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

With the Crimean War of 1854, the government’s debt increased to 294,200,000 florins. It was reduced to 145,700,000 florins by 1859. But the start of the Italian campaigns that year pushed it up again to 285,800,000 florins, along with a renewed suspension of specie payments as the public wished to redeem the paper currency representing the value of this enlarged debt.

      In 1863, an attempt was made, once again, to introduce a currency reform—the Plener Act—this time along the lines of Britain’s Peel’s Bank Act of 1844. But Austria’s disastrous war with Prussia in 1866 pushed the supply of paper money in circulation from 80,000,000 florins before the conflict to 300,000,000 florins at its end.

      The Compromise of 1867 that formally created the Austro-Hungarian Empire granted Hungary its own parliament, government, and domestic budget. It established a customs union and a common military and foreign policy between the two parts of the Habsburg domain, and a monetary union with the Austrian National Bank retaining its monopoly of note issue throughout Francis Joseph’s domain. Some of the Hungarian liberals had advocated a system of competitive note-issuing private banks in place of the National Bank, but secret agreements between the emperor’s government and the Hungarian nobility eliminated this as an option.

      On July 1, 1878, the Austrian National Bank was transformed into the Austro-Hungarian Bank. The emperor, under joint nomination of the Austrian and Hungarian parliaments, appointed its governor. He was assisted by two vice-governors—one Austrian and the other Hungarian—appointed by the respective governments. The Bank’s operating privileges were renewed in 1887, 1899, and 1910, with few substantial changes in their detail.

      Formally, from 1816, Austria had been on a silver standard. But as we saw, the Austrian National Bank maintained unofficial specie redemption only for limited periods of time, soon interrupted usually by another war crisis requiring currency expansion to fund the government’s expenditures.

      The paper currency florin, not surprisingly, traded at a significant discount against the silver coin florin. Between 1848 and 1870, this discount was never less than about 14 percent and was often between 20 and 23 percent. But restrictions on note issuance under the operating rules of the Bank limited the expansion of the supply of banknotes. The provisions of the 1863 Bank Act limited the circulation of “uncovered” florins to 200,000,000. Any amount above that had to be covered by gold or silver coin or bullion. Any additional “uncovered” banknote issuance was subject to a penalty tax against the Bank of 5 percent.

      With many of the major governments of Europe and North America establishing or reestablishing their economies on a gold basis in place of silver in the 1870s, the world price of silver began to fall.³⁴ After the Austro-Prussian War of 1866, the government’s pressures on the Bank to fund deficits were greatly reduced, and the Bank could more or less follow the rules against uncovered note issuance. As a result, the paper florin’s discount relative to silver disappeared by 1878. Silver began to flow into Austria-Hungary in such quantities that the Bank was instructed by the government to end the free minting of silver.

      As a result, the paper florin actually rose to a premium against silver. As Friedrich von Wieser expressed it, “Silver had become of less value than paper!”³⁵ In addition, the florin was significantly appreciating in value against gold. The price in paper florins for 100 gold florins between 1887 and 1892 was:

Average for the year	Austrian florin notes
1887	125.25
1888	122.87
1889	118.58
1890	115.48
1891	115.83

      The major monetary issue, therefore, during these years was to bring a halt to any further increase in the value of the Austrian paper currency. In February 1892, the Austrian and Hungarian governments invited a group of professional and academic experts to meet and address a set of questions relating to whether a gold standard should be adopted; if so, should it be monometallic or partly bimetallic with silver; what should be the status of government notes in circulation; how should the conversion from the existing florin to a gold standard be undertaken; and what monetary unit should be chosen?

      Some of the most illustrious people in the field were brought together to offer their views and opinions on these questions. Thirty years later Ludwig von Mises described them in the following manner:

      From March 8 to March 17, 1892, the government-convened Currency Inquiry Commission met in Vienna. The chairman was Finance Minister [Emil] Steinbach; beside him stood the memorable Eugen von Böhm-Bawerk, as section head. Thirty-six experts appeared before the commission to answer five questions that were posed by the government. 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, there was Wilhelm von Lucam, the highly honored longtime secretary general of the Austro-Hungarian Bank; Moriz Benedikt, the publisher of Neue Freie Presse [New Free Press]; Theodor Thaussig, the spiritual leader of the Viennese banking world; and Theodor Hertzka, the well-known writer on monetary matters and social policy. 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.³⁶

      Virtually all of the participants spoke in favor of Austria’s adoption of a gold standard. Menger, for example, at one point said: “Gold is the money of advanced nations in the modern age. No other money can provide the convenience of a gold currency in our age of rapid and massive commodity exchanges. Silver has become a troublesome tool of trade. Even paper money must yield to gold when it comes to monetary convenience in everyday life.... Moreover, under present conditions only a gold currency constitutes hard money. Neither a bank note and treasury note nor a silver certificate can take the place of gold, especially in moments of crisis.”³⁷

      Later summarizing the work of the commission, Wieser supported the adoption of the gold standard in colorful language:

      Money is like speech; it is a means of intercourse. He who would have dealings with others must speak their language, however irrational he may find it. Language is rational by the very fact that it is intelligible to others, and more rational in proportion as it is intelligible to more people or to all. There can no more be an independent money system than independent speech; indeed, the more universal character of money, as compared with language, appears in this, that while a national language has its justification and significance in the intercourse of the world, there is no place for a national monetary system in the world’s intercourse. If Europe errs in adopting gold, we must still, for good or evil, join Europe in her error, and we shall thus receive less injury than if we insist on being “rational” all by ourselves.³⁸

      The Currency Commission, in its official report to the Upper House of the Austrian Parliament, was no less adamant that gold, and only gold, was the recognized and essential international money. For that reason Austria-Hungary needed to adopt gold as the nation’s standard if it was to successfully participate in the commerce and trade of the world.³⁹

      The commission proposed and the government accepted that the monetary unit would be renamed the krone (the crown), with the new crown being equal to one-half the replaced florin. Standard coins would be gold pieces of ten and twenty crowns, each one being of 900 parts gold to 100 parts copper. The twenty-crown coin would have a full weight of 6.775067 grams, and a fine weight of 6.09756 grams. In 1892 an exchange rate for the crown was fixed at 1.05 Swiss francs and 0.8505 German marks.

      Silver was kept as a secondary medium of exchange of limited legal tender status for smaller transactions. Government paper money was temporarily kept in circulation up to a certain maximum, but with the expectation of its eventual retirement. For the transition to a full gold standard with legally mandated redemption of banknotes for specie, it was expected that the Austro-Hungarian Bank would continue to accumulate sufficient supplies of gold until at an unspecified date formal redemption would be instituted.

      An obligation to redeem crowns for gold was, in fact, never made into law. Yet from 1896 and most certainly after 1900 up until the outbreak of the war in 1914, the Austro-Hungarian Bank acted as if it now had that obligation and did pay in gold for its