Gustav von Schmoller, one of the leading figures of the Historical School, to which Menger replied in a short book, Die Irrthümer des Historismus in der deutschenNationalökonomie [The Errors of the German Historical School] (1884), written in the form of sixteen letters to a friend. Menger scathingly criticized Schmoller’s antitheoretical approach to economic analysis, saying that it “consists of a primordial ooze of historico-statistical material.”—Ed.]

[14. ][Historicism was a German reaction to the Enlightenment after the French Revolution and the Napoleonic wars, which refused to wring general rules from reason and ridiculed the idea of universal theoretical systems. Historicists insisted on observing the “unique” in its endless historical variations, arguing that economic behavior and thus economic laws were completely dependent upon their particular historical, social, and institutional context. Rooted in Hegelian philosophy and the romantic nationalist critiques of abstract theory by Friedrich List and Adam Müller, historicism relied on empirical and inductive reasoning. It offered no principles to guide or restrain political action and was hostile to both the tradition of natural law and utilitarianism. The Younger Historical School under Gustav Schmoller claimed that economics was inherently a normative discipline and thus should be engaged in forging tools for use by policy makers and businessmen. At the end of the nineteenth century historicists, in the form of the German Historical School, had a virtual monopoly over German academia, with very few members of the Austrian School able to obtain academic positions at German universities.—Ed.]

[15. ][Carl Menger, Beiträge zur Wahrungsfrage [Contributions to the Currency Question], (1892) reprinted in The Collected Works of Carl Menger, vol. 4 (London: London School of Economics and Political Science, 1936).—Ed.]

[16. ][Carl Menger, “Money,” (1892) in Michael Latzer and Stefan W. Schmitz, eds., Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money (Northhampton, Mass.: Edward Elgar, 2002), pp. 25-107. See also Carl Menger, “On the Origin of Money,” (1892) reprinted in Richard M. Ebeling, ed., Austrian Economics: A Reader (Hillsdale, Mich.: Hillsdale College Press, 1991), pp. 483-504.—Ed.]

[17. ][See also F. A. Hayek, “Carl Menger (1840-1921),” in Peter G. Klein, ed., The Collected Works of F. A. Hayek, vol. 4, The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom (Chicago: University of Chicago Press, 1992), pp. 61-107.—Ed.]

[1. ][This article originally appeared in German in Die Börse (February 17, 1921).—Ed.]

[2. ][In the immediate postwar period, the new Austrian government instituted a huge food subsidy program at artificially low prices and rationing of food through a coupon system to urban, and especially Vienna, residents. When farmers in the rural areas refused to sell their food supplies to the central government in Vienna at those below-market fixed prices, the government attempted to confiscate those supplies. This resulted in the provincial governments in the new, smaller Austria setting up customs barriers and visa requirements to enter or exit their respective jurisdictions to conserve the food supplies in their own districts. The central government then resorted to purchasing foreign food supplies with borrowed money, thereby expanding Austria’s foreign debt. By the time that Mises wrote this article in 1921, half the Austrian government’s budget deficit was caused by the food subsidies.—Ed.]

[3. ][“Stamping” refers to the fact that with the disintegration of the Austro-Hungarian Empire after November 1918, the “successor states” of Czechoslovakia, Yugoslavia, Hungary, and the new Austria began to “stamp” Austro-Hungarian Bank notes with a national mark, as a prelude to converting those quantities of the old empire currency in their respective territories into new national currencies.—Ed.]

[4. ][“Compulsory loan” refers to the proposal for a “capital levy,” which would be a huge property tax on all real assets and productive enterprises, as a means of transferring a large portion of the private wealth of the society to the government as a method for the government to pay off its accumulated debt. The tax on capital would be set so high that taxpayers would be required either to liquidate their wealth or to borrow against their property to raise the amount owed under the capital levy. See John V. Van Sickle, “The Capital Levy,” in Direct Taxation in Austria (Cambridge: Harvard University Press, 1931), pp. 136-71.—Ed.]

[5. ][See Ludwig von Mises, “Vienna’s Political Relationship with the Provinces in Light of Economics,” (1919) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 97-118.—Ed.]

[1. ][This article originally appeared in German in two parts in Neue Freie Presse (February 25 and 26, 1921).—Ed.]

