Ludwig von Mises, The Foreign Exchange Policy of the Austro-Hungarian Bank

First published in 1909 and republished in the supplied 2012 version, this economic article examines how Austria-Hungary maintained a practical gold standard without legally requiring its central bank to redeem notes. Mises argues that foreign-exchange management economized on gold without freeing the Bank from the international constraints facing other gold-paying banks. Compulsory redemption would formalize existing practice rather than introduce a fundamentally different monetary regime.

The opening section reconstructs the unfinished currency reform begun in 1892. Its governing distinction is between the currency’s legal status and the Bank’s actual operations:

According to the law paper currency is still the standard currency, for the legal tender of the Austro-Hungarian Bank is inconvertible.

The obligation to purchase gold limited the currency’s appreciation against gold, but did not establish obligatory redemption. Meanwhile, the withdrawal of government paper altered the backing and institutional responsibility of the note circulation:

The Government raised a great loan and handed over the proceeds in gold to the Bank to enable it to redeem the Government paper currency for account of the State.

This transaction replaced uncovered government money with bank liabilities supported by reserve assets. Mises makes the change explicit:

Whereas the old Government paper currency was not covered, the banknotes are partly covered by metal, bills, and loans, as in other Continental states.

The reform therefore mattered even though legal convertibility remained incomplete. Reserve provisions permitting foreign gold bills and, subsequently, foreign balances also allowed the Bank to substitute interest-bearing claims for part of its idle bullion.

The second section explains how banking practice completed what legislation had left unfinished. From 1896 the Bank supplied foreign bills at prices that made them preferable to private gold exports; from 1901 it also issued gold coins, which a public accustomed to paper largely returned. Domestic preference for notes and ready access to foreign exchange enabled effective gold convertibility without extensive gold circulation. Mises connects this economy of monetary materials with Ricardo’s currency ideal. Yet foreign claims did not remove gold from the settlement mechanism: when those claims required replenishment, the Bank itself exported gold. The innovation concerned the organization of payments, not their ultimate monetary basis.

The third section rejects the claim that legal inconvertibility insulated Austria-Hungary from international interest-rate pressures. Defenders of the existing legal arrangement attributed relatively low and stable discount rates to the Bank’s supposed freedom to refuse exchange for capital exports. Mises argues that this did not describe its conduct: it supplied foreign exchange and raised its discount rate when external demands required it. Refusal would instead risk exchange depreciation, as the experience of 1893 indicated. Comparatively cheap money could reflect weak Austrian business and investment demand, rather than successful monetary insulation. He also distinguishes long-term foreign indebtedness from short-term money-market liabilities: debtor status alone could not explain the level of the bank rate.

The fourth section disputes G. F. Knapp’s account of foreign-exchange policy as an administrative alternative to discount policy that imposed losses warranting state compensation. Mises emphasizes the interest earned on foreign assets and the proceeds from buying bills cheaply and selling them as exchange rates rose. At high rates, gold exports replenished the Bank’s foreign holdings without additional purchases of scarce bills. Such operations could smooth exchange fluctuations, but could not independently determine the average exchange level or abolish the need for discount-rate adjustments. Foreign bills supplemented metallic reserves; they did not supersede the constraints of gold payments. Mises confines this criticism to the institutional explanation at issue rather than undertaking a general assessment of Knapp’s monetary theory.

The concluding section advocates compulsory redemption. Legal recognition would preserve the Bank’s economical foreign-asset reserve and need not raise domestic interest rates. Its principal advantage would be greater foreign confidence in the monarchy’s monetary stability, improving the credit of a heavily indebted state. Across the article, Mises separates legal monetary categories from effective convertibility and reserve-management techniques from the international pressures they manage. Austria-Hungary’s distinctive practice demonstrates institutional economy within a gold standard, not an escape from its discipline.