Ludwig von Mises on the Monetary System of German-Austria After the Dissolution of the Habsburg Dual Monarchy in October 1918

Austria and Hungary also largely financed the World War by using the printing press. At the very beginning of the war, the legislation was set aside that had imposed limitations on the expansion of bank notes by the Austro-Hungarian Bank, and on the use of credit by both states of the monarchy through their central bank. This cleared the way for inflation. The indebtedness of both states to the bank grew from month to month, the circulation of bank notes increased precipitously, and, in line with the proliferation of paper currency, the prices of goods and services and the rates of foreign bills of exchange increased.

When, in October 1918, the dual monarchy of the Habsburgs disintegrated into a number of separate national territories, some of them constituted as independent states while others incorporated into neighboring states, the Austro-Hungarian Bank finished its role as the joint institution enjoying the sole privilege of issuing currency for the entire monarchy. In the legal sense, its privilege of issuing notes continued until the end of 1919. However, in actual fact this privilege was only respected by German-Austria.

After the dissolution it was obvious that the Austro-Hungarian Bank would no longer be able to extend credit to the various successor states as it had extended to the Austrian and Hungarian states during the war. . . .

At the beginning of 1919, the first step in this direction was taken by the Southern Slav government [Yugoslavia]. Czechoslovakia was to follow. The notes of the Austro-Hungarian Bank circulating within their territories were stamped, and all other notes were no longer legal tender. Henceforth, only stamped notes could be used to fulfill all contracts denominated in crowns. This completed the creation of Southern Slav and Czechoslovak crowns, though the technical implementation of these reforms may have been deficient from a monetary point of view.

Now German-Austria, also, had to act. It could no longer wait until all other states had made the transition from the Austro-Hungarian crown to separate national crowns. It had to give up the Austro-Hungarian crown in order to avoid there being notes that, for whatever reason, had not been stamped in the other states that would now flow back into German-Austria and increase the inflation within German-Austria. It had to prevent the Czechoslovak Ministry of Finance from using the half of its citizens’ holdings of notes that had been retained upon the marking of currency for the purchasing of securities in German-Austria. Bank notes circulating in the Ukraine and in neutral foreign countries that totaled several billion crowns were not to be regarded simply as German-Austrian currency. This is why German-Austria, as well, applied a special mark to bank notes denominated in crowns and circulating within her territory. The decree of March 25, 1919, which had the force of law, withdrew legal-tender status from all obligations not so denominated. This created a separate German-Austrian currency. All further issues are then of a technical nature and pertain to the independent German-Austrian currency. Important though that may be, it takes second place behind the fact of the independence of the currency. Among the issues open for discussion is the question of whether or not to set up an independent German-Austrian central bank, and the further question of whether to keep the stamped notes in circulation or to replace them by newly designed notes because of the easy possibility of falsifying stamp imprints.

—Ludwig von Mises, “The Reentry of German-Austria into the German Reich and the Currency Question,” in Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 69, 71.