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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 25

The Currency and Finances of the Federal State of Austria1

The basic ideas of the reconstruction plan that federal Chancellor Dr. Seipel decided to carry out when he assumed his duties in summer 1922 were extremely clear and simple: the rejection of any further use of the printing press to fund state finances, restoration of a balanced budget, and fixing the gold value of the crown.2 It was a complete repudiation of the inflationary and capital-consuming policies that were implemented in the first days of the war, and which the postwar government—being dependent as it was on the destructionist mood of the masses—had carried to an extreme.

The difference between Seipel’s policies and the policies inaugurated by the Social Democratic Chancellor Renner3 in 1918 is seen most clearly with the use they respectively made of foreign loans. The relief credits that foreign governments granted to Renner and his successors, and against which they pledged Austria’s national property, were in the form of foodstuffs; their price was debited against the Austrian state. The government sold these provisions to the populace at prices below their cost of production. The proceeds from their sale were used to finance current government expenditures, not to repay the debt. The state loans received by Seipel, by contrast, were used for investments.4

The stabilization of the gold value of the Austrian crown was completely successful. The rate of exchange was stabilized at 14,400 paper crowns = 1 gold crown. Under the law of December 20, 1924, the official designation schilling was introduced for 10,000 paper crowns and the designation groschen for the hundredth part of a schilling. The Austrian National Bank is holding strictly to the regulations of the Bank Law. There is absolutely no use of the Bank, indirectly or directly, for the purposes of fiscal management.

The Austrian National Bank, which began its activity in January 1923, is obligated to cover the entire quantity of banknotes in circulation and those liabilities immediately payable on demand (minus the debt of the federal government) with its specie reserves; both currency and foreign exchange may be included for this purpose, at the rate of 20 percent during the first five years, 24 percent during the following five years, and at one-third thereafter. At the end of 1927, in fact, there were quantities of precious metals and foreign exchange worth about 830 million schillings at the discretionary possession of the Austrian National Bank, meaning that 80 percent of the notes in circulation and giro obligations were fully covered.

The Austrian National Bank actually is not required to redeem its notes in specie. It has the obligation to make sure, by all means at its command, that until the redemption of the banknotes in metal becomes legally required, there should be no decline in the gold value of its notes. Obviously, it can fulfill this obligation in no other way than by actually exchanging its banknotes for foreign exchange at the legal, stabilized rate of exchange (one dollar = 7.10 schillings or one kilogram of fine gold = 4723.20 schillings), and from which parity it does not deviate by more than the gold points beyond which it would be profitable to import or export gold. In order to fulfill this obligation the Austrian National Bank follows the policy that, decades ago, Wilhelm von Lucam5 called the fundamental rule for the conduct of a note-issuing bank that does not redeem in specie, but which is determined to maintain the stability of the metal value of its notes: Do everything that a specie-paying bank would do and not do anything that a specie-paying bank would not do.

The success of this stabilization policy can be seen in the fact that no one any longer talks about an Austrian currency problem.

As has already been mentioned, the precondition for this currency policy was the government’s renunciation of any further indirect or direct use of the note press for the purposes of fiscal management.

The federal budget estimated for 1928 is given below: The current budget, therefore, shows surpluses. A deficit arises only because of investments.

The total income of the federal government from public taxes is estimated at 934.8 million schillings. Of that amount only 698.4 million is left for the federation since 236.4 million is transferred to the provinces and municipalities. The proceeds from direct taxes are estimated at 285 million schillings, of which 147 million schillings are attributable to the income tax, 52 million schillings to the general profit tax (i.e., the profit tax of those enterprises that are not obligated to tender public accounts), and 58 million schillings due to the corporate tax (i.e., the profit tax of enterprises that are obliged to render public accounts). The proceeds from customs duties are estimated at 227 million schillings, and the proceeds from excise taxes at 85.7 million schillings. These direct taxes are clearly excessively oppressive, and it will be necessary to reduce them as soon as possible.

Compensation could easily be found in an increase in excise taxes since these have not yet reached their prewar level. This is especially blatant in the case of sugar. Sugar is taxed at 14.40 schillings per 100 kg as against 38 crowns before the war; hence the prewar tax was 3.8 times as high as the present tax. The proceeds from the stamp taxes and legal fees (including inheritance and gift taxes) are estimated at 102.3 million schillings. Of very special importance is the sales tax on goods, the proceeds of which are estimated to come to 215 million schillings. The tobacco monopoly is calculated to produce a net profit of 183.1 million

schillings, the salt monopoly some 13.3 million schillings, the national lottery some 10.3 million schillings, and the monopoly for gunpowder and explosives about 0.8 million schillings.

