Ludwig von Mises Warns Austrian Bankers in 1919: “We Are Going Down a Road That Leads to the Collapse of Our Currency”

We are going down a road that leads to the collapse of our currency. Our financial policy has been reduced to one remedy: printing more and more paper money. There is almost no prospect that things will change in this respect. It is unreasonable to expect that the Social Democratic party will suddenly admit the inner collapse of its socialist ideas or openly recognize the falsity of all that it has proclaimed for decades. We cannot expect better things from the Christian Socialist party, whose economic ideal is the survival of autarchic farmers and of small craftsmen mainly concerned about their daily bread. . . . And when it comes to the German Nationalists, they have always tried to outdo the other parties by their social-reformist radicalism and are currently the special advocates for the large sector of public employees, whose syndicalism has dealt the final blow to our financial situation. . . . Our entire political life is impregnated with imperialist, mercantilist, and socialist thinking, and with the fantasies of “economic nationalism.” . . .

In terms of economic policy, however, our system, like that of the Bolsheviks, promotes an undisguised onslaught on private property, not only of the means of production but of consumption goods as well. And like Bolshevism, it survives only by using up the capital that has been accumulated over several generations under a freer economy. Movable and fixed equipment in public enterprises is not replaced as it gets worn out, and devious taxation and trade policies combine to hinder private enterprises in renovating their technical equipment. Food supplies are imported from other countries, and their counterpart is generated not by the export of domestically produced goods but by increasing indebtedness, the piecemeal sale of domestic productive capital—sale of shares, decimation of timber supplies—and an equally undesirable reduction of the domestic stock of consumption goods.

—Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” 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), 47-49.

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.

Foreign-Exchange Control Enables European Banks to Use the Government's Restrictions As a Way to Avoid Making Their Repayments Abroad

The primary problem behind the foreign-exchange controls comes from the fact that a number of European banks have invested long-term the equivalent of the short-term credits that have been extended to them from abroad, with no ability to pay on their part being anticipated in the near future. These banks are not in a position to fulfill obligations to their creditors to pay on demand or on short notice. It is the most difficult problem confronting these European banks today. Foreign-exchange control enables these banks to use the government’s restrictions as a way to avoid making their repayments abroad. But this does not resolve the underlying problem, it merely postpones it. This problem, however,must be resolved; otherwise a restoration of international relations in these as well as in credit matters in general cannot be restored.

Foreign-exchange control allows these banks to contact their creditors and temporarily arrange moratorium agreements. But these agreements do not provide a definitive solution. But a definitive solution must be found in order to restore the credit system and its functioning again in a normal manner. This is one of the principal conditions necessary for bringing an end to the world economic crisis.

The restructuring of the insolvent banks must therefore precede the abolition of foreign-exchange control. The banks whose balances are in severe deficit must be liquidated, and the losses that have occurred must be recognized as complete losses. It is useless to postpone the liquidation of these enterprises. The losses will only be made greater by delaying a final settling of accounts. Fortunately, the balances of the majority of the banks in question are not bankrupt but only insolvent. These banks would be in a sound condition if the maturity dates of their own debt obligations coincided with the dates when they received claims owed to them. It is necessary to make every effort to reach an arrangement through agreements between these banks and their foreign creditors, in collaboration with the governments of the various countries involved as well as with international organizations (the League of Nations, the Bank of International Settlements, the International Chamber of Commerce). This is all the more feasible considering that it is not in the interest of creditors that the banks in which they have placed their capital should fail and suffer further losses, only adding to the harm to themselves in the process. These arrangements should be initiated and carried out as soon as possible. Once they are, there will no longer be any obstacles, from this source, to delay the abolition of foreign-exchange control.

It would be superfluous, in this regard, to provide special legislation requiring that banks maintain their own liquidity in the future. The banks will do this in their own interest, particularly if it is clear that any bank that poorly manages it own affairs can have no hope of being kept afloat by government intervention at the expense of the rest of society.

—Ludwig von Mises, “The Return to Freedom of Exchange,” 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), 217-218.

