The Online Library of Liberty

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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 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.

[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.]