The articles and lectures included in this volume by the Austrian economist Ludwig von Mises were written in the years before, during, and after the Great War of 1914-18, as the First World War used to be called. They focus on the monetary, fiscal, and general economic policy problems of, first, the Austro-Hungarian Empire and, then, the new postwar Austrian Republic after the dismantling of the Habsburg Monarchy.

For those who may be familiar with Mises’s more theoretical works on various themes of monetary theory and policy,¹ comparative economic systems—capitalism, socialism, and interventionism²—the general nature and workings of the market economy, or the methodology and philosophy of the social sciences,³ most of these articles and lectures (like the ones in volume 2 and 3 in this series)⁴ offer a different perspective on Mises as an applied economist. Here is not the broad theorist concerned, often, with stepping back from the particular details of specific historical circumstances to investigate and evaluate the essential and universal properties of human action; or the institutional prerequisites for economic calculation and the rational allocation of resources among competing ends; or the relationships between time preference, investment time horizons, monetary expansion, and the sequential stages of the business cycle.⁵

Instead, these essays investigate and analyze the historical and institutional workings of the pre-World War I monetary system of the Austro-Hungarian Empire, and the issues surrounding legal specie redemption for the banknotes of the Austro-Hungarian Bank; the politics behind the establishment of the gold standard in Austria-Hungary; the growing fiscal imbalances developing in the Habsburg Empire due to the patterns of government spending and taxing policies in the first decade of the twentieth century; and the reasons behind the economic crisis that hit Austria-Hungary in the years immediately before the start of the Great War. Here, too, we see Mises analyzing during the war the motives behind German and Austro-Hungarian trade policy, the impact and significance of emigration from Austria, the effects from the monetary inflation used to fund the government’s war expenditures, and the pros and cons of financing those war expenditures through taxation versus borrowing by the issuance of war bonds.

After the war, Mises explains the distorting effects from the new Austrian government’s control and rationing of foreign exchange for imports and exports; the impact on the Austrian foreign exchange rate of monetary expansion to finance the government’s huge deficit spending; a specific policy agenda to bring the country’s financial house back into order, and the need for cooperation from both businesses and labor unions if this was to be achieved without Austria’s currency collapsing into hyperinflation; the claims that holders of banknotes of the old Austro-Hungarian Bank could make on the new Austrian National Bank in the postwar period; Austria’s fiscal problems in the period after the end of the inflation; and the lessons for banking reform after the collapse of several banks in 1931.

Ludwig von Mises became immersed in these issues because he had to earn a living outside the Austrian academic arena. University teaching appointments were few and far between in Austria both before and after the First World War, even though Mises was clearly qualified for such a position.⁶ His only formal relationship with the University of Vienna, after graduating in 1906 with a doctoral degree in jurisprudence,⁷ was as a privatdozent (an unsalaried lecturer), which permitted him the privilege of offering seminars during the academic year. Mises offered such a seminar almost every term from 1913 to 1934 (except for most of the time during the Great War). He was promoted to professor extraordinary in May 1918, but this was a purely honorific title that was still unsalaried and with a nominal “tenure” as a professor in this status.⁸

However, from 1920 until the spring of 1934, Mises organized and chaired a privatseminar (private seminar) of interested scholars in the fields of economics, history, sociology, political science, and philosophy. It met twice a month between October and June on Friday evenings at 7 p.m. at his office at the Vienna Chamber of Commerce. The private seminar came to an end when Mises accepted a full-time teaching position at the Graduate Institute of International Studies in Geneva, Switzerland, as professor of international economic relations beginning in autumn 1934.⁹

Because an academic career was closed off to him, from 1909 to 1934 Mises made his living as an economic advisor and policy analyst for the Vienna Chamber of Commerce, Crafts, and Industry. First hired as an assistant for the drafting of documents, in 1910 he was promoted to deputy secretary. When he returned from active duty in the First World War, he was made “first secretary” at the Chamber, responsible for matters relating to a wide variety of areas including monetary and fiscal affairs, trade and financial issues, and administrative and constitutional law.

He developed and refined his skills as an economist having to deal with the everyday practical affairs and policy issues of the Austria of his time. He had to master and maintain a thorough and extremely detailed knowledge of the Austrian economy and the impact of Austrian government policy on the industrial, commercial, and monetary and fiscal affairs of the country.¹⁰ As Mises expressed it years later in his Memoirs:

My job with the Handelskammer [the Chamber of Commerce] greatly expanded my horizons. That I now have the material for a social and economic history of the downfall of the Austrian civilization readily at hand is to a great degree the result of the studying that was required of me to be able to carry on with my work in the Handelskammer. Travels that led me to all parts of old Austria-Hungary from 1912-1914 taught me much in particular. In visiting the centers of industry, my intent was to become acquainted with the industrial situation in view of the renewal of customs and trade relations with Hungary, and the adoption of new, autonomous tariffs and trade treaties.

The main thrust of my job with the Handelskammer was not dealing with commercial questions, but those pertaining to finance, currency, credit, and tax policy. In addition, I was given special assignments on an ongoing basis. From the time of the armistice until the signing of the Peace Agreement of Saint Germain [in September 1919] I was the consultant on financial questions to the Foreign Office. Later, when the terms of the peace treaty were put into effect, I was in charge of the office concerned with the prewar debt. In this capacity I had numerous dealings with the representatives of our former enemies. I was the Austrian delegate to the international Handelskammer [the International Chamber of Commerce] and a member of many international commissions and committees, whose insoluble task it was to facilitate the peaceful exchange of goods and services in a world pervaded by national hatred and the precursors of genocide.¹¹

At a relatively early age Mises seems to have formulated in his mind a rather comprehensive classical liberal worldview of the social order. His experience in the role of applied economist clearly left its mark and influenced his understanding of the effects that government intervention could have on the effective functioning of a modern market economy. To appreciate this, and the writings included in his volume, it is necessary to take a glance at the political and economic environment of the old Austro-Hungarian Empire and the Austrian monetary system as it developed in the nineteenth century.

The House of Habsburg, which came to rule a vast empire for nearly eight hundred years, had its origin in the thirteenth century. Through a series of royal marriages, treaties, and some conquests, the Habsburg Monarchy gained control over a large territory in Central and Eastern Europe, and for a period of time large areas in Western Europe as well, including Spain, parts of modern-day France, Italy, Germany, and Switzerland, and what later became Holland, Belgium, and Luxemburg. From the thirteenth century to the middle of the nineteenth century, the Habsburgs also nominally headed the Holy Roman Empire, or its later, loose German Confederation.

It was during this time, when the Habsburgs were beginning to dominate so much of Europe, that Emperor Frederick III (1415-93) had inscribed on official buildings the five vowels, A E I O U, which he interpreted as “Alles Erdreich Ist Österreich Untertan” (“All the earth is subject to Austria”), or in Latin, “Austriae Est Imperare Orbi Universo” (“Austria must rule the universe”).¹³

The Habsburgs ruled as absolute monarchs. But under the influence of the Age of Enlightenment and the early phase of the French Revolution, Empress Maria Theresa (1717-70) and then her sons, Joseph II (1740-90) and Leopold II (1747-92), attempted to introduce various forward-looking reforms while retaining the principle of absolutism. The dark turn taken in the French Revolution and the rise of Napoleon to power shifted the monarchy back in a far more conservative direction under Francis II (1768-1835). With Napoleon’s victories over the German states, the Holy Roman Empire was dissolved and Francis II declared himself emperor of Austria in 1804.

As one of the final victors over the French after Napoleon’s defeat in Russia in 1812, the Habsburg Empire in Central and Eastern Europe was consolidated following the Congress of Vienna in 1815 as one contiguous territory that by the 1880s incorporated what are today Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia, Bosnia, and large parts of Italy, Poland, Ukraine, and Romania.

In the years just preceding the First World War, the Austro-Hungarian Empire covered a territory of about 415,000 square miles and included within its borders a dozen or so national and linguistic groups, including Germans, Hungarians, Czechs, Slovaks, Croatians, Romanians, Italians, Poles, Bulgarians, Serbians, Slovenians, and Ruthenians. Out of a population of 50 million the Germans and Hungarians each numbered about 10 million, with the remaining 30 million made up of these other groups.

Europe of the nineteenth century experienced a relentless battle between four powerful ideas: monarchical absolutism, political and economic liberalism, integral nationalism, and revolutionary socialism. Absolutism insisted upon the divine rights of kings to rule without restraint; liberalism demanded the recognition of individual liberty, representative and limited constitutional government, and freedom of private enterprise from state control; integral nationalism (by the middle decades of the nineteenth century) increasingly insisted upon the unification and political independence of peoples sharing a common language, culture, and history, and finally a common ethnicity or race;¹⁴ and socialism called for the overthrow of private property, nationalization of the means of production, and greater economic and social equality by either violent or democratic methods. All four of these ideological forces were at work in the Habsburg Monarchy until the end of the Austro-Hungarian Empire in the ruins of the First World War.

The French Revolution of February 1848 reverberated across much of Europe, including in the Austrian Empire. Within days and weeks of the uprising in Paris, students on the streets of Vienna demanded constitutional change, and the Italians and Hungarians were in open revolt against their Habsburg rulers. By the end of 1849, however, the Italians and Hungarians had been crushed (the latter through the intervention of the Russian Imperial Army), and Habsburg rule was once more imposed with especial ruthlessness against the Hungarians.

At first reforms were promised to the Austrian liberals, with a constitution promised in July 1848. And when eighteen-year-old Francis Joseph (1830-1916) assumed the throne upon the abdication of his uncle, Ferdinand I (1793-1875), in December 1848, the new emperor gave his support to the constitutional changes.¹⁵ Almost immediately, however, he reversed himself and insisted upon the reassertion of absolutist authority. What Francis Joseph had inherited from his ruling ancestors was a belief in “his divine right of unlimited monarchical power,” tempered with the idea “that his rule must, before all, produce the best possible results for the peoples of his realm.... Yet, up to the end he did not doubt that his empire, composed of so many different races and lands, could be governed successfully only by a hereditary monarch and according to his absolute will.”¹⁶ Thus, he could not make concessions that would have undermined his absolute rule in the name of caring for the well-being of his subjects.

Neither could he completely concede to the increasing nationalist sentiments of the diverse peoples in his large realm without also abdicating his responsibility as that benevolent ruler. Many Austrian liberals who lived a good portion of their lives under the reign of Francis Joseph believed that he twice missed the opportunity to successfully transform his multinational empire into a federal domain that might have reconciled the conflicting interests and demands of the national groups under his rule. The ideal of these liberals from the middle of the nineteenth century to the First World War had been what some of them called “the Austrian idea.” If a federal structure of government could have been set up in which each of these peoples had wide political and social autonomy within their own lands while sharing a common bond of economic freedom and civil liberties, the Habsburg Monarchy could have created on a larger and far grander scale what had been formed in the Swiss confederation with its reconciliation and harmony among its French-, German-, and Italian-speaking citizens.¹⁷

Francis Joseph’s rejection of constitutional reforms and the reimposition of central authority over the Italians, Hungarians, and his Slav subjects in 1848-49 was the first chance lost for any such reconciliation. The second lost opportunity occurred following his defeat at the hands of the Prussians in 1866, when Bismarck pushed Austria out of the German Confederation. Fearful of the Hungarians taking advantage of the empire’s postwar weakness to claim full independence through another violent uprising, Francis Joseph agreed to the Ausgleich, the “Compromise,” of 1867 that transformed the Austrian Empire into the Austro-Hungarian Empire. While Francis Joseph remained emperor of both halves of his domain, Hungary became widely independent in many of its domestic affairs. Only a common customs and monetary system and a shared military and foreign policy completely linked Hungary to the Austrian “Crownlands” directly ruled by Francis Joseph’s government in Vienna.¹⁸

As Hans Kohn, one of the twentieth century’s leading experts on the history and philosophy of nationalism, who had grown up under the rule of Francis Joseph in Prague, explained, “In the Compromise with the Hungarian nobility in 1867, the aspirations of the Czechs, Slovaks, Serbs, Croats, and Romanians, who in large majority were then still loyal to the dynasty, were sacrificed for the purpose of winning the assent of the Magyars to a common foreign and military policy on the part of what now became the Dual Monarchy.”¹⁹ Indeed, at first, several leading Czech and Hungarian nationalist leaders believed that the flowering of their people’s cultural and linguistic identities could best flourish in the wider setting of a multinational Habsburg Empire. But as the nineteenth century progressed this sentiment shifted into a belief that only national independence could secure these goals.

A far more liberal-minded voice in the Habsburg family was Francis Joseph’s son, Crown Prince Rudolf (1858-89), the heir to the throne. Among his personal tutors had been Carl Menger (1840-1921), the founder of the Austrian School of economics. Under Menger’s guidance, Crown Prince Rudolf had become well versed in the free trade and relatively laissez-faire ideas of the Classical economists.²⁰ Menger also had coauthored with Rudolf a scathing criticism of the Austrian nobility, who were accused of having lost their sense of social duty and, instead, had escaped into frivolous court intrigues, pointless social entertainments, and financial irresponsibility. It was a clear call for recognition of and respect for the middle-class values of enterprise, frugality, and personal responsibility. The bourgeois virtues needed to replace the anachronistic role of the aristocracy in society, who had lost their way in the pretensions of power and lure of wasteful pleasures.²¹ But whatever influence the crown prince might have had on the course of events in Austria-Hungary was cut short by his suicide in 1889 at his hunting lodge at Mayerling.²²

The particularly nationalist imperialism of the Hungarians against the other peoples under their control was not the only problem as the nineteenth century progressed in terms of growing antagonism among the subject peoples in the Dual Monarchy. The German-Austrians, also, increasingly became defensive and antagonistic toward the rising nationalist aspirations of the Czechs, Poles, Slovenians, and others in the Crownlands, as well as the growing demands of the Hungarians for independence.

