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

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.

[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.]