Monetary and Economic Policy Problems Before, During, and After the Great War. Людвиг фон Мизес
at the gates to the Nazi death camps.
In Mises’s case and for many others it meant leaving the country of their birth and seeking refuge in other lands. Among those who left before or immediately after Germany’s annexation of Austria were many members of the Austrian School of economics or Mises’s private seminar circle (both Jews and non-Jews): Martha Steffy Browne, Gottfried Haberler, Friedrich A. Hayek, Felix Kaufmann, Fritz Machlup, Ilse Mintz, Oscar Morgenstern, Paul N. Rosenstein-Rodan, Alfred Schutz, and Erich Voegelin, to name just a few.
Mises had departed in autumn 1934 for a teaching position at the Graduate Institute of International Studies in Geneva, when it was clear that the collectivist darkness was starting to fall over the center of Europe. He made a new life for himself after 1940 in the United States, like many of his Austrian colleagues and friends, where the spirit of freedom was not yet in the same shadow of tyranny as in their native Austria. America, for them, was still a land where Austrian Jews such as Mises could breathe the air of liberty.
He continued to explain and defend the principles and ideals of classical liberalism and the free market in his new home in America until his death on October 10, 1973, at the age of 92.
Richard M. Ebeling
Professor of Economics
Northwood University
June 2011
The Political-Economic Motives of the Austrian Currency Reform 1
I
The fact that from the middle of 1888, changes in the value of the Austrian currency had taken on a pattern disadvantageous to domestic production gave a direct impetus for the reform of the Austro-Hungarian monetary system, a reform that had been dragging on for decades before this.
The price of 100 florins in gold (250 francs) amounted, on average for the year 1872, to 110.37 Austrian paper florins and increased, beginning with this year (with a small interruption), up to 125.23 Austrian paper florins as the average for 1887. From then on, it began to decline. It amounted to:
| Valued in Austrian florins | Average for the year |
|---|---|
| 122.87 | 1888 |
| 118.58 | 1889 |
| 115.48 | 1890 |
| 115.83 | 1891 |
A widely held view, which met with little opposition, held that these increases in value of the Austrian currency were neither incidental nor temporary phenomena; in fact, they could be traced back to serious, economic causes. There was a perceived agreement that the fall in the agio2 would not come to an end by itself: indeed, it would continue at an increased rate in future years if a change in the currency did not occur at the appropriate time. This view found its most ardent supporter in Hertzka,3 who articulated that opinion in the investigations of the currency commission. If the monarchy persisted with a nonconvertible currency, the florin would continue to increase in value until finally it would equal the gold value of the pound sterling by the end of the nineteenth century.4 Most of the individuals who had their say during the proceedings of the currency commission shared this view; Minister of Finance Steinbach5 repeatedly expressed a similar opinion, for example, in the session of the House of Representatives on July 14, 1892. The generally widespread belief in the continuing “improvement” in the value of the Austrian currency was one of the most effective motives for the accelerated initiation of a reform of the currency.6
The majority saw the most important reason behind the increase in the value of the currency in the fact that there was a legal limit on the maximum quantity of state notes in circulation and a suspension of silver coinage for private uses. This meant that within the monarchy increases in the quantity of the currency could no longer match increases in the demand for currency. This argument, which was an application of the quantity theory to Austrian circumstances, primarily relied upon the fact that the quantity of currency in circulation within the monarchy remained considerably below the quantity in circulation in other countries.
According to O. Haupt, the currency in circulation within the Austro-Hungarian Monarchy amounted to 779 million florins at the end of 1885, which represented a per capita circulation of 20.10 fl. In the most important countries, the per capita money in circulation at the end of 1885, in francs, was [25 shown opposite—Ed.].
Austria was ranked twelfth place with respect to the relative size of the monetary system. However, this factor alone does not absolutely
| France | 234.80 |
| Netherlands | 148.70 |
| United States | 112.90 |
| Belgium | 102.50 |
| Great Britain | 98.55 |
| Germany | 91.05 |
| Spain | 86.70 |
| Switzerland | 77.70 |
| Denmark | 77.20 |
| Portugal | 74.50 |
| Italy | 58.30 |
| Austro-Hungary | 41.25 |
| Sweden | 36.90 |
| Rumania | 32.20 |
| Norway | 29.80 |
| Russia | 27.557 |
justify the conclusion that Austro-Hungary’s money in circulation failed to correspond to the demand for it. It is obvious that those Western countries where capitalistic development had advanced far ahead of the Danube Empire had a larger demand for money. In addition, it is not surprising that Italy had a larger quantity of money in circulation than was in the Austro-Hungarian Monarchy, considering that in 1885 Italy was experiencing a period of growing paper money inflation and an increasing agio. It is equally inappropriate to compare the monarchy’s circumstances with those in Spain and Portugal.
The proponents of the quantity theory laid the primary responsibility on the fact that the Austro-Hungarian monetary system lacked the possibility for a currency expansion starting in 1879, and in a certain sense already beginning in 1867.
Admittedly, an increase in the monarchy’s monetary gold reserves was practically excluded. Because gold was not a part of the Austrian currency system, it could only be employed (aside from its use for the payment of customs duties and in some business transactions) as a backing for the notes issued by the Austrian-Hungarian National Bank. However, due to the decline in the price of silver, the Austro-Hungarian Bank could not increase its gold reserves without incurring a loss; in the period from December 31, 1877, to August 10, 1892, these reserves grew by a mere 401.65 kg.8
Since the abolishment of silver coinage for private uses in the spring of 1879, silver face-value coins were minted only for government uses. In the years 1884-91, silver face-value coins were minted at an average annual value of 7 million florins. The entire amount of silver face-value coins minted between 1876 and 1891 amounted to 226.6 million florins. The Austro-Hungarian Bank’s silver holdings increased from 66.6 million florins at the end of 1875 to up to 166.7 million florins at the end of 1891.
The legal limitation on state notes in circulation to 312 million florins was a particular characteristic of the Austrian monetary constitution, under which the quantity of short-term, interest-bearing treasury bills in circulation, and the sum of state notes and interest-bearing treasury bills was prohibited from exceeding a combined amount of 412 million florins. Within this limit, however, the decrease in the quantity of Saltworks notes9 was replaced with an increase in the circulation of state notes. The possibility always existed for satisfying the increasing demand for currency in circulation within this limit through an expansion of state notes in circulation. And beginning in 1888 we see a constant increase in the quantity of these notes in circulation. The entire state note circulation amounted to:
| Million florins | At the end of the year |
|---|---|
| 336.8 | 1888 |
| 357.2 | 1889 |
| 370.4 | 1890 |
| 378.8 | 1891 |
Although