As Hans Kohn pointed out, “The spread of democracy, literacy, and economic well-being in the western half of the monarchy after 1867 strengthened the non-German nationalities there at the expense of the Germans. The result was that many Germans in the monarchy lost their faith in an Austrian idea as much as many Slavs and other non-Germanic peoples did.... By the end of the nineteenth century many Austrian Germans looked to the Prussian German Reich as their real home and venerated [Otto von] Bismarck.”²³

Looking back at the events that brought about the demise of the Habsburg Empire in the immediate aftermath of the First World War, Ludwig von Mises explained why many German-Austrians turned against liberalism as a foundation for the preservation of the monarchy and the Austro-Hungarian state. Over the centuries German-Austrian settlers had made their homes in the eastern reaches of the empire. They brought with them the German language, culture, literature, commercial knowledge, and knowhow. They viewed themselves as a “civilizing force” among the lesser-advanced nationalities, especially among the Slavic peoples. Indeed, many of these subject peoples became acculturated into German-Austrian life, since the latter was the dominant group; the German language in particular became the venue for social and economic advancement. But as literacy and national consciousness awakened among these other peoples in the nineteenth century, loyalties to and identification with German-Austria and the Habsburg dynasty were replaced with a growing allegiance and sense of belonging to their own ethnic and linguistic groups.

Furthermore, these peoples had higher birth rates than the Germans living among them. Cities and towns that had been settled and predominantly populated by Germans for centuries became increasingly Czech or Hungarian or Polish or Romanian or Slovenian communities. German-Austrians found themselves shrinking minorities in lands that they had long considered to be their own politically, culturally, and commercially. This was especially true in the Czech lands with Prague at the center.

As the nineteenth century progressed, German-Austrians discovered that adherence to liberal principles of representative government and full individual and cultural equality before the law meant the demise of the German communities sprinkled across the Habsburg domains. For many German-Austrian liberals the choice was between a liberalism that would logically mean the decentralization and possible eventual breakup of the empire along nationalist lines, or advocacy of centralized political control, monarchical dictate when required, and subversion of democratic aspirations among the non-German peoples.

The first course meant the eventual loss of German political and cultural domination in the non-German lands; the second meant holding onto both political and cultural power as long as possible in the non-German areas of the empire, but only by increasingly alienating the other subject peoples. As Mises explained, part of the German-Austrian tragedy was that national and linguistic imperialism won over liberal idealism.²⁴

What enabled the Habsburg Empire to endure for fifty years after the establishment of the Dual Monarchy in 1867 was the constitutional order that had been implemented at the same time as the Ausgleich (or “Compromise”). The Constitution of 1867, which accompanied the creation of “Austria-Hungary,” was imbued with the spirit of the classical liberal ideas that were then at their zenith in Europe.²⁵ Every subject of the Habsburg emperor was guaranteed freedom of religion, language, association, profession, and occupation, and could appeal to a special higher court of law if a violation of these rights had occurred. Any subject might live wherever he chose throughout the emperor’s domain. Private property was secure, and relatively free trade prevailed within the boundaries of the empire, though protectionist barriers to international trade not only continued but grew in various ways in the last decades of the nineteenth and first decade of the twentieth centuries.²⁶

The economic free trade zone that made up the Austro-Hungarian Empire fostered significant economic development beginning in and especially after the 1880s, though very far from matching the economic progress in Western Europe or in Imperial Germany after 1871.²⁷ However, various forms of government controls and regulations began to be domestically superimposed on the society, including the nationalization of the railways, starting in the 1880s. As a result, the remaining history of the monarchy was one of liberal freedoms introduced in 1867 being undermined by nationalist discord, periods of rule by central government decree, and the continuation or introduction of interventionist policies that merely intensified the antagonisms among the subject peoples. As A. J. P. Taylor explained:

In another way, the Austrian state suffered from its strength: it never had its range of activity cut down during a successful period of laissez-faire, and therefore the openings for national conflict were far greater. There were no private schools or hospitals, no independent universities; and the state, in its infinite paternalism, performed a variety of services from veterinary surgery to the inspecting of buildings. The appointment of every schoolteacher, of every railway porter, of every hospital doctor, of every tax collector, was a signal of national struggle. Besides, private industry looked to the state for aid from tariffs and subsidies; these, in every country, produce “log-rolling,” and nationalism offered an added lever with which to shift the logs. German industries demanded state aid to preserve their privileged position; Czech industries demanded state aid to redress the inequalities of the past. The first generation of national rivals had been the products of universities and fought for appointments at the highest professional level; their disputes concerned only a few hundred state jobs. The generation that followed them was the result of universal elementary education and fought for the trivial state employment that existed in every village; hence, the more popular national conflicts at the end of the century.²⁸

In spite of all this, and the international tensions and foreign policy fiascos that would eventually plunge Austria-Hungary and the rest of Europe into the calamitous cauldron of conflict in 1914, the Habsburg Monarchy succeeded in generating a cosmopolitan culture, especially in Vienna, that brought all the subject peoples together and fostered an inspiring and flourishing world of the arts, music, literature, philosophy, the humanities, and the sciences.²⁹

It gave many who lived in the postwar period of rising totalitarianism in the 1920s and 1930s a deep nostalgia for what seemed a far more civilized and humane epoch in turn-of-the-century Vienna. One voice that attempted to capture this “lost world” was that of Stefan Zweig (1881-1942), a renowned Austrian novelist and essayist who fled Vienna in 1934 and committed suicide in Brazil during the Second World War out of despair for all that was happening in the European world that he had known. In his posthumous work The World of Yesterday, he said:

One lived well and easily and without cares in that old Vienna.... “Live and let live” was the famous Viennese motto, which today still seems to me more humane than all the categorical imperatives, and it maintained itself throughout all classes. Rich and poor, Czechs and Germans, Jews and Christians, lived peaceably together in spite of occasional chafing, and even the political and social movements were free of the terrible hatred which has penetrated the arteries of our time as a poisonous residue of the First World War. In the old Austria they still strove chivalrously, they abused each other in the news and in the parliament, but at the conclusion of their ciceronian tirades the selfsame representatives sat down together in friendship with a glass of beer or a cup of coffee, and called each other Du [the “familiar” in the German language].... The hatred of country for country, of nation for nation, of one table for another, did not yet jump at one daily from the newspaper, it did not divide people from people and nations from nations; not yet had every herd and mass feeling become so disgustingly powerful in public life as today. Freedom in one’s personal affairs, which is no longer considered comprehensible, was taken for granted. One did not look down upon tolerance as one does today as weakness and softness, but rather praised it as an ethical force.... For the genius of Vienna—a specifically musical one—was always that it harmonized all the national and lingual contrasts. Its culture was a synthesis of all Western cultures. Whoever lived there and worked there felt himself free of all confinement and prejudice.³⁰

For Zweig, thinking back on that bygone paradise, “It was sweet to live here, in this atmosphere of spiritual conciliation, and subconsciously every citizen became supernational, cosmopolitan, a citizen of the world.”³¹

It was, of course, only an illusion. That twilight of the liberal era in the old Austro-Hungarian Empire about which Zweig was so nostalgic had never been as pure and perfect as his mind recalled it. It was certainly true that liberal ideals had been established in the Constitution of 1867, and that they were implemented and enforced for the most part, especially in the Crownlands more directly under Emperor Francis Joseph’s imperial authority. But beneath the surface of tolerance, civility, and cosmopolitanism were all the undercurrents of racial and nationalist bigotry, economic collectivism, and political authoritarianism that poured forth like destructive lava from an exploding volcano during and in the aftermath of the First World War.

A leading theme of Mises’s articles in the first part of this volume concerns the reasons for and the resistance to the full implementation of a gold standard in Austria-Hungary. His arguments in these essays can be better understood against the backdrop of Austria’s monetary policies and experiences during the nineteenth century leading up to the currency reform act of 1892.

The story of the Austrian currency in the late eighteenth century and the first two-thirds of the nineteenth century is one of almost continual financial mismanagement. The government would debase the currency to cover its expenses, then make promises to put its budget on a sound footing, only to see another crisis arise requiring once again turning the handle on the monetary printing press.³³

The Austrian government made several experiments with state-chartered banks in the 1700s. But each of these banks soon collapsed or was closed due to lack of public confidence following large quantities of paper monies being issued to cover government expenditures. These expenditures reached huge proportions during the long years of war between the Austrian Empire and first Revolutionary and then Napoleonic France.

Between 1797 and 1811, the supply of government paper money increased from 74,200,000 florins to 1,064,000,000 florins, yielding a fourteen-fold increase over this period. Not surprisingly, whereas the price of silver coin expressed in paper money was 118 in 1800, it rose to 203 by 1807, then to 500 by 1810, and reached 1,200 by 1811.

The government announced its intention in 1811 to stop the printing presses and issue a new currency that would be converted at the ratio of five old florins for one new florin, with the total amount of paper money in circulation to be reduced to 212,800,000 florins. But the renewal of the war with Napoleon in 1812 resulted in the new currency being increased to 678,716,000 florins by 1816, a near tripling of the “reformed” currency in five years.

With the final defeat of Napoleon, the Austrian government announced that it would use a portion of the war reparations being paid by France to retire about 131,829,900 florins from circulation, leaving the paper money supply outstanding at around 546,886,000 florins. This process was assisted with the establishment of a new National Bank of Austria, with the Bank withdrawing government paper money in circulation in exchange for its own banknotes, until by early 1848, the total currency supply in circulation had been reduced to 241,240,000 florins; that is, there was an almost two-thirds reduction in the paper money supply over a thirty-year period. The National Bank, in February 1848, had silver reserves of about 65,000,000 florins, or, an approximate 25 percent specie cover for its outstanding currency in circulation.

But all of these monetary reforms began to unravel with the outbreak of the revolution of 1848, especially the Hungarian revolt against Austrian rule. Within days, panic runs on the National Bank reduced its silver reserves to 35,023,000 florins, a 53 percent loss in specie. The Austrian government suspended silver redemption and banned the exporting of silver and gold. Putting down the revolution forced the government to again borrow heavily from the National Bank. As a result, confidence in the Bank fell so low that in 1849 the government publicly promised to stop borrowing and cease increasing the currency.

But the process started again in a few years with Austria’s military mobilization during the Crimean War, and then its wars against Italian nationalists and their French ally in a vain attempt to maintain control of portions of northern Italy. In 1850 government indebtedness to the National Bank had stood at 205,300,000 florins. 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:

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 banknotes presented for redemption. Indeed, the oversight of this “shadow” gold standard (as it was called) by the Austro-Hungarian Bank, with maintenance of the exchange rate within a margin not much off the “gold points,” was praised by authorities at the time as an exemplary case of a highly successful “managed currency.”⁴⁰

Ludwig von Mises’s earliest writings on monetary and fiscal policy were published between 1907 and 1914,⁴¹ and focused on these currency reform and related issues. He devoted a chapter in his Memoirs to explaining the background behind some of these articles.⁴² He details his frustrations when the articles resulted in his coming face-to-face for the first time with opposition by government officials to reasonable and publicly endorsed policies due to political corruption and misappropriation of “secret” slush funds that would be threatened by implementing a fully convertible gold standard.

But he does not go into very great detail about the content of these early essays. They may be grouped under two headings. The first consists of articles concerning the political pressures that finally led to putting Austria formally on the path of a gold standard in 1892, and the reasons for the resistance and delay in legally establishing gold convertibility up to the beginning of World War I. The second group deals with fiscal extravagance and the regulatory and redistributive intrusiveness of the Austro-Hungarian government, which was leading the country to a potential financial and economic crisis. Even if the events of the war had not intervened to accelerate the process that culminated in an end to the nearly eight-hundred-year reign of the Habsburgs, the growth of the interventionist state was weakening the foundations of the country.

The earliest of these essays is “The Political-Economic Motives of the Austrian Currency Reform.” It is primarily an analysis of the changing factors influencing various interest groups that finally led to a sufficient coalition of these interests endorsing the move toward a gold standard. It highlights the fact that a major shift in economic policy is often dependent upon the vagaries of unique historical events, without which such a change might never have the chance to be implemented.⁴³

From 1872 to 1887, the Austrian currency had been depreciating on the foreign exchange market. Many of the agricultural and manufacturing interests in both Austria and Hungary did not object to this trend, since it reduced foreign competition by raising the costs of imports and worked to make Austrian goods more competitive in other countries. But beginning in 1887, the currency began to appreciate, and continued to do so until 1891. The same interests that were quite happy living with a currency losing value were extremely anxious with an appreciating currency that lowered the costs of imports and raised the costs of Austrian exports.

