Mises Daily Articles
Austrian Paper Money: 1700 and Following
[Excerpted from chapter 3 of A History of American Currency. This chapter was originally published as an article in the Financier on October 25, 1873.]
The First Austrian National Bank was founded about the year 1700 but was transferred to the authorities of the city of Vienna very soon after. This bank issued notes in moderate amounts, which bore interest and commanded a premium. In 1762, this apparently rich source of wealth was seized upon as a resource for the distress of the government, and from that time to this Austria has been under the dominion of paper; from that time on, for more than a century, every year has seen a deficit in the Austrian finances.
The new notes bore no interest and were for sums from five to one hundred gulden. They "were to be taken everywhere in payment." It was forbidden to export coin, and base coins of small denominations were issued. The latter, nevertheless, went to a premium in paper as the notes increased. This increase was at the same time persistently represented by the government as a temporary necessity, the bank having been allowed to issue notes in return for its advances to the government. "In 1802, the country was flooded with counterfeit seven-kreutzer pieces." They nevertheless were at a premium in paper. In 1807, copper coins were issued so base as to be on a level with the paper.
Meanwhile the issues had been increasing; the government had found that there was no returning on the course on which it had entered. The wars with Napoleon demanded supplies, and there were no resources. The prohibitive system had crushed the indigenous industry of the country, made smuggling the most profitable of all forms of business, and created a few weak, exotic industries.
Prices had risen so high that the nominal sums required for army supplies, etc., were enormous. The note issue in 1796 was 47 million; in 1800, it was 200 million; in 1806, it was 449 million. There were, besides, counterfeits in immense quantities. The laws against counterfeiting or being possessed of counterfeits were so severe, and the difficulty of detecting them so great, that people feared to take notes at all, and this of course enhanced the premium.
The succeeding years saw new "patents" in regard to the finances issued every few months; each project was more desperate or more tyrannical than the last. Trust funds were required to be invested in public securities or banknotes, and deposited with the bank; then these were taken by the state, which became responsible to the owners. All silver plate was ordered to be brought to the public offices to be assayed at a heavy charge. It would be tedious to enumerate these desperate and revolting financial measures; each was brought forward with pleas of necessity, loud protestations of desire for the national welfare, confessions of past faults, and promises that each measure should be final. All of them, however, proved unavailing.
In 1810, the next stage was reached, a stage which the student of paper money meets so regularly in its history that he anticipates it sooner or later, in one form or another, in every new instance. A new class of notes was issued called "redemption notes," to represent coin, and to exchange for paper at the rate of one for three. By using these, the government prevented its expenditures from running up such enormous figures.
This plan, and others intended to support it, failed to attract even the popular attention; all confidence in the promises of the government was lost. The misery was wide and deep, reaching even the well-to-do classes. Persons on salaries found themselves in the pecuniary position of day laborers; the peasants and country people who tilled the soil had its products for food, but trade was brought to a standstill. Says Springer, whose history we follow and quote here and below:
The pecuniary corruptibility of the Austrian civil officers, and the opinion cherished by all classes, even by the Emperor, that the civil servants did not serve the state honestly, but would at any time sacrifice its interests to their own, took its origin in this period. The civil officers carried on afterwards as a habit what they had learned in a period of necessity.
The wretchedly paid custom officers connived at and shared in the smuggling. In 1810 the banknotes fell to 500 for 100, then to 800, and finally to 1,095.
This state of things came to a crisis in 1811. On February 20 of that year a patent was issued, whose appearance and character the historian thus describes:
The secret document which was to decide the weal or woe of millions had been sent out sealed to the government authorities. They were to break the seals at five o'clock in the morning on the 15th of March, and to post up the document an hour later. Long before daybreak, crowds were collected in the streets of all the cities waiting for the fateful moment, and betraying as much excitement as if the report of a decisive battle were expected. With eager haste they drank in every word of the document … which sowed the seeds of hate, and made distrust of the monarch a universal feeling. Some few could rejoice: they had unexpectedly become rich. Others, and by far the most, cursed and lamented. The fate of the beggar had befallen them in a night.