[2. ][This refers to the Austro-Prussian War of 1866, also known as the Seven Weeks War, between Prussia on the one side and Austria, Bavaria, Hanover, and a number of other smaller German states on the other. The Prussian victory resulted in Austria being excluded from the German Confederation that was then dominated by Prussia. The Austrian government financed most of its war expenditures through a huge monetary expansion through the issue of government notes. The supply of paper money was increased from 80 million florins in circulation before the war to 300 million at its end.—Ed.]

[3. ][From July 1914 to October 1918, the Austro-Hungarian money supply increased by 977 percent, from 3.4 billion crowns in circulation at the start of the First World War to 33.5 billion crowns at the end.—Ed.]

[4. ][The Treaty of Saint-Germain (September 10, 1919) formally ended the war between Austria-Hungary and the Allied Powers. It mandated the dismemberment of the Austro-Hungarian Empire into the separate states of the Republic of Austria, Hungary, and Czechoslovakia, with other portions of the empire being integrated into a reborn Poland, an enlarged Romania and Italy, and a newly created Yugoslavia, who were referred to as the “successor states.” Article 206, points 1-5 of the Treaty of Saint-Gemain referred to the procedures by which the former bank-notes of the Austro-Hungarian Bank would be converted into the banknotes of the respective successor states; points 6-8 and 11 concerned the liquidation of the Austro-Hungarian Bank and the disposition of all claims against the Bank and its assets.—Ed.]

[5. ][In 1919-21, Ludwig von Mises was in charge of the section of the Austrian Reparations Commission for the League of Nations concerned with the settling of the outstanding prewar debt of the Austro-Hungarian Empire. The commission’s task was to agree upon the rules under which each of the successor states would be responsible for a portion of the debt of the former empire. See Ludwig von Mises, “The Currency Problem Prior to the Peace Conference,” (1919) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 30-46.—Ed.]

[6. ][Article 206, point 9 of the Treaty of Saint-Germain says, “The currency notes issued by the bank on or prior to 27 October 1918, in so far as they are entitled to rank at all in conformity with this Article, shall all rank equally as claims against all the assets of the bank, other than the Austrian and Hungarian Government securities deposited as security for the various note issues.”—Ed.]

[7. ][A “bank giro credit” is an arrangement under which a bank customer instructs their bank to transfer funds from their account to a beneficiary designated by the bank customer.—Ed.]

[1. ][This article originally appeared in German in Neue Freie Presse (March 17, 1922).—Ed.]

[2. ]See Chapter 1, “The Political-Economic Motives of the Austrian Currency Reform,” footnote 5.—Ed.]

[3. ][See Chapter 16, “On Carl Menger’s Eightieth Birthday,” footnote 11.—Ed.]

[4. ][The five questions were (1) whether a gold standard should be adopted as the legal monetary system of the Austro-Hungarian Empire; (2) if so, should it be monometallic or partly bimetallic with silver; (3) what should be the status of government notes in circulation; (4) how should the conversion be undertaken from the existing florin paper money standard to a gold standard; and (5) what should be chosen as the new monetary unit under a reformed monetary system?—Ed.]

[5. ][See “On Carl Menger’s Eightieth Birthday,” Chapter 16, in the present volume.—Ed.]

[6. ][Wilhelm von Lucam (1820-1900) was the secretary general of the Austro-Hungarian Bank in the middle decades of the nineteenth century, and was influential in introducing reforms restricting inflationary policies of the Bank in support of government financing. He worked closely with leading Viennese financiers in an attempt to weather the economic storm that followed the bank crisis of 1873.—Ed.]

[7. ][Moriz Benedikt (1849-1920) was the publisher and editor of the Vienna Neue Freie Presse. Under his leadership the newspaper promulgated liberal and free-market views. He published a series of articles on economic, commercial, and financial subjects, which attracted considerable attention from businessmen and liberal intellectuals.—Ed.]

[8. ][Theodor Taussig (1849-1909) was an Austrian entrepreneur, governor of the Boden-Credit-Anstalt, a joint-stock bank that was later merged with the older and stronger Österreichische Credit-Anstalt, with new capital provided by an international banking syndicate including J. P. Morgan and Company.—Ed.]