By the time the Austrian Currency Commission was convened in 1892, all the leading manufacturing, agricultural, and financial interests had agreed behind the scenes on the necessity for currency reform to bring the appreciation of the Austrian florin to a halt. And they all concurred on the desirability for Austria-Hungary to establish a gold standard, while they initially argued over the particular rate of exchange at which the new currency—the crown—would be stabilized.

Mises’s essay reads partly as what, today, would be considered a “public choice” analysis of the special-interest politicking that often guides public policy. It brings out how a concentrated benefit to a wide array of interest groups served to generate a consensus on a significant institutional change in the existing monetary system. It also demonstrates how the costs or burdens imposed on a variety of smaller interest groups—particularly creditors and a number of medium-sized businesses who gained from currency appreciation, and conservatives who opposed a gold standard on ideological grounds—could be outweighed and outmaneuvered into being unable to prevent the monetary reform.

But at first, the Austro-Hungarian Bank was not legally compelled to redeem its notes for specie (gold). Its initial task was to prevent any further appreciation of the new crown from its formal foreign exchange rate. It was not given any direct instruction to prevent any renewed depreciation, if it were to occur. This, too, was consistent with the dynamics of the coalition of interest groups that had opposed any further increase in the value of the currency, but had not objected to the earlier years of currency depreciation.

But after 1896, the Austro-Hungarian Bank had accumulated enough gold and foreign exchange that it could assure the stability of the Austrian crown’s foreign exchange rate within both the upper and lower ends of the gold points, and in fact kept it within less than one percent of the parity rate most of the time. And after 1900, the Bank was redeeming and issuing its notes for gold as well as for foreign exchange on an unofficial de facto basis, while still not legally required to follow a policy of specie redemption.

This was the context in which Mises wrote four of the essays in this volume: “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” “The Foreign Exchange Policy of the Austro-Hungarian Bank,” “On the Problem of Legal Resumption of Specie Payments in Austria-Hungary,” and “The Fourth Issuing Right of the Austro-Hungarian Bank.”

Mises’s argument was that nothing was keeping the Austro-Hungarian Bank from now being given the legal obligation to redeem gold on demand for its banknotes, and thus formally joining the international community of gold standard nations. He insisted that this would immediately raise the creditworthiness of debt issued by the Austrian and Hungarian governments on foreign markets, and therefore lower the costs of borrowing from international creditors. It would also improve global confidence in Austria-Hungary as a developing nation desirous of attracting foreign investment and lower the cost of international capital for Austrian entrepreneurs.

Opponents of formal specie redemption argued that requiring the Austro-Hungarian Bank to redeem gold would risk a large hemorrhage of specie reserves at any time an international crisis induced holders of crown notes to transfer their liquid capital out of the country. If during such an international crisis other central banks were to raise interest rates to protect their gold reserves from the danger of capital flight, the Austro-Hungarian Bank would be compelled to also raise its interest rate to prevent loss of its own gold reserves. Domestic manufacturing and commerce would then find that the cost of capital was held captive to the uncontrollable market forces of international finance. Domestic interest rates could experience swings that would carry negative effects for business within the country, merely to counteract speculators who wished to move gold in and out of the country to take advantage of interest rate spreads that had nothing to do with the legitimate needs of the import and export trade to facilitate international transactions. These critics argued that it was far better to maintain the present system of de facto specie payments, which gave the Austro-Hungarian Bank the latitude and liberty to, at any time, refuse gold or foreign exchange redemption for its notes to shelter the domestic economy from unnecessary and destabilizing interest rate changes.

Mises counterargued in these articles that since the 1860s, first the old Austrian National Bank and then its successor, the Austro-Hungarian Bank, had had legal authority to hold a sizable portion of its reserves against notes outstanding (even when official redemption was not imposed) in foreign bills of exchange, foreign currency, and other foreign-denominated assets that were, themselves, redeemable abroad in specie money. In other words, the Austrian central bank operated on the basis of a gold-exchange standard rather than a full gold standard. Through this method the Austro-Hungarian Bank was able to earn a significant interest income from its reserve holdings instead of letting its gold sit idle in the Bank’s vaults. At the same time, these foreign earnings not only went to the Bank’s stockholders, but were shared by law with the Austrian and Hungarian governments, thus reducing what otherwise might have been higher taxes to cover government expenditures.

For a long time the Bank already had been utilizing its holdings of foreign exchange and other foreign-denominated assets precisely to substitute for having to meet every demand with an actual gold outflow. This not only was an effective tool for meeting “legitimate” needs for specie in international transactions, but served to counteract speculative demands for gold or foreign exchange to keep the crown’s foreign exchange rate within the gold points, beyond which it would become profitable to export or import gold.

Furthermore, the Austro-Hungarian Bank did, in fact, export gold at times of international crisis, as well as on a regular basis. In normal times it exported gold precisely to replenish its stock of foreign exchange, foreign bills of exchange, and other foreign-denominated assets redeemable in specie abroad to maintain a supply sufficient to cover its international dealings and obligations. And during international financial crises it consciously exported gold to markets in Germany, Great Britain, and France to help alleviate the pressure for gold abroad, and at the same time earned a handsome return when gold prices were high. By supplying gold to foreign markets at such times, it also reduced the need to raise interest rates at home since the gold exports reduced the need for other central banks to raise their interest rates to protect their own gold reserves.

Finally, even while not legally obligated to redeem its notes for specie, the Austro-Hungarian Bank used its discount rate when it deemed it necessary to dampen the demand for both gold and other foreign-denominated assets among its reserves on the part of “speculators” and any others. Thus the Bank was already doing all the things that it would be required to do or could do under formal specie redemption to both maintain the official parity rate and preserve its gold reserves from undesired withdrawals. From any of the critics’ perspectives, no case could be reasonably made against the Austro-Hungarian government’s legislatively enacting the final completion of the currency reform process that had begun in 1892.

So why did the Austrian and Hungarian governments never pass legislation establishing formal specie redemption on the part of the Austro-Hungarian Bank? Mises gave no fully satisfactory answer in these articles, which were all published in respected scholarly journals of the time. However, in his Memoirs Mises explained that behind the scenes the opposition to formal convertibility was partly because a portion of the rather large funds earned from foreign exchange dealings by the Austro-Hungarian Bank were hidden away in a secret account from which senior political and ministerial officials could draw for various “off the books” purposes, including influencing public opinion through the media. He learned about this special fund from Eugen von Böhm-Bawerk (1851-1914),⁴⁴ the internationally renowned Austrian economist and Mises’s mentor, who told him about it off the record. Böhm-Bawerk was disgusted by the whole business and frustrated that even when he was finance minister (1900-1904), he had not been able to abolish the fund. A good part of the opposition and anger expressed against Mises’s defense of legal convertibility was the fear by those accessing these special funds that this source of money would dry up under the more transparent accounting procedures that would come with legal redemption.⁴⁵

In his 1909 article “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Mises did point out that one reason behind the opposition to legal convertibility was the resistance of the Hungarians. They wanted to weaken the power of the joint Austro-Hungarian Bank as a way to continue their drive for independence from the Habsburg Monarchy. Since the Compromise of 1867,

Hungarian politics have ceaselessly endeavored to loosen the common bonds that connect that country to Austria. The achievement of economic autonomy from Austria has appeared as an especially important goal for Hungarian policy as a preliminary step leading to political independence. The national rebirth of the non-Magyar peoples of Hungary—Germans, Serbo-Croatians, Romanians, Ruthenians, and Slovaks—will, however, pull the rug out from under these endeavors and contribute to the strengthening of the national ideal of Greater Austria. At the moment, however, Hungarian policy is still determined by the views of the Magyar nobility, and the power of the government rests in the hands of the intransigent Independence Party.

The nationalistic “rebirth” of these peoples under the often oppressive control of the Hungarians did not strengthen the “national ideal of Greater Austria”—that “Austrian idea” of a harmonious multinational empire under the reign of the Habsburgs—that Mises assumed and clearly hoped would triumph. Instead, the appeal of nationalism over individual liberty and liberalism that had been developing throughout the empire for decades finally contributed to the death of the Habsburg dynasty in 1918.⁴⁶

But if the centrifugal forces of nationalism were pulling the empire apart from within, it was also being undermined by the fiscal cost and growth of the state. This was the second theme in Mises’s policy writings before the First World War, in two essays: “Financial Reform in Austria” and “Disturbances in the Economic Life of the Austro-Hungarian Monarchy During the Years 1912-13.”

After having its financial house in order for almost twenty years, Mises pointed out, the Austrian government was now threatening the fiscal stability of the society with increasing expenditures, rising taxes, and budget deficits. Government spending was likely to significantly grow in future years partly due to the expenses of maintaining costly military forces in an environment of an international arms race. The other major factor at work on the spending side of the government’s ledger were social welfare expenditures that the Austrian authorities were taking on, and which would only grow in the years ahead. Already in the preceding ten years, government spending had increased by over 53 percent, and over the same decade the cost of funding the government’s debt had increased by nearly 20 percent. The cost of financing many of the ministries was exploding; the nationalized railway system was running large deficits that had to be covered from other government funding sources; and the Austrian Crownlands were managed with a three-layered bureaucratic system of administrators at the national, provincial, and municipal levels, each with its own rules, regulations, and taxing authorities—and often in contradiction with each other.

To cover these expenditures, a wide variety of taxes were being increased, including inheritance taxes, sales and excise taxes, and income and corporate taxes. They frequently were manipulated to shift the incidence of the tax burden away from the agricultural and rural areas of Austria onto the shoulders of the urban populations and especially onto industry and manufacturing. In addition, the finance ministry wanted to implement legislation giving the government the authority to examine the books of businesses and industries. Mises observed that “Austrian entrepreneurs rightly see in this arrangement an intensification of the harassment that the authorities display toward them.” Although the tax rates and burdens that Mises analyzes and criticizes seem by today’s higher and more intrusive fiscal standards to be part of that bygone, idyllic world of limited government liberalism before the First World War, they all represented significant increases at the time, and all pointed in a dangerous direction for the future.

What Mises also found most disturbing in the coalition of political forces raising taxes and shifting them onto industry and the urban areas was a clear ideological bias against modern capitalist society. There were conservative and rural interests who wished for a return to the preindustrial era, Mises claimed, and were using their preponderant representation in the Austrian parliament to place roadblocks in the way of modernization, and delay if not stop the economic development of the country.

The economic crisis in Austria-Hungary in 1912 and 1913, Mises argued, showed that fiscal irresponsibility was pervasive in both the government and the private sector. Everywhere consumption spending was growing at the expense of savings, while everyone did all in their power to avoid work. Government expenditures were expanding and eating away at the hard-won wealth and capital accumulation of previous years as a result of government deficit spending. But the private sector was no more frugal than government. In every walk of Austrian life, people attempted to live beyond their means. Everyone lived on credit that depended upon the illusion that debts accumulating on the books of retailers and wholesalers eventually could be repaid. Retailers extended credit to their customers; wholesalers extended credit to retailers; and the financial institutions extended credit to the wholesalers, manufacturers, and merchants.

It was a financial game of musical chairs in which everyone throughout the entire chain of production and sales appeared to be prosperous and profitable only because of the claims on the books against others up and down the payment structure of the economy. A serious default anywhere along the line could set off repercussions that would threaten the entire financial system. And precisely because of this, whenever anyone failed to pay even a fraction of the balances owed, the lines of credit were extended further to put off the inevitable day of reckoning and keep the illusions going.

The financial crisis of 1912-13, Mises explained, had been partially that day of reckoning in which the financial system was found to be built on sand. Mises could only hope that some lessons would be learned: that consumption needed to be based on production, and debts undertaken needed to be repaid through savings, work, and investment. He feared that the lessons had not been learned. Within a matter of months after writing in early 1914 his analysis of the causes and consequences of this crisis, Austria-Hungary was plunged into a far more disastrous crisis from which it would not survive as a political entity.

In two pieces written in 1913, “The General Rise in Prices in the Light of Economic Theory” and “On Rising Prices and Purchasing Power Policies,” Mises had attempted to explain the monetary mechanism by which increases in the supply of money and credit bring about a general rise in prices. Mises develops part of the argument that he had formulated in 1912, in The Theory of Money and Credit,⁴⁷ that the period of inflation through which Austria-Hungary and much of the world was passing was due to the expansion of credit by the banking system in the form of fiduciary media. The latter, in Mises’s terminology, are money substitutes in the form of banknotes and checking deposits that are claims against specie currency held as reserves by the central bank and other lending institutions. However, such fiduciary media may be of two sorts: those that Mises calls “commodity credit,” which is fully backed by bank reserves, and “circulation credit,” which is only partially backed by reserves in the banking system. It is the fractional reserve basis behind a growing amount of the fiduciary media in circulation, Mises insists, that is the real cause of price inflation and the business cycle. Creating and lending unbacked fiduciary media at artificially lowered rates of interest produces an imbalance between savings and investment that leads to an unsustainable boom, which finally has to end in an economic downturn and a period of readjustment in the market.⁴⁸

But Mises suggested that another influence was generating a general rise in prices, which he argued was caused by the nature of monetary transactions in an increasingly complex market order. In a developed market with multistaged processes of production, in which producers no longer meet face-to-face with their ultimate consumers, each seller must fix his prices on the basis of his expectations about what he thinks buyers further down the production chain may be willing to pay. This expectation about what his buyer will be willing to pay, in turn, influences the price he will be willing to pay to the producer or wholesaler from whom he purchases goods.

