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• 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

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.

[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.]