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

[10. ][See Chapter 10, “On the Goals of Trade Policy,” footnote 2.—Ed.]

[11. ][See “The Gold Exchange Standard,” Chapter 22, in the present volume.—Ed.]

[12. ][See Ludwig von Mises, “Foreign-Exchange Control Must Be Abolished,” (1919) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2: Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 87-90.—Ed.]

[13. ][Richard Lieben (1842-1919) was a prominent Austrian economist who coauthored with Rudolph Auspitz (1837-1906) Untersuchungen über die Theorie des Preises [Investigations on the Theory of Prices] (1889), an early and highly regarded mathematical formulation of the marginalist approach to prices and costs. See Ludwig von Mises, “Richard Lieben as Economist,” Neue Freie Presse, no. 19835 (November 14, 1919):Auspitz and Lieben cannot really be considered as part of the Austrian School of economics, though in their ideas and arguments they were closely related to Menger and Böhm-Bawerk. They preferred the mathematical method, which places them closer to the Englishman William Stanley Jevons and the Swiss Leon Walras. Auspitz and Lieben may be placed next to these great names of modern economic theory: they, too, have performed a great service in advancing the theory of price. Their book is one of the richest in modern economics. Besides his [Lieben’s] main work, of importance are a number of smaller papers and articles mostly dealing with monetary issues. He was an unquestionable supporter of a “sound money” policy, and never tired of vigorously combating all inflationary ideas. The present generation and posterity will have to admit that he was on the right track. The statements that he made during the currency inquiry of 1892 were among the best said in a brilliant assembly of economists, and they can still be read today by anyone to their benefit.—Ed.]

[14. ][Gresham’s law was named after Sir Thomas Gresham (1517—79), financier and advisor to Queen Elizabeth I. In a proclamation dated September 27, 1560, Gresham warned that since the government had fixed the exchange rate between gold and silver at a level different from the market rate, the more undervalued coins were sure to be exported. In other words, the “bad” (overvalued) money would drive out the “good” (undervalued) money.—Ed.]

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

[16. ][Otto Michaelis (1826-90), a German journalist and politician, was a staunch advocate of economic liberalism and free trade and one of the founders of the National Liberal Party. He served as chief editor of the economic section of the Berliner Nationalzeitung and a lecturer in the Federal Chancellery and Ministry of Finance. As a leading member of the National Congress in the Reichstag he led the fight for freedom of movement, abolition of restrictions on interest rates, and ending of compulsory guilds and tests for entry into crafts.—Ed.]

[17. ][See Chapter 1, “The Political-Economic Motives of the Austrian Currency Reform,” footnote 52.—Ed.]

[1. ][This paper, written in German, was prepared as a position statement for the Austrian Chamber of Commerce and presented on August 28, 1922. It has not been previously published.—Ed.]

[2. ][See Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (Indianapolis: Liberty Fund, [1919] 2006), pp. 132-35.—Ed.]

[1. ][This article originally appeared in German in Neue Freie Presse (February 5, 1923).—Ed.]