To the extent that such a seller expects that his buyer may be willing to pay more, he then will be willing to pay prices to those who sell to him that he otherwise might consider too high. Thus, Mises argued, a dynamic is set in motion that results in a continuing rise in prices throughout the various sectors of the economy in a certain temporal sequence. For example, trade unions may demand wages higher than employers consider the workers’ labor to be worth. But if those employers are confident that they can pass on the cost of paying higher money wages to those to whom they sell their products, they acquiesce in money wage demands that would otherwise be unjustifiable. At the same time, the higher real wages that those workers hope to obtain through an increase in their money wages will be eroded as prices of finished goods continue to rise in the economy due to this general inflationary process throughout the market. What trade unions might consider their demonstrated capacity to improve the real wages of workers was illusionary, since over time any temporary gains would be washed out by the general rise in prices. In the long run workers could not obtain real wages in excess of the value of their marginal product.

Mises went as far as to say that nothing really could be done about this inherent price-increasing process; he even suggested that it was indicative of a dynamic and growing economy in which constant shifts in supply and demand and the conditions and methods of production required pricing decisions to be made on the basis of expectations under inescapable uncertain future market conditions. Mises concluded that the fact that the economy was not static, and therefore not more fully predictable, was a reason for optimism that these changing economic circumstances were bringing about improvements all the time.

What is missing in this part of Mises’s analysis is any clear link with either a prior or simultaneous increase in the supply of money and fiduciary media that permits this price-inflationary process to continue, or an indication that the process implies an increase in the velocity of money that would allow the same number of market transactions to be facilitated at rising prices. As he formulated it in these two articles, his argument seems to represent a version of what in the post-World War II period became known as cost-push inflation.⁴⁹

When war broke out in summer 1914, Mises’s artillery reserve unit was called up for active duty. For part of the next four years he sometimes saw intense action on the eastern front against the Russian Army. However, in 1918, during the last year of the war, Mises was assigned to work in various consulting capacities for the Austrian High Command in Vienna. And for a short time he served in Austrian-occupied Ukraine involved with currency matters.⁵⁰

In 1916, he published “On the Goals of Trade Policy,” in which he presents a clear analysis of the gains from division of labor and international trade. But Mises goes on to explain that what motivated nations such as Germany and Austria-Hungary was a particular dilemma. For these relatively overpopulated countries in Europe, the greater economic opportunities in foreign countries resulted in emigration that meant a loss of manpower both for future wars and as part of the work-force during peace as well as at times of international conflict. Also, in the cultural struggles between countries, emigration meant a loss of part of a nation’s human heritage, since over time many such emigrants were absorbed into the culture and language of the host nation.

Thus, in countries like Germany and Austria-Hungary the task was to develop policies that would raise the living standards and opportunities in the homeland to reduce the incentive to leave and be “lost” to the fatherland. The nationalist trade method rejected free trade and erected protectionist barriers to artificially raise prices and secure domestic employments for the population. Alternatively, such a country could attempt territorial expansion into surrounding areas to gain the land and resources that would overcome the too densely populated condition within the pattern of existing political boundaries in which, for example, Germany was currently confined. One other method was to acquire colonies abroad to which emigrants could move while retaining their cultural identity and political allegiance to the fatherland.

Writing at a time of war, Mises carefully emphasized that these political trade policy goals were in the long run incompatible with the economic forces of an increasingly global market society. These forces were constantly working to guide both labor and capital to where their productive capacity was most highly valued, which inevitably would result in redistributions of people around the world to reflect their most optimal employments in the international division of labor. In the long run, the logic and incentives of the market would transcend the political goals of nationalist ideology.

In “Remarks Concerning the Problem of Emigration,” a memorandum that Mises prepared in 1918 for the Austrian government commission to which he was assigned in Vienna, he suggested a variety of domestic policies that would reduce the incentive for workers to leave Austria. These included making more farmland available out of existing larger estates for the benefit of small landholders who currently could not support their families on the properties they owned. It would be useful for the government and private associations to assist seasonal migrant labor in finding more attractive wage and work condition opportunities abroad, thus increasing the likelihood they would return home to a country that cared about their well-being. It was also necessary to reduce the burden and inconveniences of compulsory military service that too often induced some workers employed abroad to not come home.

Also in the summer of 1918, Mises delivered a public lecture, “On Paying for the Costs of War and War Loans.” He praised the military successes of Austria’s armed forces in its fight against the Allied Powers and the industrial efficiencies of Austrian business that had provided the manufacturing wherewithal for, Austria to do so well, even in the face of Allied blockades that cut Austria off from foreign sources of supply. But production had to be paid for, and the issue arose of whether the government’s war costs should be covered by taxation or debt.

Mises reminded his listeners that borrowing did not enable the current generation to shift any part of the costs of war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by forgoing all that could have been produced and used, if not for the war. Mises also explained to his audience what today is often referred to as the Ricardian equivalence theorem, named after British economist David Ricardo (1772-1823). In his 1820 essay, “Funding System,” Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.⁵¹

But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. First, many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and need for ready cash to pay the tax obligation. Second, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than the government’s. As a consequence, these private individuals would have to pay a noticeably higher interest rate than that at which the government could finance its borrowing. Thus, the interest burden from government borrowing to be paid for out of future taxes would be less for the citizenry than the financial cost of their having to borrow money in the present to cover all the costs of war through current taxation.⁵² Hence it was both patriotic and cost-efficient for those listening to Mises’s presentation to buy war bonds in support of the war effort.

Finally, in “Inflation,” another lecture delivered in the late summer of 1918, Mises explained the impact of the government’s financing a large amount of its war expenditures through monetary expansion. First, all creditors who had failed to anticipate the resulting depreciation in the value of the Austrian crown are paid back in money possessing less purchasing power than when the loan was issued. This might seem to be a desirable side effect, since clearly the debtor gains by paying back his loan in depreciated crowns, especially if it is “the poor” who are the predominant debtor group. But it was worth recalling, Mises said, that in modern society the debtors were most often businesses that had borrowed to cover investment costs, while the creditors were middle-class citizens, widows and orphans, civil servants, and members of the lower-income working class who had put their savings into the financial institutions that did the lending. Hence, Mises pointed out, in this debtor-creditor relationship, under inflation the “rich” benefited at the expense of the middle class and the “poor.”

Some saw the benefit from inflation in that it also reduced the real value of the government’s accumulating debt, thus reducing the “real” cost of the war. At the same time, rising money incomes and profits in the private sector due to inflation meant that the government gained higher tax revenues in money terms. On the other hand, to the extent to which the government had covered part of its debt with foreign borrowing denominated in another currency, the falling value of the crown on the foreign exchange market due to inflation increased the amount of crowns the government had to pay to meet its foreign financial obligations. Also, some taxes were fixed at a specified level, so in this instance the taxpayer gained in real terms during inflation while the government lost. Furthermore, the worse and more continuing the inflation, the more reluctant citizens would be to buy war bonds and other government debt instruments, thus increasing the difficulties of financing the war other than through inflation. Thus, from a variety of perspectives, inflation was a dangerous and undesirable method of covering the costs of war, since it undermined the real wealth of the middle class and those in the working class who saved in an attempt to improve their position in society.

In October and November 1918, the Austro-Hungarian Empire began to disintegrate as various national groups began to break away and declare their independence, most notably the Czechs and Slovaks, who joined in creating their own country, then the Hungarians, who were then followed by the Serbs, Croats, Slovenians, and Bosnians, who formed a new Yugoslavia. The Romanians soon began to incorporate Transylvania within their borders, and Italy seized south Tyrol and the port of Trieste. Galicia became a battleground between the Poles, the Ukrainians, and the Russian Bolsheviks in the next few years.

In what was declared the new state of German-Austria a coalition government was formed between the Social Democrats, the Christian Socialists, and the Nationalist Party. Almost immediately, they began a campaign of expensive food subsidies for the urban population at controlled prices, compulsory requisitioning of agricultural goods from the rural parts of the country, foreign exchange controls on all imports and exports at an artificial rate of exchange, a vast array of social welfare programs, and the use of the monetary printing press to finance it all. By the middle of 1919 and then into 1920 and 1921, serious inflation had degenerated into hyperinflation.⁵⁴

Mises’s articles “Monetary Devaluation and the National Budget” and “For the Reintroduction of Normal Stock Market Practices in Foreign Exchange Dealings” explained that the foreign exchange rate was a market-created price that could not be simply fixed and manipulated by the state. The value of any one currency in terms of another was ultimately a reflection of each currency’s purchasing power. Guided by the “law of one price,” the market tendency was to establish the exchange rate at that point at which the attractiveness of buying some quantity of a good in either country was the same. Setting the exchange rate at some level other than the market-determined rate merely meant that it was artificially fixed at too dear or too cheap a price. In the face of the currency shortages that the exchange control resulted in, the government then commanded that all foreign exchange earnings be sold to the Austrian Exchange Control Authority at the fixed rate, with the government bureaucracy now determining the rationing of it to both importers and exporters.

Prohibiting normal foreign exchange dealings merely drove transactions underground into the black market, and prevented the functioning of those institutional arrangements through which individuals can hedge against uncertain fluctuations in the foreign exchange rate by utilizing a legal futures market. Instead, the inflationary environment, with limited legal avenues to “take cover” against the effects of a depreciating currency, meant that more and more people were shifting into the use of foreign monies in domestic Austrian business transactions. The foreign exchange controls needed to be abolished, and the printing presses needed to be brought to a halt if a monetary disaster was to be averted.

The fundamental cause for Austria’s problems was that it was in the stranglehold of the socialist idea, with all of its negative consequences. This was the theme in two pieces by Mises: “The Austrian Problem” and “The Social Democratic Agrarian Program.” The socialists were determined to control and spend their way into the destruction of the country. Under this administration, taxes and inflation ate away at the accumulated wealth of the past and hindered any capital formation in the present. They demagogically promised wealth while causing waste by nationalizing and regulating industries that ended up suffering losses that needed to be paid for through even more inflation. Their agricultural agenda was to do with the rural economy the same harm they were doing with industry and manufacturing in the cities.

What was to be done? In February 1921, Mises presented the outline of a plan in answer to the question, “How Can Austria Be Saved?” The first order of business was to stop the monetary printing presses. But this could be done only if the costly food subsidies were eliminated and the nationalized industries were reprivatized to end the huge expenses to cover their deficits, so the national budget once again could be brought into balance. Foreign exchange controls had to be abolished with a free market in all currency dealings. At the same time, the value of the Austrian crown had to be stabilized once the central bank had stopped issuing paper money and the depreciation of the currency was brought to a halt. All domestic regulations and controls inhibiting free commerce among the various provinces of Austria had to be lifted, and free trade had to be reintroduced in all forms of foreign trade. This was the path to a revitalized and prosperous Austria.

A sound monetary system was unlikely if the governments of those new states that had formerly been part of the Austro-Hungarian Empire looted the assets of a reconstructed Austrian central bank. Thus, in “The Claims of Note Holders upon Liquidation of the Bank,” published in February 1921, Mises argued against those who asserted that those other governments had a right to a portion of the old Austro-Hungarian Bank’s gold reserves. Under the Treaty of Saint-Germain, which had ended the war between Austria and the Allied Powers, the successor states were obligated to redeem the old crown notes on their territories for their own respective currencies. The old Austro-Hungarian Bank notes were then to be turned over to the new Austrian central bank, which would take them out of circulation. Mises argued that everyone knew that the huge expansion of banknotes to fund the government’s war expenses were backed by nothing, and certainly not by whatever gold may have remained in the central bank’s vaults. To demand anything else would be to plunder the gold and other assets upon which a reconstituted Austrian monetary system would be built.

Mises observed in an article early in 1922, “The Austrian Currency Problem Thirty Years Ago and Today,” that the key to ending Austria’s problems was stopping inflation. Thirty years earlier, in 1892, the task had been to stabilize a currency that was appreciating in value. The task in 1922 was to bring a halt to its depreciation. But the method was the same: link the currency to gold and do not manipulate its quantity in circulation.

As the situation worsened, Mises put together a proposal on behalf of the Vienna Chamber of Commerce for “The Restoration of Austria’s Economic Situation,” which was submitted to other trade and labor union associations in the country to devise a way to bring an end to the government budget deficits as a prelude to stopping the inflation. In a nutshell, Mises recommended the establishment of price indexation throughout the economy. Already government expenditure levels were automatically adjusted in line with a cost-of-living index. Now the same arrangement had to be set up for government revenues. Otherwise nominal expenditures would keep growing while nominal tax revenues would always lag behind, never leading to an end to the deficits. Incomes, profits, and wages and prices all had to be indexed to the market value of gold. This would continually adjust government tax revenues to government expenditures. It would mean that government nationalized sectors, such as the railway system, would have their prices rise in tandem with the average rate of depreciation of the currency reflected in its link to the price of gold, which would help to reduce their losses and maybe even earn a profit from transit fees for cargos passing through Austria. At the same time, gold indexation would assist in keeping the wages and salaries of many workers rising to maintain a certain real value of their income.

