Oskar Morgenstern, Entstehung und Abbau der österreichischen Devisenbewirtschaftung (1938)

Morgenstern’s journal article, based on a lecture delivered in Copenhagen in February 1937, examines Austria’s introduction and substantial dismantling of foreign-exchange controls after the Credit-Anstalt crisis of 1931. Its structure moves from a chronology of monetary measures to an account of economists’ influence on policy and public opinion, then draws general conclusions about exchange rates and regulation. Austria’s significance lies in having largely reversed a policy that other countries continued to intensify. Morgenstern attributes this reversal to monetary discipline, the gradual restoration of market exchange, and sustained public explanation of the controls’ damaging effects.

The crisis began with the Credit-Anstalt’s losses and the ensuing run. State guarantees and foreign assistance failed to stop withdrawals. Banks obtained funds by discounting bills at the Nationalbank; depositors then exchanged those funds for foreign currency. Consequently, the central bank accumulated effectively worthless assets while losing reserves, even though net note circulation scarcely changed. Exchange controls, introduced in October 1931, attempted to preserve an official parity already contradicted by private-market premiums. Public memories of inflation made explicit devaluation politically difficult: government and population mistakenly treated depreciation and inflation as necessarily identical.

Morgenstern’s central analytical move is to treat exchange control as ordinary price regulation, rather than as a distinct technique of monetary protection:

Ökonomisch gesehen, bedeutet die zwangsweise Ablieferung und Zuteilung von Devisen die Festsetzung eines Höchstpreises mit allen nachteiligen Wirkungen, die bisher immer bei Höchstpreisen zu beobachten waren.

English translation: Economically speaking, the compulsory surrender and allocation of foreign exchange amounts to fixing a maximum price, with all the adverse effects that have always previously been observed with maximum prices.

An artificially cheap official exchange rate stimulated demand while discouraging supply. The resulting shortage required administrative rationing, supposedly distinguishing essential from nonessential imports. Morgenstern regards these distinctions and their numerical quotas as arbitrary interest bargaining disguised as rational calculation. The system effectively subsidized successful import applicants and taxed exporters compelled to surrender earnings below their market value. It therefore worsened the trade imbalance it purported to remedy and generated additional foreign indebtedness through unpaid imports.

The turning point came with Viktor Kienböck’s appointment as Nationalbank president in February 1932. His refusal to continue discounting Credit-Anstalt bills forced banking adjustment and introduced deflationary pressure. Meanwhile, “private clearing” allowed specified exporters to sell foreign exchange to specified importers above the official rate. The crucial institutional distinction is between formal legislation and actual practice:

Man sah, dass der herrschende Zustand ganz ungesund sei, nicht andauern könne, ohne dem Lande fortdauernd schweren Schaden zuzufügen, und begann ihn zu beseitigen; aber nicht etwa durch Aufhebung der bestehenden Vorschriften, sondern durch ihre schrittweise Nichtanwendung.

English translation: It was recognized that the prevailing situation was wholly unhealthy and could not continue without inflicting sustained serious damage on the country, and its elimination began; not, however, by repealing the existing regulations, but by progressively ceasing to apply them.

Permissions expanded, a trading venue emerged outside the official exchange, and compulsory surrender requirements diminished. April 1933 brought the end of the surrender obligation and official recognition of the schilling’s depreciation; Austria terminated its banking standstill agreement in December 1934. Liberalization nevertheless proceeded alongside import restrictions and a transfer moratorium. Morgenstern therefore qualifies his success story: monetary controls and the restrictive trade policies accompanying them form a single system, whose complete removal would also require dismantling the surviving protectionism.

His endorsement of recognizing depreciation is not an endorsement of discretionary devaluation as crisis policy. The economists initially hoped to restore the old parity through credit contraction. Once prices had adapted and protectionist rigidities obstructed further adjustment, additional deflation threatened to deepen the depression. The relevant choice was consequently between restoring the official rate in economic reality and bringing the official rate into line with reality:

Soll eine solche im Grunde unhaltbare Situation verschiedener Wechselkurse für die gleiche Währung beseitigt werden, so besteht offenbar immer wieder nur ein und dieselbe Alternative: entweder es wird der niedrige effektive Wert zum offiziellen gemacht, oder der offizielle Wert wird zum effektiven gemacht.

English translation: If such a fundamentally untenable situation of different exchange rates for the same currency is to be eliminated, there is evidently always just one and the same alternative: either the low effective value is made official, or the official value is made effective.

Falling world prices eased Austria’s transition: domestic prices could remain broadly stable while adjusting relatively to depreciation. Morgenstern treats this as a historically specific advantage, not a reason to abandon the general argument for liberalization. He also rejects the claim that Austria needed simultaneous action abroad, explaining that free-market exchange relationships would prevent neighboring countries from persistently buying favorable currencies through Vienna at Austria’s expense.

The article’s second organizing argument concerns independent economic inquiry as a practical political force. Economists challenged official claims through research, journalism, lectures, and discussion without possessing executive authority. Evidence of the schilling’s reduced value helped make liberalization intelligible, while Kienböck’s attention to confidence explains the cautious pace. Morgenstern does not claim that theory alone could determine implementation:

Dazu bedarf er bei ihrer Anwendung der ergänzenden Erfahrung des Praktikers, der auch andere Umstände berücksichtigt, die sich der rein wissenschaftlichen Behandlung entziehen.

English translation: For this, its application requires the supplementary experience of the practitioner, who also takes account of other circumstances that elude purely scientific treatment.

The concluding position remains discriminating rather than absolute. Some supervision of volatile capital movements may be legitimate, and exchange-control statistics could improve monetary research. Austria’s experience matters above all as evidence that independent analysis can expose special interests behind purported monetary necessities and help restore workable institutions without denying the political and psychological conditions of reform.