Monetary and Economic Policy Problems Before, During, and After the Great War. Людвиг фон Мизес

      All of these arguments, which had been brought forward by inflationists from all countries and at all times, were accepted by the friends of “our fathers’ paper florin” to defend their standpoint.⁴¹ The weapons with which these battles were fought were not always genteel; opponents did not lack for suspicions of and insults toward the “liberal, usurious, capitalistic, national economy.” The objective accomplishments, in contrast, could hardly assert a claim for a serious respect; because even if one accepted all of the inflationist arguments and wanted to admit that “increasing the media of exchange in circulation means welfare and earthly happiness, decreasing misery by the same amount,”⁴² a series of important considerations remain against the practical implementation of these plans.

      When Prince Alois Liechtenstein⁴³ recommended “a rational, moderate inflation accommodating the needs of production but not anticipating them by too much,”⁴⁴ or Schober desired that the nation might equip the economy “with a sufficiently large amount of non-dwindling money,”⁴⁵ there was still nothing that could be learned about the goals and methods of a future monetary system policy.

      Only Josef Ritter von Neupauer formulated a certain suggestion. Based on chartalist theory,⁴⁶ he supported maintaining the paper currency; he even wanted to replace the silver florin with notes. Money is, namely, “that which the state declares it to be.” The purchasing power of money is dependent upon its quantity, its velocity of circulation, and the monetary requirements within its geographical area of use. The currency reform, with its transition to specie circulation, was not only squandering the people’s capital, but also was fraught with disadvantages, since it would deprive the government of its ability to influence the value of money by increasing or decreasing the amount of media of exchange in circulation. Indeed, money must not be capriciously increasable. “The natural obstacle to the increase in hard currency,” however, can “be substituted by legal obstacles to the increase in state paper money under public control.” One merely had to detect “an ideal measure of value” that would underlie economic policy. For this ideal measure, however, Neupauer proposed the relative market price of gold for Austrian currency notes. The legislature would have to ascertain a standard price for the yellow metal and decree “by how much the state administration would have to approximate this standard price and counterbalance fluctuations above or below a certain point by regulating the amount of money in circulation.”⁴⁷

      It should be noted that if Neupauer’s proposal had been adopted, which boils down to a type of calculation in terms of gold, the monarchy would have been unable to avoid the effects from a change in the price of gold, whether it were a devaluation due to production exceeding demand, or a rise in its price due to insufficient production. It is inconceivable why Neupauer did not want to endorse the free minting of gold coins according to parity at the standard price. This would offer a secure means against all increases in the international price of gold for the currency, and would place only low costs on the economy, if the circulation of state notes were retained at its entire amount. The primary failure in the Neupauer project, which it shares with all other inflationist proposals, by the way, is the lack of any clear observable indicator for measuring increases in the value of gold. Neupauer carefully skirts another obstacle with which similar proposals usually collide: we mean the difficulty of detecting a reliable criterion for an insufficiently supported demand for currency. Because he starts with the tacit understanding that all other states will retain specie in circulation, a benchmark for the value of the paper currency results directly from its international appraisal. The goal of monetary policy for maintaining the value of money becomes maintaining its parity with a foreign currency; however, the methods that lead to this goal will remain obscure for now. No one can say what effect an increase in the media of exchange by a certain amount is capable of generating. Even Neupauer had to concede this, since he says there might be “by way of a test, a successive increase in media of exchange to be placed in circulation.” The economy, however, is not a suitable object for tests.

      It should be assumed with all probability that even the news that a potential increase in the state note circulation was impending (albeit only under legally determined preconditions) would have forced down the price for Austrian money further than would have appeared healthy even to many of the friends of “cheap money.” To what steps would the moderate inflationists then turn? It could have easily come about that the increasing agio would have gone hand in hand with insufficient supply of money in circulation.

      The mistrust within market circles and among the broadest classes of the population against any new issuance of notes would have been completely justified. Once such a basis for influencing the value of the currency had been accepted, who could have assured that the agricultural and bourgeois interests (that have prevailed for a quarter century in our politics) would not have soon been pushing for an endless progression on the way to inflation. Where would this have led, if Josef Schlesinger’s⁴⁸ People’s Money fantasy had become law?

      A rational and feasible monetary policy can only make preservation of the stability of the currency’s exchange rate its goal; in the first place, the only means to adhere to this is to maintain specie in circulation, and under the current circumstances this means keeping gold in circulation. Every attempt to promote a single interest group through selective changes in the value of money must inherently fail, ignoring all other reasons, because the economic effects of this kind of measure are only temporary; in order to maintain those effects there would have to be a continuing increase of the notes. This could, however, end in no other way than with a complete devaluation of the money in circulation.⁴⁹

      VI

      The power relationships between the parties concerned with monetary policy at the time of tackling currency reform were generally in favor of the introduction of a gold currency. Unimportant in number and influence were those who advocated the maintenance of the current monetary system, because they expected a continuing increase in the value of money. To wit, these were solely the possessors of monetary claims. All other interest groups desired a change in the currency that would offer, at a minimum, a halt to the continuing “improvements” of the value of the currency; all manufacturers belonged to this group, and also the workers and employees, whose interests here went hand in hand with those of their employers. Even high finance, which had substantial words to say about currency questions, was found to be on this side. Admittedly, the opponents of the current currency system were not united in their views about the structure of a future system. However, the efforts to create a “national,” inflationist monetary system were completely futile.

      Voices that spoke for the adoption of a gold-backed currency included those speaking for trade and manufacturing interests, and also those voices supporting the gold currency doctrine, the tenet starting from Lord Liverpool’s theory,⁵⁰ developed further by Bamberger⁵¹ and Soetbeer,⁵² and which remained unshakably standing despite all of the bimetallist attacks. They found solely in the yellow metal a suitable basis for the currency system of a cultured people.

      Thus, the question of implementing a metallic currency was already decided before the actual discussions about the reform project had even begun, and general interest had already turned to the so-called relation. This was the point where the parties’ differences most vehemently collided. One ascribed the greatest economic importance to the gold content of the future monetary unit. All investigations about the economic goals and the results of the reform began with the question of the parity exchange relationship.

      The importance of the question—whether the new florins would be minted lighter or heavier—was neither to be denied nor underestimated. If one had selected, instead of the parity set by law in August at a base of 2 francs, 10 centimes, a lighter florin of approximately 2 francs or a heavier florin of approximately 2 francs, 50 centimes (the known proposals that were made about the value of the florin fluctuated within these boundaries), this certainly would have exerted a deep and enduring effect on the entire economic system of the monarchy, and the results of such a revolutionary change to the value of money would only have been settled much later. However, there could be no discussion of such a drastic “reform” of the value of the Austrian currency.

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