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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 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.

[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.]