Mises emphasized that such an indexation policy was desirable not only due to questions of equity in a period of rapid depreciation and the need to bring the government’s budget better into balance. It was also needed because inflation distorted the very essence of a money-using economy: the ability for economic calculation to reasonably estimate profit and loss, and relative profitability of alternative lines of production. Price and wage indexation linked to the price of gold would help to reduce the miscalculations that inflation caused, and which often resulted in capital consumption. This measure, Mises stated, was meant to be a transition method to bring stability to the Austrian economy, or, as he concluded, “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.”

The inflation was brought to a halt in late 1922 and early 1923 with the financial assistance and supervisorial oversight of the League of Nations. In 1925, in “The Gold-Exchange Standard,” Mises pointed out that while Austria and a number of other countries were moving back to a gold-backed currency, it was not a full gold standard system. Most countries did not have large amounts of actual gold reserves, and gold coins were nowhere in circulation. Instead, their monetary systems (like that under the old Austro-Hungarian Bank) were gold-exchange standards, under which most reserves were held in other countries in the forms of financial assets that were, in principle, redeemable in gold in those other countries. The entire system depended upon at least a few countries, like the United States at that time, being willing to serve as ultimate gold reserve redeemers. Mises thought that this was only a shadow of the type of real gold-backed system that could assure noninflationary stability to the various countries of the world.

In 1926, Mises had spent three months traveling in the United States. When he returned he delivered the talk “America and the Reconstruction of the European Economy.” Any further European recovery from the effects of the Great War could not count upon American political or economic leadership. Both manufacturing and agricultural interests in the United States were heavily protectionist and therefore resistant to imports. This, in turn, made it difficult for Europeans to find markets for their goods or to earn the dollars to pay back their wartime loans to America. While the United States was a creditor nation with the means to invest in Europe, money would not be given away but would depend on the profitability of such investments. Thus Europe would have to rely upon itself if it was to continue to overcome the legacy of the war.

Mises pointed out the difficulty for such stable recovery and growth in a summary he presented in 1928, “The Currency and Finances of the Federal State of Austria.” Five years after the end to Austria’s inflation, the currency was on a relatively sound basis. A new schilling had replaced the old crown and was fixed at a specific value in terms of gold. The rules under which the new Austrian National Bank operated made it difficult for it to serve as a means to finance the expenses of the government.

However, the fiscal affairs of the nation were far from sound. The government was still running budget deficits, but all of it was due to cost overruns in the nationalized sectors of the economy, especially the railway system and the lumber industry in the nationalized forest system. Financial pressures were placed on the federal authority because of the tax and related transfers to the provincial governments, which were all overlaid with bureaucratic regulatory structures and mismanagement. And in Vienna, where the Social Democrats controlled the municipal government, the financial extravagance on public projects was exceptionally large. For domestic growth and international competitiveness, Austria had to make its economy more productive. Cutting wasteful government and radically reducing taxes was the only avenue to a prosperous future for Austria.

When the Great Depression began in the early 1930s, the banking system was badly shaken. The collapse in May 1931 of the Austrian bank, Credit-Anstalt, in particular, sent shock waves throughout the financial markets. Shortly afterward, Mises wrote “The Economic Crisis and Lessons for Banking Policy.” In his eyes, the banking systems in Germany and Austria had two weaknesses. First, too many banks had become financially entangled with the industrial corporations to whom they lent. In fact, they often had become major shareholders in the very companies whose financial status they were supposed to oversee with a critical eye in terms of continuing creditworthiness. Instead, they unsoundly extended more credit to companies they should have pulled back from because their own balance sheets were too closely linked to the illusion of their continuing profitability. Finally the situation imploded, taking the banks down with those companies.

Second, those same banks had poorly managed the term structure of their investment portfolios. They lent long, while being liable for depositor withdrawals on demand. In other words, they had become caught in the system of fractional reserve banking, in which the amount of claims payable on demand far exceeded their available cash reserves to meet depositor liabilities.

The banking crisis, as far as Mises was concerned, was not the end of capitalism, but showed the need to reorganize the way banks managed their liabilities and investments after the crisis had passed. Sounder banking principles in a market economy were the avenue to avoid similar crises in the future.

In the 1920s, one of the contributions for which Mises was most famous was his theory of government intervention. In 1930, he published “The Economic System of Interventionism,” a brief summary of his critique of this practice, with particular emphasis on the deleterious effects from all forms of control over prices. While various forms of production regulations had the tendency to reduce productivity, price controls were a far more directly harmful type of intervention. They inevitably distorted the relationship between supply and demand, artificially generated either shortages or surpluses, and deflected production from those avenues most likely to satisfy consumer demand. They also had a tendency to spread out to more and more sectors of the economy, as the government imposed similar controls on other markets and industries in a vain attempt to compensate for the imbalances the earlier price controls had created. If followed to their logical conclusion, such price controls led to a fully planned economy through piecemeal interventions imposed one after another.

Where did all this lead? In “Economic Order and the Political System” (1936), Mises pointed out that in the eighteenth and early nineteenth centuries, political democracy, civil liberty, and economic freedom had grown hand in hand. But in the second half of the nineteenth century the idea had taken hold that political democracy and personal freedom could be preserved even if the government increasingly intervened in and controlled the economic affairs of the citizenry in the name of social justice and socialist planning.

What the twentieth century was showing, however, was that political democracy and individual freedom could not last long when government planning increasingly replaces the market economy. Economic planning means planning people’s lives, and people must then conform in all their affairs to what the plan dictates. In countries like Soviet Russia, fascist Italy, or National Socialist (Nazi) Germany even the appearance of preserving democratic and personal liberties had been discarded and the reality of where planning leads could be most clearly seen. This was the crossroads that now confronted the remaining relatively free and democratic societies in the West: freedom or planning.

More than twenty years later, in 1959, Mises offered “Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923,” when hyperinflation had brought Germany to the edge of total economic collapse. He reflected back to when he was a young man before the First World War, during the years when he wrote those early pieces on the gold standard and had only just published The Theory of Money and Credit. He had attended the meetings of the Verein für Sozialpolitik (Society for Social Policy), the leading and most influential social science association in the German-speaking world, which was dominated by members of the German Historical School. Here he came face-to-face with the enemies of economic liberalism, who rejected most of economic theory in the name of a historically based approach to social analysis, on the basis of which they rationalized aggressive nationalistic conclusions, all leading to an eventual war. They had contempt for the Austrian economists and ridiculed the idea that there were “laws of economics” that should stand in the way of markets and money being controlled by the state. These were the thinkers who were the harbingers of many of the disasters of the twentieth century. Their aggressive nationalism had led to two world wars; their belief in the interventionist state had cultivated the coming of the planned and regulated society; and their confidence that money and its value were creatures of the state had fostered the inflations of the twentieth century.

And though Mises did not point it out, many of these German thinkers laid the ideological groundwork for the mass murder of millions at the hands of the National Socialists, including the destruction of six million Jews. Indeed, it was because of such ideas and their consequences that Mises himself was forced to flee a Nazi-dominated Europe and find sanctuary in America in the midst of the Second World War.

Leaving Europe for America had not been an easy decision for Mises. Indeed, he said in a letter to Friedrich A. Hayek in May 1940, as he was approaching his departure from Switzerland for the United States, “The decision to leave is truly difficult. For me, it represents saying good-bye to a life which I have always lived, it is for me an ‘adieu’ to a Europe which is about to disappear forever.”⁵⁵

It is only appropriate, therefore, that before concluding this introduction we should take a look at Mises’s Jewish family roots in the old Habsburg Empire and how the fate of the Austrian Jews led to a man like Mises having to say good-bye to the life and world in which he made his career and won his reputation as one of the leading economists of his time, and his having to make a new start at the age of fifty-eight in the New World.

Ludwig von Mises was born on September 29, 1881, into a prominent Jewish family in Lemberg (Lvov in present-day Ukraine), the capital of the Austrian Crownland of Galicia, far to the east of Vienna and near the border with the Russian Empire. In the last decades of the nineteenth century, more than 50 percent of the population of some parts of Galicia was Jewish, with the center of Jewish life and culture being in Lemberg.⁵⁷

The documents that Ludwig von Mises’s great-grandfather, Mayer Rachmiel Mises (1801-91), prepared as background for his ennoblement by the Austrian emperor, Francis Joseph, in mid-1881 (just a few months before Ludwig was born), record the history of the Mises family in Lemberg going back to the 1700s. Mayer’s father, Fischel Mises, had been a wholesaler and real estate owner who had received permission to live and conduct business in the “restricted district” reserved for non-Jews. At the age of eighteen, Mayer married a daughter of Hirsch Halberstamm, the leading Russian-German export trader in the Galician city of Brody.

Mayer took over the family business following his father’s death and also served for twenty-five years as a commissioner in the commercial court of Lemberg. For a time he also was on the city council and was a full member of the Lemberg Chamber of Commerce. He also was a cofounder of the Lemberg Savings Bank, and later was a member of the board of the Lemberg branch of the Austrian National Bank. He also was one of the founders of the Cracow-Lemberg railway line. In addition, he was a founder of a Jewish orphanage, a reform school, a secondary education school, a charitable institution for infant orphans, and a library in the Jewish community. Some of these charities were begun with funds provided by Mayer for their endowment. Indeed, it was for his service to the emperor as a leader of the Jewish community in Lemberg that Mayer Mises, great-grandfather of Ludwig von Mises, was ennobled.

Mayer’s oldest son, Abraham Oscar Mises, ran the Vienna office of the family business until he was appointed in 1860 the director of the Lemberg branch of the Credit-Anstalt bank. Abraham also was the director of the Galician Carl-Ludwig Railroad. His other son, Hirsch Mises, was a partner in and a director of the Halberstamm and Nirenstein banking company.⁵⁸

It is perhaps because of the family’s connection with the railroad business that Hirsch Mises’s son, Arthur Edler von Mises, took up civil engineering with a degree from the Zurich Polytechnic in Switzerland, and then worked for the Lemberg-Czernowitz Railroad Company. Arthur married Adele Landau, the granddaughter of Moses Kallir and the grandniece of Mayer Kallir, a prominent Jewish merchant family in the city of Brody. Arthur and Adele had three sons, of whom Ludwig was the oldest. His brother, Richard, became an internationally renowned mathematician who later taught at Harvard University. The third child died at an early age.

Members of the Mises family also were devout practitioners of their Jewish faith. The vast majority of the Galician Jews were Hasidic, with all the religious customs and rituals that entailed. But the Mises family was part of that movement in the Jewish community devoted to theological and cultural reform, and participated in the liberal-oriented political activities that were attempted in nineteenth-century Galicia. As a small boy, Ludwig would have heard and spoken Yiddish, Polish, and German, and studied Hebrew in preparation for his bar mitzvah.

Ludwig’s father, Arthur, like many of his generation, chose to leave Galicia and make his life and career in the secular and German cultural world of Vienna, where he accepted a civil servant’s position with the Austrian Ministry of Railways. But from the documents among Ludwig von Mises’s “lost papers” found in the Moscow archives,⁵⁹ it is clear that his mother maintained ties to her birthplace, contributing money to several charities in Brody, including a Jewish orphanage. In Vienna in the 1890s, Arthur was an active member of the Israelite Community’s Board, a focal point for Jewish cultural and political life in the Austrian capital.⁶⁰

Until the early and middle decades of the nineteenth century, Jews throughout many parts of Europe were denied civil liberties, often being severely restricted in their economic freedom, and, especially in Eastern Europe, confined to certain geographical areas. In the 1820s it was still not permitted for Jews to unrestrictedly live and work in Vienna; this required the special permission of the emperor.⁶¹ Commercial and civil liberation of the Austrian Jews occurred only in the aftermath of the Revolution of 1848, and most especially with the new constitution of 1867, which created the Austro-Hungarian Dual Monarchy following Austria’s defeat in its 1866 war with Prussia. The spirit and content of the 1867 constitution, which remained the fundamental law of the empire until the collapse of Austria-Hungary in 1918, reflected the classical liberal ideas of the time. Every subject of the emperor was secure in his life and private property; freedom of speech and the press was guaranteed; freedom of occupation and enterprise was permitted; all religious faiths were respected and allowed to be practiced; freedom of movement and residence within the empire was a guaranteed right; and all national groups were declared to have equal status before the law.