The conditions of federal public enterprises are hardly satisfactory. It is true that the post-and-telegraph office is calculated to have a cash surplus of 0.6 million schillings, but the facilities have not been appropriately depreciated, and no doubt a considerable depreciation needs to be recorded; there is also an excess in personnel and inefficient management, which is characteristic of public enterprises. Similarly unfavorable are the conditions of the federation’s abundant possession of forests; and even more unfavorable is the situation of the (fortunately not very extensive) national coal and steel enterprises.

The situation of the federal railroads is also extraordinarily unfavorable. The federal railroads were established as an “independent economic body,” so that their activities do not appear in the national budget. The figures concerning the railroads and the postal system given in the above summary of the federal pre-estimate include only the part of the departments which the tangled and artificial structure allows to go through in the national general accounts.

Whoever wants to be informed about the condition of the railroads must examine the business report of the “Austrian Federal Railroads” for the year 1927. The details of this report cannot be gone into within the framework of a short article. Anyone who evaluates the condition of the federal railroads from the viewpoint of national finances will be less interested in confirmation of the universally known fact of their unprofitability; the real problem is how, or even whether, there can be any improvement in this situation as long as they remain public enterprises. The great expectations over the electrification of the federal railroads seem not to have been fulfilled, even though there are still differences of opinion among the experts; moreover, it should be pointed out that the financial condition of the federal railroads will become even more unfavorable to the extent to which the highway network (which today is no longer adequate to meet modern demands) will be organized in such a way that motor transportation in Austria will acquire the same place in the modern system of transportation that it has elsewhere.

Let just one fact be highlighted from the federal railway report. The total business expenses of the federal rail system came to 550.5 million schillings in 1927. Of this amount 57 percent went to pay the wages of the current personnel and 17.4 percent to cover retirement pensions; hence the combined outlays for personnel constitute three-quarters of total business expenses.

The financial condition of the Austrian Federation would be far more favorable if the federation were not burdened with the ownership and operation of the railroads, the post and telegraph system, the national forests, and the mines.

Moreover, the national administration is much too expensive. Austria consists of nine federal states. Five of these have fewer than 400,000 inhabitants and seven have fewer than 1,000,000. The smallest federal state, Vorarlberg, numbers only 140,000. The constitutional right of autonomy that was granted to the provinces has led to their setting up an excessively large administrative apparatus, which not only is exorbitantly expensive but does not even work very well and, above all, only puts impediments in the way of economic activity. But the worst is that in the provinces and in the towns those who must raise the revenues do not decide on the expenditures.

We have already spoken about the remittances of the federation to the provinces, which represents more than a quarter of the provincial revenues. In the provincial diets there predominates among the elected representatives a rural or petty bourgeois mentality, which sees industrial enterprises and especially banks as objects for unlimited taxation. It is even worse in the municipal chambers. The situation here is basically no different than in Germany; but it must be kept in mind that the Austrian economy is even less in a position to afford the luxury of a costly administration, along with superfluous provincial and local socialistic experiments. The leading fiscal policy problem in Austria is the financial regulation of the autonomous entities. The extent of the fiscal problem is clearly seen by the fact that the provincial and municipal budgets account for about six-tenths of the total budget of the federation.

Vienna, which constitutionally is both a province and a municipality at the same time, is in a far more favorable situation than the one prevailing in the other provinces. In the period before the war the Christian Social Party developed a vigorous municipal socialistic system that monopolized the streetcars and the provision of electricity and gas, and set up various other economic operations. All these investments were financed through loans, the burden of which was reduced to almost zero by the inflation. The Social Democratic Party, which rules Vienna today, consequently has taken over a rich inheritance. Moreover, Vienna succeeded in coming out extraordinarily well in its financial arrangement with the federation.

Finally, the Social Democratic municipal administration exploits its taxing authority without any regard for the city’s economic capacity to pay.6 The municipal socialistic activity of the Vienna government very severely harms the development of the city. Vienna’s most important means of urban transportation is still the streetcar. The municipal government thwarts the development of modern autobus traffic in order not to endanger its revenues from the streetcars and the metropolitan railway (the latter was turned over to the municipality gratis by the federal government and was electrified in a way that was far too expensive). Vienna has no subway since the municipality shrinks from this sort of enterprise, which might well make no profit under city management; on the other hand, private entrepreneurs are not allowed to set up a subway system due to the reigning socialistic bent of the city.

The development of an urban transportation system would be a far more beneficial influence on the housing situation in Vienna than the construction of rental apartments. The Social Democratic thesis is that the housing shortage (in a city whose population of 2.2 million in 1914 declined by 335,000 to 1.86 million in 1923) is not due to rent controls but merely the scarcity of housing.7 The municipal government in Vienna undertook a brisk construction activity in the last few years. The city government spent on these projects 117 million schillings in 1926; for 1927, 118 million schillings are projected for the same purpose and 76 million schillings for 1928.