The banknotes, of which there were over one billion gulden in circulation, were reduced by the proclamation to one-fifth of their nominal value, and were to be exchanged for redemption notes, called the Viennese legal tender. These latter became, and remain, the Austrian legal-tender currency. The government promised to issue of these only enough to convert the outstanding banknotes, viz.: 212 million gulden.
Taxes were to be paid in the new currency; government pensions and salaries in the same. The debased 30 and 15 kreutzer coins were to be rated at 6 and 3 kreutzers, and the interest on the national debt was to be reduced one-half. The smallest redemption notes were for 25 gulden, so that the poorest people who held 1, 2 and 5 gulden notes could not exchange them. On the other hand, it was believed that certain persons, who hastily adjusted their affairs just before the patent was issued, in a manner to avoid loss, had received secret information of its contents.
In the following May the redemption issues were at 216, and in June at 338; the banknotes were at 1,690 to the 100 silver. The only recourse, in the midst of new necessities, seemed to be to issue more paper. The solemn promise of the emperor in the patent from whose effects the country was still smarting, and on which the virulence of popular hate and the sharpness of popular wit had been expended, stood in the way of any such issue.
The difficulty was obviated by giving the new notes a new name — "anticipation notes." In the decree for issuing them it was anxiously explained that they were only exchequer bills for anticipating the revenue. At first, 45 million were issued, but the issues were secretly increased to 426 million. In 1816, the amount of paper money was over 638 million, and, says the historian:
Austria offered the strange spectacle of a State buried in the stillness of death — a grotesque conglomerate of States of different sizes, some of which did not dare, others of which did not know how, to breathe independently and freely. Undeniably, the paper money exercised the worst influence on the morale of the people. Frugality and diligence were lost virtues. Vulgar pleasure-seeking and wild extravagance became habitual even in the lowest classes. Of what use to care for the future? Why not enjoy to-day all the pleasures of the senses? How could any one hesitate to pay 200 gulden for admission to a ball? In fact the "money" had no value, and, if one stood reflecting, he might lose ball and money both. The very fact of speaking continually of large sums, which, however, in truth amounted to but very small value, stimulated to frivolity and folly. So the ground was prepared for developing the celebrated "Viennese" disposition; and the loafer-life, in which the hot-spiced pleasures of the palate seemed the highest good, became indigenous to "the unique city of the Emperor."
In 1816, the Austrian National Bank was founded. It was intended to draw in the paper money, both as subscription to capital, and through the agency of the bank in the conversion of treasury notes. Its relation to the government, which deposited 50 million in silver to begin the operation, robbed it of confidence at the outset. It bought the notes at more than the current rate, so that there was a profit in buying them on the Bourse1 and taking them to the bank. A run ensued which forced almost immediate suspension. Loans were then raised for redeeming the notes, and the mass of them was reduced to 181 million.
In 1817, the bank shares were once more offered, and with better success. The bank went into operation and still remains, but government guarantees were given which were burdensome to the treasury and robbed the bank of independence. Its operations were mainly transactions with the government; its means could not be employed in furthering the industry of the country; and to this day a large part of its assets consist of government obligations, and until these are paid its usefulness is crippled.
The "anticipation notes" were reduced in number; their value improved, and their fluctuations were narrower. In 1827, these notes were reduced to 99 million, and in 1840 to 10 million. The period of peace was employed in this effort, and with a sound industrial system and no deficit, an equal amount of energy might have conquered the evil.
As it was, however, the notes were redeemed by loans, the deficit was met by loans, and, after 1830, Austria entered on a ruinous policy of armed peace. The relations with Hungary were bitterly hostile, and the policy of repression proved exceedingly expensive. New loans were continually required, the energy of reform died out, the power to decide on a policy was wanting, the dread of confession and of self-denial was deep-seated, and the habit of putting off and of seeking temporary makeshifts was established.
In 1848, a run on the Bank, at the outbreak of the revolution, reduced the coin reserve from 85 to 35 million. Forced circulation was given to the bank notes, and the events of that and the following years had the good result of rousing the nation from its stupor. Baron von Czoernig, chief of bureau in the department of commerce and industry, details fully the measures taken to regenerate the nation. Austria was in the position in 1850 in which Colbert found France. Efforts were made to reform the tax system, and important changes were made in the right direction.