No group within the Austro-Hungarian Empire took as much advantage of the new liberal environment as the Jews. In the early decades of the nineteenth century a transformation had begun among the Jewish community in Galicia. Reformers arose arguing for a revision in the practices and customs of Orthodox Jewry. Jews needed to enter the modern world and to secularize in terms of dress, manner, attitudes, and culture. The faith had to be stripped of its medieval characteristics and ritualism. Jews should immerse themselves in the German language and German culture. All things “German” were distinguished as representing freedom and progress.⁶²

With the freedoms of the 1867 constitution, Austrian and especially Galician Jews began a cultural as well as a geographical migration. In 1869, Jews made up about 6 percent of the population of Vienna. By the 1890s, when the young Ludwig von Mises moved to Vienna from Lemberg with his family, Jews made up 12 percent of the Vienna population. In District I, the center of the city where the Mises family lived, Jews made up over 20 percent of the population. In the neighboring District II, the Jews made up over 30 percent.⁶³

But in the late nineteenth and early twentieth centuries, there was a stark contrast between these two districts of the city. In the central District I, the vast majority of the Jewish population had attempted to assimilate with their non-Jewish neighbors in dress, manners, and cultural outlook. In District II, bordering on the Danube, on the other hand, the Jewish residents were more likely to have retained their Hasidic practices and orthodox manners, including their traditional dress. It was the visible difference of these Jews, who often had more recently arrived from Galicia, which so revolted the young Adolf Hitler—who was shocked, and wondered how people acting and appearing as they did could ever be considered “real Germans.” They seemed such an obviously alien element in Hitler’s eyes.⁶⁴

The characteristic mark of most of the Jews who migrated to Vienna (and other large cities of the empire such as Budapest or Prague) was their desire and drive for assimilation; in many ways they tried to be more German than the German-Austrians.⁶⁵ The Czechs, the Hungarians, and the Slavs, on the other hand, often were still focused on their traditional ways; the Hungarians in particular were suspicious of the Enlightenment, civil liberties, and equality—these threatened their dominance over the subject peoples in their portions of the empire (the Slovaks, Romanians, and Croats). To constrain the Hungarians, the emperor increasingly put the Czechs, Poles, and Slavs under direct imperial administration on an equal legal footing with the German-Austrians. For the Jews, Austrian imperial policy meant the end of official prejudice and legal restrictions, and a securing of civil rights and educational opportunities.⁶⁶ Their continuing and generally steadfast loyalty to the Habsburgs, however, led many of the other nationalities to be suspicious and anti-Semitic as the years went by. The Jews were viewed as apologists and blind supporters of the Habsburg emperor, without whose indulgence and protection the Jews might have been kept within the ghetto walls.⁶⁷

Civil liberties and practically unrestrained commercial and professional opportunity soon saw the Jews rise to prominence in a wide array of areas of Viennese life.⁶⁸ By the beginning of the twentieth century more than 50 percent of the lawyers and medical doctors in Vienna were Jewish. The leading liberal and socialist newspapers in the capital were either owned or edited by those of Jewish descent, including the New Free Press, the Viennese newspaper for which Mises often wrote in the 1920s and 1930s. The membership of the journalists’ association in Vienna was more than 50 percent Jewish. At the University of Vienna, in 1910, professors of Jewish descent constituted 37 percent of the law faculty, 51 percent of the medical faculty, and 21 percent of the philosophy faculty. At the time Mises attended the university in the first decade of the twentieth century almost 21 percent of the student body was Jewish. The proportion of Jews in literature, theater, music, and the arts was equally pronounced.⁶⁹

The main avenue for social and professional advancement was education in the gymnasium system—the high school system in the German-speaking world. But the gymnasium education not only offered a path to higher education and a university degree for many Jews, it also was an avenue for acculturation and assimilation into European and especially German culture. For example, Mises and his fellow student Hans Kelsen (who later became an internationally renowned philosopher of law and the author of the 1920 constitution of the Republic of Austria) attended the Akademisches Gymnasium in the center of Vienna. It was meant for students preparing for the university and professional careers. Here a wide liberal arts education was acquired, with mandatory courses in Latin, Greek, German language and literature, history, geography, mathematics, physics, and religion, with electives in either French or English—Mises selected French. At the core of the curriculum was the study of the ancient Greek and Roman classics. Mises and other Jewish students at the Akademisches Gymnasium, as a part of their religion training, had courses in Hebrew.⁷⁰ According to memoirs written by people who attended the Akademisches Gymnasium in the 1880s and 1890s, most of the students ridiculed the religion classes as “superstition.” The Greek and Roman classics were considered literary avenues for entering the mainstream of modern European and Western culture. And while it was not assigned, the students absorbed on their own contemporary writings in history, social criticism, literature, and the sciences as their way to integrate themselves into modern and “progressive” society.⁷¹

In the 1890s, during Mises’s time at the Akademisches Gymnasium, 44 percent of the student body was Jewish. But there were some gymnasiums at which Jewish admission was informally restricted. For example, the Maria Theresa Academy of Knights in Vienna was reserved for the children of the nobility and senior officials. Joseph Schumpeter attended it in the 1890s, but only because his stepfather was a lieutenant field marshal. No matter what his academic qualification, Mises would have had virtually no chance to be accepted there. Thus clusters of these gymnasiums were clearly closed to Jews, even if they were converts to Christianity, while other clusters represented the high schools where middle-class Jewish businessmen, professionals, and civil servants sent their children.⁷²

But for all their assimilationist strivings—their conscious attempts to be German-Austrians in thought, philosophy, outlook, and manner—the Jews remained distinct and separate. Not only was this because they belonged to schools, professions, and occupations in which they as Jews were concentrated, but because non-Jewish German-Austrians viewed them as separate and distinct. However eloquent and perfect their German in literature and the spoken word, no matter how contributing they were to the improvement of Viennese society and culture, most non-Jewish Viennese considered these to be Jewish contributions to and influences on German-Austrian corners of cultural life.⁷³

Name, family history, gossip, and mannerisms made it clear to most people who were Jewish and who were not. The wide and pronounced success of so many Viennese Jews made non-Jews conscious of their preponderance and presence in many visible walks of life. This success also served as the breeding ground for anti-Semitism.⁷⁴

In the Habsburg domain, part of this anti-Semitism was fed by conservative and reactionary forces in society who often resented the emperor’s diminishment or abolition of the privileges, favors, and status of the Catholic Church and the traditional landed aristocracy. The high proportion of Austrian Jews involved in liberal or socialist politics made them targets of the conservatives who said they were carriers of modernity, with its presumption of civil equality, unrestrained market competition, and a secularization that was said to be anti-Christian and therefore immoral and decadent. Preservation and restoration of traditional and Christian society, it was claimed, required opposition to and elimination of the Jewish influence on society. Jews were the rootless “peddlers” who undermined traditional occupations and ways of earning a living, as well as the established social order of things. They pursued profit. Honor, custom, and faith were willingly traded away by them for a few pieces of gold, it was said. Craft associations became leading voices of anti-Semitism, especially when economic hard times required small craftsmen and businessmen to go hat in hand to Jewish bankers for borrowed sums to tide them over.⁷⁵

German nationalism also was a vehicle for growing anti-Jewish sentiment. The paradox here is that in the 1860s and 1870s a sizable number of Jewish intellectuals were founders and leaders in the Austrian and German nationalist movements. German culture and society were viewed as representing the universal values of reason, science, justice, and openness in both thought and deed. German culture and political predominance within the Austro-Hungarian Empire restrained the backward-looking forces of darkness—the Hungarian, Czech, and Slavic threats. At the same time, German culture in Central Europe offered rays of enlightenment in the regions of Eastern Europe.

Mises estimated that before the Second World War, Jews made up 50 percent of the business community in Central Europe and 90 percent of the business community in Eastern Europe.⁷⁶ Indeed, in Omnipotent Government he asserted that in Eastern Europe “modern civilization was predominantly an achievement of Jews.”⁷⁷ What the Jews in these parts of Europe introduced and represented, at least in their own minds, was the enlightened German mind, with its culture and institutions. But to those other nationalities being introduced to and “threatened” by this German cultural influence, it was perceived as being Jewish as much as German—a dominating, imperial, and “foreign” culture.

At the same time, in both Germany and German-Austria, the Jews in the forefront of the Pan-German nationalist movements were viewed as interlopers by many of the Christian German nationalists. As a consequence, there emerged in the second half of the nineteenth century rationalizations to justify the rejection of Jewish participation in the cause of German nationalism and culture. First, it was said that only Christians and the Christian faith were consistent with true German life and culture. But when a significant number of German and Austrian Jews converted to Christianity, it still was found not to be enough. Now it was claimed that to be a true German it was not sufficient to be a convert to Christianity. “Germanness” was a culture, an attitude toward life, and a certain sense of belonging to the Volk community.

As a growing number of Jews immersed themselves in all things German—language, philosophy, literature, dress, and manner—it was found, again, not to be enough. Really to be a German was to share a common ancestry, a heritage of a common blood lineage.⁷⁸ This was one barrier the German and Austrian Jews could not overcome. In the emergence of racial anti-Semitism in the 1880s and 1890s, there were laid the seeds of the “final solution.”

In Vienna, Karl Lueger, who was mayor of the capital city in the first decade of the twentieth century and a leader of the Christian Social Party, represented the spirit of anti-Semitism. He insisted that only “fat Jews” could weather the storm of capitalist competition. Anti-Semitism, Lueger said, “is not an explosion of brutality, but the cry of oppressed Christian people for help from church and state.”⁷⁹ He blended anti-Semitism with social-left reforms, which included civil service and municipal government restrictions on Jewish access to city jobs or contracts. On the other hand, when Lueger was challenged as to why he had Jewish friends and political associates, he replied, “I decide who is a Jew.”⁸⁰

But in spite of the presence and growth of anti-Semitic attitudes in the late nineteenth and early twentieth centuries in Austria in general and Vienna in particular, Mises’s seeming lack of attention to his own Jewish family background or any hint of the impact of anti-Semitism around him—there were anti-Jewish student riots at the University of Vienna during the years when he was a student there around the turn of the century—was in fact not uncommon.⁸¹ One can read Stefan Zweig’s fascinating account of everyday life in the Vienna of this time and have the distinct impression that anti-Semitic attitudes or municipal government policy were virtually nonexistent.

Yet many invisible walls characterized the circles in which people moved in Viennese society both before and after the First World War. Traditional or Orthodox Jews lived and worked within a world of their own in the city.⁸² Secular and assimilated Jews, like Ludwig von Mises and Hans Kelsen, moved in circles of both Jews and non-Jews, but even the nonreligious and German-acculturated Jews clustered together. A review of the list of participants in Mises’s famous private seminar in Vienna, for example, shows a high proportion of Jews.⁸³ And even after Mises had moved to Geneva, Switzerland, in 1934, his agenda books for this time show that many of his social engagements were with other Jews residing in or visiting that country.

The end of the nineteenth and the beginning of the twentieth century saw the eclipse of liberalism in Austria and the rise of socialism in its place, centered in the political ascendancy of the Social Democratic Party. A sizable number of Jews were prominent in the Austrian socialist movement; they were anticapitalist and viewed the entrepreneurial segment of the society as exploiters and economic oppressors. The capitalist class would be swept away in the transformation to socialism, including the Jewish capitalists in the “ruling class.” Most of the Jews in the socialist movement not only were secular and considered themselves harbingers of the worker’s world to come; they were contemptuously opposed to cultural and religious Judaism as well.⁸⁴

These three political movements in Austria and Vienna when Mises was a young man—conservatism, German nationalism, and radical socialism—were, each for its own reasons, enemies of liberal society, opponents of free-market capitalism, and therefore threats to the ideas and occupations of those middle class, or “bourgeois,” walks of life heavily populated by the Jews of Austria and Vienna.

The history of Austrian Jewry during this time is a story of triumph and tragedy. The winds of nineteenth-century liberalism freed the Austrian Jewish community, both internally and externally. Internally, the liberal idea pried open Orthodox Jewish society in places such as Austrian Galicia. It heralded reason over ritual; greater individualism over religious collectivism; open-minded modernity over the strictures of traditionalism. Externally, it freed the Jewish community from legal and political restraints and restrictions. The right of freedom of trade, occupation, and profession opened wide many opportunities for social improvement, economic betterment, and political acceptance.⁸⁵

Within two generations this transformed Austrian Jewish society. And that same span of time saw the rise of many Jews to social and economic prominence, with greater political tolerance than ever known before. If these two liberating forces had not been at work, there would not have been Ludwig von Mises—the economist, the political and social philosopher, and the notable public figure and policy analyst in Austria both before and between the two world wars.

At the same time, these two liberating forces set the stage for the tragedy of the German and Austrian Jews. Their very successes in the arts and the sciences, in academia, and in commerce fostered the animosity and resentment of those less successful in the arenas of intellectual, cultural, and commercial competition. It set loose the emotion of envy, the terror of failure, and the psychological search for scapegoats and excuses. It ended 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 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:

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

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:

Although until the fourth privilege of the Austro-Hungarian Bank went into effect the quantity of notes in circulation not backed by precious metals was strictly limited to 200 million, the number of bank-notes in circulation increased from 247 million florins at the end of 1867 to 391 million florins at the end of 1887. The system adopted in the Austro-Hungarian Bank’s fourth privilege of an indirect limitation offered a freer scope to the expansion of notes in circulation. It amounted to:¹⁰

The entire paper money in circulation (state- and banknotes) amounted to:

This corresponded to a total increase of 71.5 million and an average annual increase of 23.8 million florins. That this increase in the quantity of paper money in circulation did not lag behind the increasing demand for it, or at least not far behind, is shown by a comparison of the numbers from the period after the inauguration of the currency reform. Since then, it is generally accepted that the increase in currency in circulation completely satisfied the needs of business. The monarchy’s money in circulation amounted to:

This represents a total increase of 551 million and an average annual increase of 45.9 million crowns. The average annual increase of money in circulation was thus not larger in the period after 1892 than it was in the years immediately preceding that year.

In light of these facts, the claim that Austrian currency in circulation lacked the possibility for expansion cannot be maintained. However, to conclude that the increase in the currency in circulation satisfied the developing and increasing demand for it would be equally invalid. Such a conclusion would be prohibited because the statistical evidence is completely lacking for determining what were the required amounts of currency in circulation. Irrespective of this, however, even with the presumption of a domestic contraction, a direct causal relationship between such a contraction and an increase in the international value of the currency could not be determined.