It Is Up to Us Citizens to Try to Do on Our Own What the Government Is Failing to Do for Us Because We Can Hardly Expect the Government to Be of Any Help

Domestic anarchy, a possible Communist-Bolshevik uprising, and enemy occupation, these are all conceivable consequences resulting from the collapse of our currency. If we wish to avoid all these eventualities, we must prepare for the day of the catastrophe. We can hardly expect the government to be of any help. For five years the Ministry of Finance has not only pursued a disastrous inflationary course but has repeatedly tried to defend it. Beyond that, it has accelerated the depreciation of the crown by misguided measures that stemmed from its complete blindness to the single true cause of the monetary depreciation. It can hardly be assumed that it will now suddenly see the light. Even those influential financial policymakers who have an insight into the economic nexus have not been able to swim against the tide of prevailing ideas. It is up to us citizens to try to do on our own what the government is failing to do for us. All we can hope for from the government is that it will not stymie the endeavors of its private citizens. In their own interest and in the interest of the community, banks as well as large industrial and commercial enterprises must take the necessary preparatory steps to avert the catastrophic consequences that will follow from the collapse of the currency.

--Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 53.

The Economic Failure of All Public Enterprises Is Not a Peculiarity of the Austrian Government; Public Enterprises Have Failed All Over the World

If one considers what enormous sums have been extracted from the nation’s wealth through the failure of publicly managed enterprises and through the failure of the Postal Savings Office, one can pretty well judge how completely different our national finances would be today if the national agenda were restricted to the more limited responsibilities of government. The economic failure of all public enterprises is, however, not a peculiarity of the Austrian government. Public enterprises have failed all over the whole world. The finances of every single European and non-European nation are in as much or greater disorder as the government concerned has gone farther into the field of the management of business enterprises. In view of this fact, it sounds like a mockery that only a few years ago the further expropriation of private enterprises was recommended in all earnestness for the relief of financial distress and that this policy is still looked upon by wide circles as the highest wisdom in financial policy. The real root of all of our finance difficulties lies precisely in the existence of these public enterprises; in order to cover their operational losses the private sector must be taxed enormously.

--Ludwig von Mises, "The Balance Sheet of Economic Policies Hostile to Property," in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 238.

Property Taxes Impede the Creation of Capital; Capital Consumption Is Detrimental for both Property Owners and Workers

The second questionable principle is the preference for direct taxation—those taxes that are assessed on “property”—over indirect consumption taxes. Over many years, the inflammatory rhetoric of the Social Democrats has succeeded in spreading the view that taxes on commodities of mass consumption should be opposed, but that levying “taxes on property” does not affect the interests of the workers. The leaders of the Social Democratic party always talk about “gifts” for entrepreneurs whenever property-tax reductions are proposed. In reality the situation is quite the opposite. Property taxes impede the creation of capital. And when the taxation of enterprises goes too far, it results in the consumption of capital. To a large extent, this has been the case here in Austria for the last eighteen years. Capital consumption is detrimental not only for the owners of property but for the workers as well. The more unfavorable becomes the quantitative ratio of capital to labor, the lower is the marginal productivity of the work force, and, consequently, the lower are the wages that can be paid. That the Austrian economy is only able to compete and survive on the basis of the relatively low wages that are paid today is primarily due to the fact that very significant amounts of the capital belonging to Austrian entrepreneurs have been eaten up during the past eighteen years.

--Ludwig von Mises, "Adjusting Public Expenditures to the Economy's Financial Capacity," in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 242-243.

A Soviet Response to Mises: Professor Mises as a Theorist of Fascism

Viennese professor Ludwig Mises is a very angry guy and he very strongly dislikes Marx and Marxism. Just speaking between us, he shouldn’t dislike it one bit. If not for Marxism, our professor would have to beg for handouts, since he has never managed to prove himself in science. Crushing Marxism, however, is a very profitable business.

“The science of the so-called Marxists,” states Mises, “can be no more than ‘scholasticism.’” Mises talks about “men and women who are in this business” with total disregard. They beat the air, live by canonized Marxian dogmas, with their writings mattering only because it helps their political careers; their “science” only pursues party goals; and the whole argument about revisionism and dictatorship is not scholarly, but is purely political.

--Ludwig von Mises, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, vol. 2 of Selected Writings of Ludwig von Mises, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 381-382.