To pay for these expenditures a special-purpose tax was imposed, but it covered only a part of the outlays. For 1927 the yield from this special tax is estimated to be 35.3 million schillings, not even a third of the amount spent on housing construction. In reality it is financial transfers from the federation that make building activity possible for the municipalities. In 1926, the last year for which the figures have already been published, the proportion of general federal revenue transferred from the federation to Vienna amounted to 118.2 million schillings, which approximately equaled the expenditure by the City of Vienna for residential building and housing-project construction.

Austria’s future fiscal policy, first of all, must be directed toward cutting back on the direct taxes that impose a heavy burden on industry. This is necessary in order to stimulate investment activity, attract foreign capital, and strengthen the competitiveness of our industry on the world market. It must be acknowledged that much has been done in this area in recent years. The corporate tax rate has been lowered from 36 percent to 25 percent; some oppressive regulations connected with the pension tax have been eliminated; some tax encouragements for investment have been created; and the regulations relating to the personal tax law have been moderated.

All this, however, is still far from enough. It will not be possible to avoid radical reforms in the area of provincial and local taxes, especially in Vienna. This is true in the first place in reference to the hotel tax, which hampers the development of the tourist industry and has far more importance for Austria than it has for Germany. To carry out these reforms it will be necessary to simplify the administrative apparatus, especially in the provinces and municipalities, and to eliminate superfluous expenses. The crucial problem, however, relates to the public enterprises, above all the national railways.

One can see, then, that the financial problems that Austrian fiscal policy is confronted with are basically the same fiscal policy problems that other European states have to solve. For the present, Austria’s financial situation is by no means disadvantageous; the treasury holdings of the federal finance administration are very considerable, the balance of the federal budget is not endangered, and the financial difficulties of a number of provinces and municipalities could be sorted out with a bit of good will. Hence the task of reconstruction that Seipel tackled in 1922 has unquestionably succeeded.

Today, Austria’s fiscal policy problem is a problem of production. Not all the factors affecting costs of production in the Austrian economy can be influenced by domestic economic policy measures. The raw materials and semimanufactured goods that Austria has to import from abroad must be paid for at world-market prices. As a capital-poor country, Austria must have recourse to foreign capital; it follows that profit and interest rates have to be higher in Austria than in the majority of the industrial states that compete with her. The labor unions use all the means at their disposal to resist a lowering of wages.

A reduction in costs of production, which is an unavoidable precondition for an increase in Austrian exports and a decrease in imports, therefore, must be attempted, first of all, through a reduction in the taxes that burden industry.

[1. ][This article was originally published in German in Deutsche Wirtschaftszeitung, vol. 25 (September 20, 1928).—Ed.]

[2. ][Ignaz Seipel (1876-1932) was a Roman Catholic prelate and head of the Christian Social Party in Austria. He twice served as chancellor of Austria (1922-24 and 1926-29). In general he followed a policy of social welfarism and interventionism, but he opposed the more directly socialist policies advocated by the Austrian Social Democratic Party during this time. He most especially opposed the inflationary policies of the immediate post-World War I period in Austria, and was able to bring the inflation to an end in 1922-23 with the financial and supervising assistance of the League of Nations.—Ed.]

[3. ][See Chapter 10, “On the Goals of Trade Policy,” footnote 23.—Ed.]

[4. ][See Ludwig von Mises, “The Direction of Austrian Financial Policy: A Retrospective and Prospective View,” (1935) 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. 286-93, for Mises’s more detailed summary of the consequences of what he, there, calls the “Renner System” of fiscal mismanagement and inflation, and what followed in the 1920s.—Ed.]

[5. ][See Chapter 19, “The Austrian Currency Problem Thirty Years Ago and Today,” footnote 6.—Ed.]

[6. ][In the mid-1920s, one Vienna newspaper referred to the fiscal policy of the Social Democratic government in control of the city as “the success of the tax vampires.” See Richard M. Ebeling, “The Economist as the Historian of Decline: Ludwig von Mises and Austria Between the Two World Wars,” in Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (London: Routledge, 2010), pp. 88-140, especially pp. 96-98.—Ed.]

[7. ][On the negative impact of rent controls imposed on residential housing in Vienna during this time, see F. A. Hayek, “The Repercussions of Rent Restrictions,” (1928) in Walter Block and Edgar O. Olsen, eds., Rent Control: Myths and Realities (Vancouver: The Fraser Institute, 1981), pp. 87-103.—Ed.]