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 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.

[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.]