[2. ][Siegfried Strakosch (1867-1933) was a prominent Austrian industrialist and agricultural expert. He was a principled economic liberal who opposed both protectionism and all government subsidies for agriculture. See Ludwig von Mises, “Siegfried von Strakosch (1867-1933),” in Neue Österreichische Biographie ab 1815, vol. 15, Grosse Österreicher (Vienna: Amalthea-Verlag, 1963), pp. 160-65:Strakosch was one of the last representatives of that Austrian upper middle class that, in many ways, provided the character of Viennese life in the era of Emperor Francis Joseph. But his interests included far more [than only scientific and agricultural matters]. He was well acquainted with all the currents in intellectual and artistic life. He counted among his many friends most of the important musicians, writers, and visual artists. He had the gift of creative achievement for all to understand and appreciate. . . . Strakosch clearly understood the contradiction in the economic and sociopolitical ideas in the agricultural circles. Around the declining old aristocracy were found landowners and peasant farmers who supported a socialist program. Their ideal was a conservative state that would support the principle of the self-sufficient farmer. This is what they had in mind when they spoke about the practice of moral values. But what was not explained was how such [agrarian] independence could be preserved with continued involvement of the state. Strakosch stated quite correctly that every measure to “protect” and “favor” agriculture was a step down the road to socialism. . . . In the years after World War I . . . The vast majority of the electorate [in Austria] opposed the plan of a small band of Marxist firebrands who wanted to follow the Russian example. But the key word “socialization” was the dominating spirit of the time, and the government appointed a socialization commission that was entrusted with the theoretical task of preparing for the transformation of Austria into a socialist society. The resistance of the “bourgeois” parties was primarily directed against the general political and cultural program of the socialists. They were less against the attempts to bring about socialization through step-by-step interventionist methods. Inflation had ruined the state budget, but all of the resulting consequences were wrongly interpreted by public opinion as being due to the shortcomings of the market order. This was the state of affairs that was dealt with by Strakosch in his book The Suicide of a Nation (1922). In plain words that anyone would understand, he showed that a change in economic policy was inevitable. Balance had to be restored to the public budget, and the currency had to be stabilized. The economy had to adjust to the new circumstances, and the spirit of entrepreneurship had to be set free without bureaucratic obstacles getting in its way. That was the only way that Austria could be reconstructed. . . . In an era of the destruction of old values and institutions, Siegfried von Strakosch was a man of constructive work. He united in his person scientific-technological knowledge and economic understanding; he was a businessman, an industrialist and a farmer; he was a successful writer and an economist; he was a friend, advisor, and colleague to all, in the first third of the twentieth century. At a critical moment in Austrian history, even while some sincere patriots questioned the “viability” of the new Austrian state, he was among that small band of pioneers working for a better future.—Ed.]

[3. ][René Stourm, Les Finances de l’Ancien R é gime et de la R é volution [The Finances of the Old Regime and the Revolution], 2 vols. (Paris: Guillaumin et Cie, 1885).—Ed.]

[1. ][This article was originally published in German in the Deutsche allgemeine Zeitung. Ausgabe Grosse (February 24, 1925).—Ed.]

[2. ][On the history of Indian monetary reform in the late nineteenth and early twentieth centuries, see Edwin W. Kemmerer, Modern Currency Reforms: A History and Discussion of Recent Currency Reforms in India, Porto Rico, Philippine Islands, Straits Settlements, and Mexico (New York: Macmillan, 1916), pp. 3-154.—Ed.]

[3. ][David Ricardo (1772-1823) spent his formative years in his family’s brokerage business, until he retired at the age of forty-two after accumulating a large fortune. He devoted his time to the study of political economy, writing several influential essays on inflation, gold, and monetary reform in the early nineteenth century during Britain’s wars with France. In 1817, he published his most famous work, The Principles of Political Economy and Taxation, which became a cornerstone of the Classical system. Among his contributions was the development of the theory of comparative advantage. He served as a Member of Parliament in the House of Commons from 1819 until his death.—Ed.]

[4. ][David Ricardo, “Proposals for an Economical and Secure Currency,” (1816) 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.]

[5. ][See Ludwig von Mises, “The Return to the Gold Standard,” (1924) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Intervention, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 136-53, for Mises’s analysis and criticisms of Irving Fisher’s and John Maynard Keynes’s proposals.—Ed.]

[6. ][See Chapter 2, “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” footnote 10.—Ed.]

[7. ][Fritz Machlup (1902-83) was an internationally recognized economist for his writings on international trade, finance, and currency; methodology of the social sciences; and market structures in his two major works, The Political Economy of Monopoly (1952) and The Economics of Sellers’ Competition (1952). He is also considered a pioneer in the development of the theory of the economics of knowledge in the three-volume work he completed before his death, Knowledge: Its Creation, Distribution, and Economic Significance (1980, 1982, 1984). He studied at the University of Vienna under Friedrich von Wieser, and Ludwig von Mises was his dissertation advisor for the book reviewed in this chapter. In Mises’s copy of the book, Fritz Machlup wrote the inscription “To my spiritual father.” Machlup also contributed to literature on the Austrian monetary and business cycle in The Stock Market, Credit, and Capital Formation (1940) and defended the Austrian theory of capital in his article “Professor Knight and the ‘Period of Production,’” Journal of Political Economy (October 1935).—Ed.]