It must be acknowledged that as the domestic currency in circulation becomes scarcer, this initially leads to a contraction of credit and an increase in the cost of borrowing, and has the further result of bringing about a fall in the prices of goods. It is obvious, however, that such a drop in prices can be only for those goods that cannot be exported. A decline in the prices of these goods in terms of the domestic currency will not result in foreigners offering higher prices for bonds on the Viennese market. This could be brought about only by a reduction in the prices of exported goods. This could occur only if as a result of the fall in other domestic prices the production of exported goods increased to such an extent that their prices fell due to their increase in supply. The increase in the rate of exchange that would result, however, as a consequence of this increased supply of exportable goods could be neither considerable nor of significant duration, because the decline in their prices would be transferred to the global market within a short period of time. Then any motive that foreigners would have to offer higher prices for Austrian bonds would slip away.¹¹

It is not possible, given the current underdeveloped state of monetary theory and the lack of statistical data, to arrive at any certain conclusions about what influence the limit on increases in currency in circulation may have had on the value of money through its impact on the prices of goods. In other respects, the impact on the foreign exchange rate due to the limit on the maximum quantity of state notes in circulation and the administrative suspension of silver coinage can be determined with certainty: in fact, it was a means of securing the credit of the monarchy. The strictness with which the two governments of Austria-Hungary followed the conservative rules of its currency policy reestablished trust in the two financial administrations’ fulfillment of its monetary obligations, especially after this had been severely shaken both domestically and abroad by the events of 1797-1866. The danger of an inflationary increase in the supply of paper money, much like the danger of a return to a silver-backed currency, retreated into the distance.

The improvement in the creditworthiness of the currency went hand in hand with the strengthened creditworthiness of the government bonds. This was considerably influenced by the gradual disappearance of the threat of war, which had risked the peaceful development of our fatherland since the Congress of Berlin.¹²

Without a doubt, a war with one of the Great Powers would have forced Austria to resort to a new issue of paper money emissions, to renewed borrowing through the issuing of premium bonds, and perhaps also to a reduction in bond coupon payments, which would have destroyed the national credit for a long time.

The average annual rate of Austrian 4 percent gold bonds on the Berlin exchange rose from 61.05 percent in 1877 to 93.50 percent in 1886. Following a downturn in 1877 to 89.67 percent (during the Bulgarian Question),¹³ the upward movement continued. The annual average amounted to:

The rate for Hungarian gold bonds was increasing as well. The rate of return on the 6 percent gold bond amounted to (calculated according to the average annual rate) 7.9 percent in 1877, and that of the 4 percent gold bond amounted to 4.4 percent in 1891.¹⁴

As long as the concern continued regarding peace in Europe, speculation countered an increase in the note value. Out of fear of a decline in the Austrian currency, investors avoided accumulating large amounts in Austrian cash assets and preferred to deposit their liquid assets in gold bills of exchange. The disappearance of the risk of war allowed such a speculative collecting of gold exchanges to appear superfluous, and the pressure that the domestic speculative demand for gold had exerted on the currency market dropped off.¹⁵

If one item in the monarchy’s balance of payments improved in this way, other entries show a favorable pattern as well.

The Austro-Hungarian trade balance for imports and exports amounted to:

The excess exports in the import-export trade amounted to:

Starting in 1889, Austro-Hungarian investments began to immigrate back from abroad. The unfavorable effect that a capital migration of this type is able to exert on the balance of payments, and through this on the bond rate, was alleviated by the fact that new government borrowing by both governments had practically come to a halt in 1889. The domestic demands for investment were extensive enough to take up the funds flowing back into the country without disturbing the currency or bond markets.¹⁶

According to Sax,¹⁷ the positive balance in the balance of payments amounted to:

The favorable pattern of the balance of payments explains the general improvement in the Austrian currency in the four-year period that began in the summer of 1888. The exceptionally low rate for foreign bonds in the third quarter of 1890 can be traced back to a particular cause: the Sherman Act of July 14, 1890.¹⁸

Since the Bland-Allison Act (February 28, 1878),¹⁹ agitation by silver proponents in the United States had decreased and, following a break of several years, only resumed in 1889 with new vigor. The movement’s goal was the freeing of silver coinage; however, all that the silver proponents were able to achieve was the Sherman Act of July 14, 1890. An unparalleled bull market speculation was linked to the American agitation. The silver price in London was quoted at:

These bull market movements influenced the Viennese foreign exchange and currency markets. The German Reichsmark was quoted on the Vienna exchange at:

As an aside, it should be noted that circumstances similar to these, which had caused the improvement in the Austrian currency, also drove up the price of the ruble. In this case as well, favorable balance of payments, political quiet both domestically and abroad, and the silver bull market of 1890 were of primary importance. The quote for 100 credit rubles on the Berlin exchange was:

The decrease in the agio placed the currency question, which had been dealt with only tepidly for years, back on the agenda.

It is true that, following the unfavorable events of 1848/49 and 1859, the financial administration immediately and energetically tackled the organization of the subverted monetary system; it aimed with vigor and skill at eliminating the forced exchange after the Prussian War, which wrecked the large-scale plans of the elder Plener²⁰ in the same fashion that the French War a few years previously had destroyed similar endeavors by Bruck.²¹ No serious steps for reforming the currency were undertaken for a long time. The cause for this conspicuous inactivity in the area of currency policy, which contrasted so sharply with the bustling activity of the previous epoch, was not simply the difficulty and complexity that the international currency problem had developed into since the continuous drop in the price of silver. It was, rather, that the project for reforming the currency was absolutely unpopular in Austria, and even more so in Hungary. One could only imagine an implementation of currency reform by means of depressing the so-called agio²² until it disappeared completely. The fast drop of the agio, which had occurred in the first half of the 1860s as a result of the currency reform endeavors, was still an uncomfortable memory for all manufacturers. The fact that the situation had changed essentially since 1879, and that a return of the so-called gold agio at parity to the customary exchange rate for Austria was not possible, was not easy to recognize at the beginning, especially because the designation of the twenty-franc coin as an eight-florin coin gave ample cause for errors.

With the depreciation of the currency in the period 1872-87, the agrarian and industrial manufacturers both capitalized in the same manner. The increasing agio functioned like a protective tariff against the import of foreign manufactured goods, and assisted the export of domestic products like an export premium, and also benefited the debtors. Under such circumstances, support for currency reform plans could not be counted on from the industrial or agricultural circles.

The falling agio affected primarily those who had taken advantage of the previous increases. While the prices on the global market remained unchanged, the foreign exchange rate on the Viennese market dropped, and the exporter who had received 50 fl., 6³/₄ krona (crowns) for 100 francs in February 1887 received only 44 fl., 54½ krona in September 1890. The farmer received 10 percent less for his produce than two years previously, but taxes and mortgage interest had to be paid at the old levels.

Up until spring 1890, hope had been placed on an early backlash. The summer of the same year brought such expectations to an end. As soon as the recognition began to spread that the increase in the value of the currency was not based on temporary circumstances, and when it would stop could not be predicted, the demand for currency reform became general. In the first half of September 1890, the Austro-Hungarian Export Association dispatched a call to its members, in which it advocated for action in favor of currency reform. Rallies in favor occurred in all corners of the empire.²³ In the general media, propaganda for reform was heard.

Particularly characteristic was the reversal of opinion in Hungary. Hungary had raised constant, fervent resistance to the Austrian currency reform plans, and delivered a decisive veto in November 1884 to the proposals by Austrian Finance Minister Dunajewski.²⁴ Now, however, Hungary ardently advocated for reform. Of primary importance in this decision were the agricultural interests, particularly those of the wheat exporters; a further drop in the foreign exchange should be prevented at all costs. Therefore, the Hungarian Finance Ministry began to buy gold foreign exchange in November 1890, in order to exert pressure on the rate of the paper florin. Over the course of a few months, the Hungarian treasury had acquired about 45 million florins in gold exchange, and the desired result had not failed to occur.²⁵

Along with the agrarian motives, however, which allowed Hungary to call for currency reform as a method to stop the “improvement” of the currency, other motives were also present. For forty years, Hungary’s politics had only one goal: the achievement of economic independence as a precursor to political independence. In the introduction of the gold currency and the implementation of specie payments, those in Budapest saw their most secure means of financially freeing themselves from the Viennese banks, increasing the prestige of Hungarian national credit abroad, and acquiring the means from international capital that were necessary for economic war with Austria.

Since 1890, hardly a single voice has been raised in Hungary against currency reform. With unique unity, the entire nation followed the political rallying cry pronounced by Alexander Wekerle,²⁶ the most knowledgeable Magyar in monetary-related areas: truly an example of political discipline worthy of awe.²⁷

With the reversal of opinion in Hungary, the fate of currency reform was decided. Since October 1890, no one doubted any longer that the currency reform would be tackled as soon as possible, and it was just as certain that the currency’s rate of exchange would be higher than the exchange rate prevailing on the market at that time. The following comparison shows how quickly and correctly the Viennese banking circles grasped the new situation.

On October 2, 1890, Wekerle announced in his exposé the early realization of the currency draft (which was, however, delayed as a result of the Baring Crisis).²⁸ On October 6, he met in Vienna in order to confer with Dunajewski about currency reform. Under the influence of this news, the currency rate soared. German Reichsmarks were quoted on the Viennese market at:

The question has to be asked, whether the belief in the continuing improvement of the Austrian currency, and in the general pervasiveness of which belief we detect the main reason for the swift tackling of currency reform, was not based on an error.

It must be noted in advance, however, that even if this question were to be answered affirmatively, one would not be justified thereby in accusing the initiators of currency reform of lacking foresight. Ignoring the fact that a continuation had been presumed to be highly probable of all of those circumstances that had affected the favorable pattern of the balance of payments since 1888, no one in Europe could predict around 1892 which direction the silver question would take in the United States. The majority by which the House of Representatives had voted against the freeing of silver coinage numbered:

One had to come to terms, therefore, with the fact that soon the silver proponents would achieve their goal, which they had pursued for years with an enormous energy. What result this would have for the foreign exchange rate was learned in the summer of 1890.

An examination of the exchange rates shows that the favorable pattern of the monarchy’s balance of payments has been maintained in the fifteen years that have elapsed since the beginning of the currency reform. In 1893-96, however, the exchange rate showed an unfavorable character: in fall 1893, the agio temporarily reached a level of more than 6.5 percent compared with the “relation” established in the Act of ’92. This formation of the agio was traced back to the chance coincidence of a series of unfavorable circumstances.³⁰ Since 1896, the agio has indeed disappeared and, since this time, the exchange rates have maintained parity on average with limited fluctuations. For more than a decade, the monarchy has enjoyed, in this manner, a currency that is stable in value compared with foreign countries.

The means by which this goal was achieved, the well-known foreign exchange policy of the Austro-Hungarian Bank, was made feasible only by the favorable pattern of the balance of payments. Lotz remarked quite correctly, “the Bank can issue exchange only for as long as they can buy foreign exchange, even at a sacrifice. Foreign exchange, however, can only be obtained as long as the Austrian economy possesses foreign receivables or can acquire them through the sales of goods or securities. As long as a country can do this, then gold impoverishment due to an actual specie system absolutely need not be feared again.”³¹ The well-known appraisals by the Austrian Finance Ministry about the monarchy’s balance of payments yield the statistical proof for the correctness of this statement.

The great advantages that the Bank’s (justifiably praised) foreign exchange policy brought to the economy do not lie, as the naïve layman’s view perceives whenever he hears talk of suspended specie payments, in the fact that it frees Austria from the actual fulfillment of its international obligations, but rather in the fact that it gives the Bank the possibility of separating so-called legitimate requests for gold from illegitimate ones. In this fashion, it was possible to keep the bank rate in Vienna lower than that in Berlin and London; what this means, however, does not require any further explanation. It should be noted in passing that the necessity of dealing differently with speculative demand for gold to exploit the difference in the discount rates than with demand by importers has demonstrated itself elsewhere. The Bank of France does not require a gold premium if it is brought proof that the bearer of the notes presented for redemption requires the gold for the import of foreign raw materials. The German Reichsbank and the Bank of England also only hand over gold coins for export at a weight 2-3 per mill lighter than the newly minted coins.

Just like the German and English gold currency policy and the French gold premium, the Austrian foreign exchange policy is possible only through the monarchy’s favorable balance of payments. That the favorable balance of payments can be established only by increasing external debt through the export of investments is not relevant. The only deciding circumstance, above all, is that the balance of payments is positive. If this were not the case, then the Bank could not sell enough foreign exchange and would have to introduce an agio immediately.

In the past decade, there have been repeated periods in which the foreign exchange rate has been below parity. Gold imports into Austria then took place, and the Bank accepted the gold. In 1901, for example, gold stockpiles of approximately 153 million crowns flowed into the Bank in this manner. The import of gold from abroad continued each time until the foreign exchange rate again had approximated parity as closely as possible, so that additional gold imports were no longer profitable. Under the hegemony of the old Austrian currency system, such gold imports would not have occurred, and this impossibility would have led to an increase in the value of the currency.

