Fighting Inflation

There was a reason Mises encouraged Hayek and all students he mentored to study the problems of currency and banking. Austrian public finance was in terrible shape and the government paid for substantial parts of its expenditures by printing more money. Wartime controls on foreign exchange were still in place to encourage the belief among the citizens that the government was fighting, rather than creating, inflation.

Mises successfully mobilized the Kammer apparatus to oppose foreign exchange controls. In the Kammer general assembly, he quoted from letters in which affiliated entrepreneurs described how the current monetary regime made it virtually impossible for them to serve geographically close customers who used a different currency.¹³ Mises also had a more direct impact on monetary policy. Owing to his position in the Bureau for Claims Settlements and in the first Renner government, he was one of a handful of senior advisors to the Austro-Hungarian Bank, the central bank of the old monarchy, which survived several years into the Republic.

The governor of the Bank, Alexander Spitzmüller, was determined not only to stop the fall of the krone, but to increase its exchange rate in a manner similar to what Churchill was about to do in Britain.¹⁴ Mises certainly opposed Spitzmüller's plan and disagreed with his view that a stabilization of the krone at its present low value would amount to a bankruptcy of the state. Mises's position can be inferred from his writings, including the following passage in a 1923 essay:

It is quite wrong to consider “devaluation” to be a case of state bankruptcy. Stabilization of the present—low—value of money, even if considered only with respect to its effect on existing debts, is something very different; it is both more and less than state bankruptcy. It is more than state bankruptcy to the extent that it affects not only public debts, but also all private debts. It is less than state bankruptcy, on the one hand, to the extent that it also affects the government's assets denominated in paper money; on the other hand, to the extent that it does not affect its obligations denominated in hard money or foreign currency....

The general economic effects, and in particular the trade-political effects of any money-induced change of the purchasing power of money—hence also the effects of a rising purchasing power of money—weigh in against any attempt to raise the value of money before stabilizing it. The present level of the value of money should be stabilized.¹⁵

His argument ultimately won the day and provided the basis for the currency reforms of the fall of 1922, but only after fierce resistance from Spitzmüller, who remained unconvinced and clashed with Mises repeatedly. Or, in more diplomatic terms: Spitzmüller had

taken measures that in my eyes were inadequate. I have publicly spoken against these measures, for example, against foreign exchange controls, and I have frequently explained my standpoint in discussions with Excellency Spitzmüller...; I have not succeeded in convincing him of the pertinence of my views.¹⁶

Spitzmüller later honored Mises as the most important Austrian monetary politician.¹⁷ However, Mises always stressed that his influence was entirely through writing and public lectures. The monetary stabilization of 1922 was the only time official policy met with his approval.

On October 21, 1921, Mises lectured before the Österreichische Politische Gesellschaft (Austrian Political Society) on “The Present State of Austria's Public Finance.”¹⁸ He argued that the government budget could only be balanced by eliminating food subsidies and selling public enterprises. Every other proposal fundamentally failed to come to grips with the question of how to balance the budget.

The Schober government still preferred the printing press. The ever-increasing production of krone notes was soon followed by a decrease in real purchasing power—the more banknotes the Austro-Hungarian Bank issued the weaker they became. This development became a serious threat to the Austrian economy in the late fall of 1921, increasingly thwarting the financial plans of Austrian firms and choking the division of labor.

In Germany, where the same phenomenon could be observed, the most eminent monetary experts—Reichsbank president Rudolf Havenstein and Finance Minister Karl Helfferich—believed there was no causal connection between these events. The decline of the purchasing power of the mark resulted, among other things, from the deficit of Germany's balance of payments, and the Reichsbank's increase of the (nominal) mark supply was necessary to prevent a further decline of the mark supply in real terms.

These views impressed the Austrian public and influential circles within government, but Mises was unconvinced. The purchasing power of money declined faster than the new banknotes were printed, but that was because of the present expectations of money holders concerning the future purchasing power of their money:

If the future prospects for a money are considered poor, its value in speculation, which anticipates its future purchasing power, will be lower than the actual demand and supply situation at the moment would indicate. Prices will be asked and paid which more nearly correspond to anticipated future conditions than to the present demand for, and quantity of, money in circulation.... The monetary units available at the moment are not sufficient to pay the prices which correspond to the anticipated future demand for, and quantity of, monetary units. So trade suffers from a shortage of notes. There are not enough monetary units on hand to complete the business transactions agreed upon.... This phenomenon could be clearly seen in Austria in the late fall of 1921.¹⁹

Thus there was in fact a causal relationship between the increased production of money and the over-proportional decline of the purchasing power of money. The decline of Austria's money could not be stopped or even reversed through the printing press—on the contrary, more inflation would aggravate the situation even further.

The problem was that Spitzmüller's Austro-Hungarian Bank was still a stronghold of the party of inflation.²⁰ The Bank followed the Helfferich-Havenstein line, in a desperate attempt to catch up with the shrinking krone by printing yet more of them. Mises tried to steer counter as much as possible, placing two articles in the Neue Freie Presse in March 1922: “Inflation and the Shortage of Money: Against the Continued Use of the Printing Press” and “The Austrian Monetary Problem Thirty Years Ago and Today: A Commentary.”²¹ He especially sought to raise the public's awareness of the destruction that the inflation wrought on the economy. Austria had become a poor country, and already had to pay for at least a part of its imports by decreasing its capital base, but inflation would destroy it altogether. As he explained to Moriz Dub:

I think that in evaluating our situation one has to strictly distinguish between two things. There is on the one hand the inflation, which leads to increasing prices for all commodities and for foreign currency; on the other hand, there is the fact that our population lives today from capital consumption and pays for imported commodities through the export of capital assets such as fungible claims and other ownership titles. Between these two facts there is however something of a close connection to the extent that the falsification that the inflation has induced in the calculation of business profits represents the psychological basis for the unrestrained consumption of the accumulated capital of the national economy. The devaluation of money leads to illusory profits that the people have long held to be true profits.²²