[8. ]Die Goldkernwährung. Eine währungsgeschichtliche und währungstheoretische Untersuchung [The Gold-Core Standard: A Historical and Theoretical Monetary Investigation] by Dr. Fritz Machlup. With an appendix: translation of Ricardo’s currency plans from the year 1816 by Dr. Wilhelm Frontowitz and Dr. Fritz Machlup (Halberstadt: H. Meyers Publisher, Abteilung Verlag, 1925).

[1. ][This was originally written in German as a foreword to Siegfried Strakosch’s Das sozialdemokratische Agrarprogramm in seiner politischen und volkswirtschaftlichen Bedeutung [The Political and Economic Meaning of the Social Democratic Agricultural Program] (1926). The foreword was dated January 5, 1926.—Ed.]

[2. ][See Chapter 21, “The Austrian Problem,” footnote 2.—Ed.]

[1. ][This article originally was published in German in Mitteilungen des Hauptverbandes der Industrie [Reports of the Chief Association of German Industry], vol. 8 (1927). It was first delivered as a lecture at a meeting of the Austrian Industrial Association. During the three months from March 9 to May 31, 1926, Mises had toured the United States under the financial auspices of the Laura Spelman (the Rockefeller) Foundation, visiting and lecturing in a dozen cities.—Ed.]

[2. ][This would be approximately $109.4 billion in 2010 dollars. In 1913, U.S. Gross Domestic Product (GDP) was 39.1 billion, or $855.8 billion in 2010 dollars. Thus, U.S. debt to European creditors was about 12.8 percent of GDP.—Ed.]

[3. ][In 1922, the U.S. Congress passed the Fordney-McCumber Tariff Act, which increased the average ad valorem tariff rate to 38.5 percent, as a protectionist measure against foreign imports. It soon resulted in retaliatory trade restrictions against American goods in France, Spain, Italy, and Germany. Three years after Mises wrote this article, the U.S. Congress passed the Hawley-Smoot Tariff in 1930, which imposed an effective tax rate of about 60 percent on foreign imports into the United States, which again soon resulted in trade retaliation on the part of many other nations. The Hawley-Smoot Tariff is usually credited with exacerbating the intensity of the Great Depression, with international trade declining by around 30 percent during 1930-33.—Ed.]

[4. ][American farm groups attributed the rise in the prices of many manufactured goods used in agriculture to the reduction in foreign competition due to tariff restrictions on imports. For example, it was estimated that between 1918 and 1926, a fourteen-inch plow had doubled in price from $14 to $28; mowing machines from $45 to $95; and farm wagons from $85 to $150. On the other hand, by the mid-1920s, much of European agriculture had either normally recovered from the destruction and disorganization of the First World War, or had been artificially stimulated by government protectionist measures; as a consequence, American food exports to Europe had significantly decreased and, therefore, lowered American farming revenues from export sales.—Ed.]

[5. ][See Ludwig von Mises, “Changes in American Economic Policy,” (1926) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars:Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 160-62.—Ed.]

[6. ][The Mexican Constitution of 1917 declared that the private ownership of land was no longer a right but a privilege, and that the state possessed the authority to seize land and redistribute it in the national interest. This included restrictions on foreign ownership and use of land and resources in Mexico. It finally culminated in the Mexican government’s nationalization of American and other foreign-owned oil companies in 1938. See Ludwig von Mises, “Mexico’s Economic Problems,” (1943) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 3, The Political Economy of International Reform and Reconstruction (Indianapolis: Liberty Fund, 2000), pp. 203-54.—Ed.]

[1. ][This article was originally published in German in Deutsche Wirtschaftszeitung, vol. 25 (September 20, 1928).—Ed.]

[2. ][Ignaz Seipel (1876-1932) was a Roman Catholic prelate and head of the Christian Social Party in Austria. He twice served as chancellor of Austria (1922-24 and 1926-29). In general he followed a policy of social welfarism and interventionism, but he opposed the more directly socialist policies advocated by the Austrian Social Democratic Party during this time. He most especially opposed the inflationary policies of the immediate post-World War I period in Austria, and was able to bring the inflation to an end in 1922-23 with the financial and supervising assistance of the League of Nations.—Ed.]

[3. ][See Chapter 10, “On the Goals of Trade Policy,” footnote 23.—Ed.]