If the country had adhered to the nonconvertible currency, then a lack in circulating media of exchange in domestic commerce would have made itself felt soon as well. Even if it is not possible to say something specific about the increase in demand for circulating media of exchange, it remains that the swift (at least for Austrian circumstances) economic development of recent years has broadened this demand to a considerable degree. If this demand for circulating media of exchange were not being correspondingly satisfied (and that that satisfaction was realized was only made possible by the new currency acts), then without doubt, credit reductions and, as a result of them, critical occurrences would have arisen.

The experiences of the last fifteen years confirm the correctness of that theory that a continuing “improvement” awaited the Austrian paper currency.

The increase in the value of the Austrian currency reduced agricultural and manufacturers’ income, and increased the capitalists’ income. The owners of bonds payable in paper or silver saw the value of the debt owed to them constantly increase, and it was understood that they could not be enthusiastic about a currency reform that cut off their hope of additional increases in the value of money.

Nevertheless, the opposition that currency reform found in these circles was powerless, primarily because it lacked even the appearance of a legal foundation. The owners of paper and silver bonds, even of state bonds, had no claim that the country should allow the favorable situation of the monetary system to continue unchanged for their interests alone. The country would have committed no breach of law with regard to them, even if it had freed silver minting again.

The sharp protests that some foreign news media raised against the planned currency stabilization were accorded little importance, because foreign ownership in Austrian investments included only the smallest portions in securities paying interest in silver or in notes, the vast majority of which, however, were paid interest in gold. However, even on the part of the majority of domestic owners of bonds payable in silver or notes, a boisterous opposition was not to be expected. Their standpoint was represented in the currency inquiry commission solely by the secretary general of the First Austrian Savings Bank, Mr. Nava. In the course of parliamentary discussions, hardly any voice had been raised on the part of these doubtless affected interests.

It is surprising, but not inexplicable, that the markets and the banks were not only not opponents of currency reform, but, on the contrary, they exerted so much effort for this cause that those not involved would have acquired the impression that the currency change was primarily in the interests of this circle. The Christian Social Party repeatedly pointed out that high finance decisively advocated for reform.

This opinion of the monetary institutions cannot be traced directly back to the interest that they had in the development of industry and agriculture. Such considerations may well have played a role; however, they were not pivotal by any means. Much more decisive was the fact that, since the Crash of 1873, the banking business in Austria had not really prospered.³² Issuance of securities practically slumbered. In Cisleithanien [Austria], it amounted to:

From 1883 to 1892, only one joint-stock bank was established in the kingdoms and states represented in the state council: the exchange society “Merkur” opened in Vienna in 1887 with capital of 1.2 million florins, which had increased to 1.8 million in 1891. Even two decades after the great speculative crisis, the entire practice of founding institutions still stood under the shadow of a critical breakdown.

Even the bond business had lost its importance since equilibrium had been restored in the state budget. Beginning in 1889, the issuing of new state securities had come to a stop in both halves of the kingdom. The continuing nationalization of the railways withdrew a broad field of activity from private capital.³³ The connection between the banks and industry was quite weak, the proceeds from running a business had not assumed the position in the banks’ balance sheets that they enjoy today, and deposit banking was still in its infancy. It was therefore only natural for the banks to link large expectations to currency reform. In spite of this, it could be predicted that this would impact the foreign exchange business, because they promised substantial profits from the issuing of currency certificates and from the acquisition of gold for both governments, and hoped that the simultaneously enacted conversion of the 5 percent bond securities would enliven interest in dividend stocks.

The prospect for large profits that could be made here appeared more appealing to the financial circles than the always doubtful increase in capital bonds. Contributing to this position may have been the fact that the assets of the large capitalists, the bankers and those personalities who directed the policy of the large banking institutions, were predominantly invested in dividend securities and less so in fixed-income-bearing bonds, so that their interests were more closely related to those of the manufacturers than those of the capitalists. The medium and smaller capitalists, mostly owners of public bonds, mortgage creditors, and investors in savings banks, did not have the possibility of effectively representing their endangered interests, because they did not have friends in the media nor in the parliament.

Among the opponents of currency reform that arose in parliament and in the media, the supporters of bimetallism earn a certain respect because two of the most distinguished leaders of the international bimetallism party, Eduard Sueß and Josef Neuwirt, appeared at their head. However, their efforts had to be limited to preventing the implementation of a gold currency in such a way that it would not prevent a possible future transition to a double currency. One could not speak about an implementation of bimetallism in Austria-Hungary alone; it was predictable that the monarchy by itself would not be able to establish a legal exchange rate between the two currency metals and that, under such circumstances, the transition to a double currency would be tantamount to a return to a pure silver currency.³⁴

The primary argument of the bimetallists—the increase in the value of gold since 1873 and its counterpart, the general depression in the price of goods—was completely without effect in Austria, because the value of Austrian paper money experienced greater increases than that of international gold money. The political-economic interests demanded that a currency comparable to that in the Western European nations be established as soon as possible; this pushed into the background for the foreseeable future the demand for a money possessing an invariant purchasing power.

It can only be ascribed to the lack of clarity dominating the problem of the currency system that very few supporters of the international double currency were to be found among the Austrian agriculturists and their close circles. The farmers in countries that had gold currencies were supporters of bimetallism, whose introduction would have meant a decrease in the purchasing power of money. For the monarchy, however, affiliation with an international bimetallism system, which was conceivable only because of the traditional exchange ratio of 1:15.5, would have increased the value of money. “For a country with a gold currency, the transition to bimetallism means a price increase, for Austria, on the other hand, a direct and initial drop in prices,” explained the expert Benedikt in the currency inquiry, because the Austrian seller would initially receive the old amount for his export articles abroad, while those same articles would have a lower value domestically.³⁵

With growing enlightenment about questions of currency policy, the number of bimetallists melted down. There were no supporters of a pure silver currency; this was understandable, since the fluctuations in the price of silver and the fear of a fast rise in value of the white metal if the silver proponents were victorious in North America had given the direct impulse for tackling currency reform in the first place.

One cannot gain a true picture of the position on the currency question held by the individual classes of citizens and interested groups from the reports of the parliamentary sessions or from the news media. Purely political considerations stepped into the foreground and pushed economic opinions into the background. The Croatian and the Young Czech representatives raised fervid opposition to the draft of the reform, because the motto and crest on the coins of the crown currency did not accommodate their constitutional claims. Otherwise, the Czech representatives declared themselves to be completely and fundamentally in agreement with a transition to a gold currency. It is significant for this type of opposition that a few years later their leader, Kaizl,³⁶ when finance minister, cooperated in the continuation of the reform efforts in a distinguished manner.

The currency reform met a truly serious and boisterous opposition in the then small, but active, Christian Social Party.

The gold currency was generally viewed with mistrust in the camp of the conservative parties. “The currency reform,” opined Wilhelm Freiherr von Berger, was designed “in the interests of international commerce and international competition, that is, the global economy.”³⁷ He continues, “our limited standpoint allows us to observe humanity in regard to its economic interests as members of naturally and historically determined economic areas; we see grave dangers for these economic interests from a gold currency that appears suitable for assisting the global economy; this is even ignoring for the moment that our monetary system will be abandoned to international gold speculation and exposed to all of the disadvantages associated with the circulation of an international currency.” The advantage from the introduction of a gold currency was “mostly for those elements that believe they have an interest in the development and construction of the global economy, and these are big industry and the large mobile funds.” These two are, by their nature, “cosmopolitan and international.” On the other hand, “the rightly understood interests of all working classes of the truly producing people” depend “on the development of the fatherland as an autonomous national economic state, as an autonomous national customs and commercial area.”³⁸

The uncertain stance of the conservative parties regarding the currency question can be traced partially back to the fact that there were only a few men in their ranks who were capable of making an independent judgment about the difficult and complex problems of the monetary system. They included among their supporters many distinguished agriculturists, several merchants and industrial magnates, but hardly any banking experts, and their scientific party members had consistently dealt more with questions about agricultural and social policy than with policies about the monetary and credit systems. Even a man like Rudolf Meyer³⁹ considered the usual arguments of the bimetallists from gold currency countries to be applicable to the Austrian circumstances, and had nothing to say about the difficulties that arose for Austrian manufacturing from the sinking of the agio.⁴⁰

Only the events on the foreign exchange market since 1888 and their consequences for agriculture have convinced the conservatives, little by little, that maintaining their opposition to the gold currency was out of place. Finance Minister Steinbach sought out the individual party clubs from the House of Representatives in May and June 1892 and issued explanations to the representatives about all of the important points of the currency question. Indeed, he succeeded in dispelling the misgivings of the agrarian supportive parties, and in winning the Polish Club and the Hohenwart Club, the two most powerful conservative, religious groups in the House, for the draft.

Only the Christian Social Party fought the draft reform proposal with great energy. They were not open even to the necessity of currency reform, and with good reason, as they primarily represented small manufacturing interests. The small manufacturer indeed had less to suffer under a decline in the foreign exchange rate, because he generally did not export anything; he was squeezed by a lack of capital and a lack of credit. The friends of “the little guy” opined that both could be traced back to the lack of circulating media of exchange and considered the most certain assistance to lie in the increase of the nation’s money supply, best achieved through a “moderate” increase in state notes, and eventually through increasing the annual silver minting also, which, however, would be undertaken only for the state budget. The strongest attacks from this side targeted the government’s intention of initiating the currency reform by borrowing a large amount of gold, the proceeds from which the state notes would be redeemed. At least it had to admit, it was claimed, that as a result the tax burdens would be increased and any possible tax reductions would be postponed.

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

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.

The proposals receiving serious consideration for the future exchange value of the currency did not deviate more greatly from each other than the actual fluctuations of the exchange rate on the Viennese market during times of intense movement within a few months or even weeks. That the exchange rate resulting from the currency reform would not essentially depart from 119 was considered to be agreed upon by market circles already one and a half years prior to the introduction of the draft reform in the State Council; and, indeed, it was this fact that constantly pinched the currency rate beginning in fall 1890, far more so than the much discussed gold purchases by the Hungarian government. Also, the apparent difference between average market price and current price, which played a large role in the publicized debates about the draft, lost its importance upon closer examination, particularly if one took into consideration that the difference between these two prices became ever smaller and completely disappeared on the day of the introduction of the draft in the two parliaments, which can certainly be traced back to the activities of currency speculation.

The belief that lay behind the excessive emphasis on the importance of the “relation” in agricultural circles and among commercial manufacturers and the scientific discussions about the currency question (the suspense with which the market followed the battle between the light and heavy florins requires no further explanation) was that the value of money in domestic commerce would not, or would not immediately, change according to the change in the value of the currency on the global market. Or, in other words, it was considered possible, with the transfer to the new currency system, to “eternalize” the currency differential between the Austrian currency and those of the gold currency countries. This view is based, however, on an error. Sooner or later, the prices of all domestic goods and services will adjust to the change in value of money, and the advantages that a devalued currency offers to production, and the obstacles that an overvalued one sets against production, will disappear. This is because the agio as such does not function as an export premium or as a protective tariff; rather, it is merely the increasing agio, or inversely only the decreasing agio, not the low agio in itself, that is able to check exports and boost imports.

The importance of currency policy in relation to currency reform did not lie in the higher or lower “relation,” but rather in that the monarchy converted from a monetary system with a currency that was increasing in value compared with the currencies of the economic Great Powers, to a monetary system with a currency that was stable abroad.

The Act of August 2, 1892, admittedly only arrested the increase in the value of the Austrian currency. Since August 11, 1892, the day that it came into effect, the value of the Austrian florin (2 crowns) essentially cannot rise above the value of 2 francs, 10 centimes or 1 mark, 70.12 pfennig. In contrast, no legal barricade was placed against a decrease in the value of money. This should become impossible in the future due to the implementation of specie payments, which was considered by the creators of the reform act to be its conclusion.

It is certain that the implementation of specie payments was initially postponed only because for its assurance sufficient provisions, most notably the accumulation of a correspondingly large stockpile of precious metal in the bank’s vaults, were necessary, and a favorable configuration of circumstances on the international currency markets had to be awaited. However, it also appeared just as certain that, precisely due to the fact that only a further increase in the value of money had been made provisionally impossible by the adoption of the draft reform, the chance of a possible decrease in the value of money, if one might even discuss such a thing, by contrast remained open, and had assisted in the victory of the reform project. By agreeing to currency reform, the friends of “cheap money” sacrificed nothing and won a great deal: the establishment of an upper limit to the value of money.

The further fate of currency reform admittedly has turned out differently than even the most highly informed circles could have predicted in 1892. After the events on the international currency market in 1893 and 1896 had placed the success of currency reform in doubt, the foreign exchange policy of the Austro-Hungarian Bank, inaugurated in 1896, established the stability of the currency, including a lower limit. It should be noted, however, that this bank policy, initially suggested in 1894 by the then Austrian Finance Minister Ernst von Plener,⁵³ resulted absolutely from the initiative of governmental agencies that were accommodating the desires of the business world. Up until now, it had undergone neither an exhaustive parliamentary criticism nor a corresponding appraisal from the political parties.

Only through the bank’s intervention on the foreign exchange market was the stabilization of the price of the Austrian currency achieved on both ends, and thereby the currency question was solved for the monarchy. Whether specie payments are to be implemented or not is a question of expediency and of the discount policy, in which currency policy considerations play only a limited role. No rational person on this or the other side of the Leitha⁵⁴ would advocate today against the gold currency.