Ludwig von Mises · 1910
Mises’s article defends his account of Austro-Hungarian monetary policy against Walther Federn’s contention that the absence of legally obligatory specie payments gave the central bank exceptional freedom over interest rates. The decisive distinction is between legal status and operational practice: by maintaining foreign-exchange rates below the upper gold point, at which exporting gold becomes economical, the Austro-Hungarian Bank already acted as a specie-paying institution. Mises therefore disputes the supposed monetary advantages of preserving the existing legal arrangement.
His argument begins with everyday exchange-market behavior. Complaints that the bank charged high prices or temporarily withheld foreign exchange could appear to substantiate Federn’s position. Mises acknowledges this conduct:
Ebenso wird hier und da darüber geklagt, daß die Bank zeitweilig überhaupt keine Devisen abgebe.
English translation: Likewise, complaint is heard here and there that the Bank at times supplies no foreign exchange whatever.
Withholding exchange, however, does not establish that the bank could insulate domestic interest rates from international capital movements. When rates stood sufficiently below the gold-export threshold, it could restrict sales to secure better prices. Such conduct affected the market predictably:
Die Folge dieser Zurückhaltung der Bank ist natürlich, wenn die Nachfrage nicht unbedeutend ist oder nicht gänzlich fehlt, ein Steigen der Devisen.
English translation: The consequence of this restraint on the part of the Bank is naturally, if the demand is not insignificant or entirely absent, a rise in the rates of foreign exchange.
The question is thus not whether the bank satisfied every demand at prevailing prices, but how far it permitted exchange rates to rise. Mises identifies the boundary governing intervention:
Wichtig aber ist, daß dieses Eingreifen stets erfolgt, bevor noch die Devisenkurse den oberen Goldpunkt erreicht haben.
English translation: What is important, however, is that this intervention always takes place before the rates of foreign exchange have reached the upper gold point.
Temporary restraint in selling exchange was compatible with effective convertibility. Mises distinguishes commercial management of the bank’s exchange portfolio from refusal to defend monetary parity. On this reading, market participants mistake discretion within a limited range for independence from the constraints of international payments.
The historical development of this policy qualifies the argument. Before gold entered domestic circulation, the bank lacked a dependable practical indication of the export threshold, and appreciable deviations from parity occurred. From the second half of 1901, exports of circulating gold and demands for gold supplied a warning signal. German exchange was especially important because of Germany’s role in trade, securities ownership, and international financial intermediation. Mises presents discount-rate increases as the bank’s conventional response to pressure on the monarchy’s gold holdings.
He supports his interpretation through market practice, statements by former governor Biliński, and the Vienna stock-exchange chamber’s account of the 1907 crisis. Biliński’s distinction between legitimate and illegitimate demands for international payments might seem to support selective refusal. Mises instead stresses the remedy actually described: higher discount rates. The chamber’s explanation of the June 1907 increase likewise connects it to preserving the bank’s voluntarily assumed specie-paying function. Vienna’s comparatively moderate interest rate later in the crisis need not prove monetary insulation; local liquidity and lenders’ reluctance to undertake risky foreign investments could also sustain international interest-rate differences.
The annexation crisis of 1908–09 provides a further test. Federn interpreted withholding gold and making exchange expensive as means of discouraging precautionary capital flight. Mises counters that German exchange remained below parity during October 1908–March 1909, while London exchange rose only marginally above it. He also emphasizes the bank’s satisfaction of domestic gold demand connected with military mobilization and runs on provincial savings banks. Refusal, on his account, would have endangered confidence established through its previous conduct.
Finally, Mises challenges the effectiveness of distinguishing between long-dated foreign bills and immediately payable exchange. Investors seeking foreign returns could buy the former, so restricting the latter would burden current payment needs without reliably preventing interest arbitrage. The practical defense of exchange stability, rather than the legal absence of compulsory redemption, determines the bank’s monetary character:
Ihr Charakter als eine in Devisen faktisch barzahlende Institution wird dadurch nicht beeinflußt.
English translation: Its character as an institution which in fact makes cash payment in foreign exchange is not thereby affected.
The article’s central contribution is this operational test of monetary institutions. For Mises, intervention before the gold-export threshold already imposed the discipline that Federn associated with legally compulsory specie payments; temporary exchange-market discretion did not establish an alternative monetary regime.
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