The currency also received attention, but the history consists of little more than a record of changes from one form of paper to another. The deficit still continued; the expensive repression in Hungary seemed more necessary than ever, and the Crimean War forced Austria once more to heavy military expenses.2 The war of 1859 in Italy,3 and of 1866 with Prussia, produced new emissions of paper, and Professor Bergius, of Berlin, quotes the Austrian finance minister as saying, in 1868, that if new complications should arise in Europe it would be necessary to issue more paper.
After 1866, however, the repressive policy in Hungary was abandoned, and a freer industrial system was adopted. The panic of the summer of 1873 is the latest incident in this miserable story. The Journal des Économistes for June  gave the following account and explanation of it:
The financial crisis at Vienna was not simply a stock exchange crisis, but a general one, an effect of extravagance in new undertakings, and of a fever of speculation which took possession of all classes of the population.
After the war of 1866, a large emission of paper money took place, both on the part of the State and on the part of the Bank, all legal tender. The abundance of paper led to a belief in the abundance of capital, and prompted to undertakings of all kinds. These influences were assisted by the abundance of the harvests of 1867 and 1868. Urged on by the opposition, the State encouraged by guarantees of dividends the construction of railroads which had been neglected during the war. Speculation also seized upon credit institutions of various kinds, which were multiplied in all the great centres, on industrial establishments, on constructions in the cities, and on land. Hence ensued a great quantity of bonds and securities, good and bad, which there was not time to classify, and which produced a glut. They led to all the financial expedients usual in such cases, advertisements, reports, emissions of paper, loans of all forms, tempting the prudence of buyers and provoking the distrust of the Bank of Vienna and of other credit establishments. The great speculators, finding their means surpassed, suspended. The smaller ones imitated them. Strong houses were shaken, and the panic followed. It was necessary to close the Bourse for a day to prevent violence amongst the speculators. There were great calamities and some suicides.
After the crisis measures were taken to find a remedy. The Chamber of Commerce, the directors of the great financial establishments, the municipality of Vienna, etc., called on the government, which, of course, could do nothing. By permitting the Bank to raise its emissions to 500 millions it put the same in a position to discount and to make advances on national securities. Fusions and combinations and guarantees are being planned. The most important relief, however, is given by the purchases of good securities, which the low prices induce. As for bad securities, they disappear in the general clearing up. Thus end all crises — offspring of delusion.
An able writer in the same journal for September gives as the circulation on June 30, 1873, 380 million of treasury notes and 340 million of banknotes. The bank holds 144 million in specie, "enough to bring its notes to par if it were not for the treasury notes and the debt of the State to the Bank, part of which cannot be realized." In commenting on the character of the city of Vienna, outwardly grandiose and pretentious, but badly drained and otherwise provided, and upon the light and frivolous character of the people, the same writer refers these phenomena to the financial disorder and paper money as chief causes.
No one can deny that the above is a most instructive study in political and financial disease. The popular mind rests on instances like the French assignats, or our continental money, as showing the error of paper money where it absolutely perishes. It is thought that, short of this, only alarmists see danger. The story of Austria shows that an irredeemable paper currency is a national calamity of the first magnitude, of which one may indeed find greater or less examples, but of which the least is a peremptory warning to statesmen and financiers.
It is like a disease in the blood, undermining the constitution and spreading decay through all the arteries of business. A young and vigorous nation, with a sound political system, may stand it far better than an old one with feudal traditions; but in its measure and according to circumstances it is pernicious, if not fatal. It is not like an acute disease; it is like an invalid state with occasional fever.
We may also infer from Austrian experience what the London Economist recently inferred from ours, that the interference of government with banking is as mischievous as its interference with any other trade. The emperor of Austria was not intentionally a liar. When he said he would issue so much and no more, he meant it. He only did not know that he was releasing a power which he could not curb again. He was promising to perform a financial miracle.
His broken promises, however, cost him and his government all credit with his people, and it is now frequent subject of remark in Austria that the more solemn the asseverations of the government, the more ludicrous they appear to the people. A government which interferes with banking exposes itself to great danger of error, and such errors cost it popular confidence sooner than any others.