[4. ][See Ludwig von Mises, “The Direction of Austrian Financial Policy: A Retrospective and Prospective View,” (1935) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 286-93, for Mises’s more detailed summary of the consequences of what he, there, calls the “Renner System” of fiscal mismanagement and inflation, and what followed in the 1920s.—Ed.]

[5. ][See Chapter 19, “The Austrian Currency Problem Thirty Years Ago and Today,” footnote 6.—Ed.]

[6. ][In the mid-1920s, one Vienna newspaper referred to the fiscal policy of the Social Democratic government in control of the city as “the success of the tax vampires.” See Richard M. Ebeling, “The Economist as the Historian of Decline: Ludwig von Mises and Austria Between the Two World Wars,” in Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (London: Routledge, 2010), pp. 88-140, especially pp. 96-98.—Ed.]

[7. ][On the negative impact of rent controls imposed on residential housing in Vienna during this time, see F. A. Hayek, “The Repercussions of Rent Restrictions,” (1928) in Walter Block and Edgar O. Olsen, eds., Rent Control: Myths and Realities (Vancouver: The Fraser Institute, 1981), pp. 87-103.—Ed.]

[1. ][This article originally appeared in German in the Allgemeiner Tarifanzeiger (August 1, 1931). For Mises’s general analysis of the causes, consequences, and cures for the Great Depression, see Ludwig von Mises, “The Causes of the Economic Crisis,” (1931) in The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 155-181; also, Mises, “The Economic Crisis and Capitalism,” (1931) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 169-73; and for a general exposition of the Austrian theory of the trade cycle in the context of an analysis of the causes of and policy cures for the Great Depression in comparison to the Keynesian approach, see Richard M. Ebeling, “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short Run,” in Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (London: Routledge, 2010), pp. 203-72.—Ed.]

[2. ][A leading Austrian bank, Credit-Anstaldt, declared bankruptcy on May 11, 1931, when under Austrian banking law it had reached the threshold of losing more than half of its capital, due to demands from foreign and domestic depositors and lenders for withdrawals of sums owed to them. In May 1931, as well, the prominent German Danot-Bank fell into bankruptcy due to demands by depositors. The same happened to a series of other German banks in the weeks after Danot-Bank’s collapse.—Ed.]

[3. ][See Ludwig von Mises, “Senior’s Lectures on Monetary Problems,” (1933) in Richard M. Ebeling, ed., Money, Method, and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 104-9, especially pp. 107-8:

Deposits subject to cheques and savings deposits are two entirely different things. The saver wishes to entrust his money for a longer period; he wishes to get interest. The bank that receives his money has to lend it to business. A withdrawal of the money entrusted to it by the saver can only take place in the same measure as the bank is able to get back the money it has lent. As the total amount of the saving deposits is working in the country’s business, a total withdrawal is not possible. The individual saver can get back his money from the bank, but not all savers at the same time. That does not mean that the bank is unsound. It does not become unsound until the banks explicitly or tacitly promise what they cannot perform: to pay back the savings at call or at short notice.

The deposits subject to cheques have a different purpose. They are the businessman’s cash like coins and banknotes. The depositor intends to dispose of them day by day. He does not demand interest, or at least he would entrust the money to the bank even without interest. The bank, to be sure, could not earn anything if it were to hold the whole amount of these deposits available. It has to lend the money at short notice to business. If all depositors simultaneously were to ask for their deposits back, it could not meet the demand. This fact that a bank which issues notes or receives deposits subject to cheque cannot hold the total amount corresponding to the notes in circulation and to the deposits in its vaults, and therefore can never redeem at once the total amount of its liabilities of this kind, is the knotty problem of banking policy. It is the consideration of this difficulty that has to govern the credit policy of the banks that issue notes or receive deposits subject to cheque. It is this consideration that led to the legislation that limits the issue of banknotes and imposes on the central banks the retention of a reserve fund of a certain magnitude.

But the case of the savings deposits is different. Since the saver does not need the deposited sum at call or short notice it is not necessary that the savings bank and the other banks that take over such deposits should promise repayment at call or short notice. Nevertheless, this is what they did. And so they became exposed to the dangers of a panic. They would not have run this danger, if they had accepted saving deposits only on condition that withdrawal must be notified some months ahead.

—Ed.]