Emil G. Spitzer
THE REPUBLIC OF AUSTRIA, with a present population of over seven million, was established in November 1918 as one of the successor states of the Austro-Hungarian Monarchy. The new Republic was born into inflation; inflation so spectacular that—with that of Germany at the time—it still remains one of the outstanding historical examples. In Austria, this runaway inflation was at last brought to an end in the early 1920’s by a radical currency reform (including the introduction of the schilling as a new currency unit) and other measures, such as international loans under the auspices of the League of Nations. The currency was stabilized, but the Austrian economy was again severely shaken in the early 1930’s by the onset of the world-wide depression, which left a high rate of unemployment even after steady recovery. On March 12, 1938, Austria was annexed by Nazi Germany and its economy was integrated with the German economy; thus, deprived of its independence and identity, Austria participated in World War II as a part of the German Reich.
After the war Austria was re-established as an independent country; but for a period of ten years it remained under Four Power Occupation with its territory divided into four occupation zones (British, French, U.S., and U.S.S.R. zones of occupation). During that period—apart from other economic burdens—Austria lost control over the so-called German assets in the Soviet zone (several hundred agricultural and industrial enterprises, including the important oil industry). The Austrian State Treaty of May 15, 1955 ended the occupation and restored Austria’s full sovereignty; but Austria had to pay compensation to the Soviet Union, mostly in the form of unrequited deliveries of industrial goods and crude oil valued at about $300 million, for the return of these enterprises. Inflation, followed by economic depression with a high rate of unemployment, and then by annexation, had been Austria’s experience from 1918 to 1945. It is hardly surprising that as a consequence of World War II inflation reappeared.
At the end of the war Austria was suffering from an abundance of money and a shortage of goods. Large demand and savings deposits (reflecting the combined results of war financing and rationing) had been accumulated. There were also large amounts of currency in circulation, consisting mainly of reichsmarks (since 1938 Austria had had the same currency as Germany) but partly also of military schillings issued by the Allied authorities. Additional reichsmarks were flowing in across the open frontiers before steps could be taken to stop this inflow. Legislation in 1945—including the reintroduction of the schilling at the rate of 1 reichsmark per schilling—skimmed off only a part of the surplus money. At that time, reichsmark notes amounting to about 8 billion, as well as approximately 1 billion Allied military schillings, were withdrawn from circulation, part of it being placed in blocked accounts; also 60 per cent of the deposits with credit institutions was blocked, while the remainder was temporarily subject to restrictions. However, the issue of new schilling notes, largely for the financing of occupation costs, withdrawals from bank accounts, and the considerable expansion of credit, made the money supply swell even beyond the point previously reached. Black market prices soared. In the fall of 1947, the official cost of living index stood at about 300 (1937=100) but black market prices were many times higher than official prices. A further legislative measure, the Currency Protection Law of November 1947, reduced the money supply by about one half, while supplementary measures were taken with regard to prices and wages (see below). With certain exceptions, notes were exchanged at the rate of one new for three old schillings, deposits already blocked by the currency reform of 1945 were finally written off—which helped to restore the position of the banks holding worthless German Treasury bonds—while so-called free deposits (i.e., deposits made after the end of 1945), owned by individuals and business firms, retained their full value, one half of them being temporarily blocked.
Temporary blockage and similar measures were not enough to halt the inflation. From 1948 to 1951 the expansion of commercial credit was the most important factor in the creation of money. The needs of reconstruction caused a great demand for credit both in the private and in the public sector of the economy. Although production and productivity were rising, the inflationary tide rose faster. The money supply rose from about S 8 billion to about S 16 billion, and the volume of credit from S 2 billion to S 11 billion, while prices and wages rose by 140 per cent.
Inflation Successfully Attacked: 1951
The first attempts to check credit expansion were made in the spring of 1951. In April, an agreement for voluntary credit control was concluded between the National Bank and the Ministry of Finance, on the one hand, and the Association of Austrian Banks (representing mainly the commercial banks) on the other. The latter agreed to restrict financing of imports and of inventories and to cut loans for consumer goods; they likewise agreed to a minimum liquidity ratio of 25 per cent of liabilities, scheduled to increase to 30 per cent after January 1, 1952.
A further agreement, concluded on June 25, 1952, provided for a gradual rise in the liquidity ratio by the end of 1952, to 40 per cent, of which 15 per cent (of total liabilities) should be primary liquidity assets, at least half of them to be held in cash while the other half could be rediscountable Treasury certificates. Moreover, the new agreement added the provision that only 50 per cent of new deposits (those made after June 30, 1952) could be used for extending credit. The Government had, however, to be careful that in checking inflation they did not at the same time check reconstruction or exports, so credits for both of these purposes were exempt from this credit ceiling provision.
Restriction of credit thus formed one line of attack on inflation. Another was manipulation of the discount rate of the National Bank. The rate of discount for commercial bills was first increased from 3½ per cent to 5 per cent, and later to 6 per cent. The rate of interest charged by commercial banks on loans to their customers rose, consequently, from 8½ per cent (including commission fees) to 9½-10 per cent, and later to 11 per cent.
Price and Wage Policy
In 1938, after the incorporation of Austria into Germany, the rate of conversion between the schilling and the reichsmark was fixed at 1.5 schilling per reichsmark, and Austrian prices in schillings were accordingly converted into reichsmarks to fit into the German price structure. During the war, prices were kept down by price control measures; the official price level in 1945 was, therefore, practically the same as in 1938. After the war, rationing and price controls remained, but could hardly be said to function. The Austrian black market became notorious. Wage earners and others naturally could not keep their place in this race.
Confronted with rapidly accelerating upward movements in prices and wages, the Government sponsored between 1947 and 1951 a series of five “Price-Wage Agreements” to stabilize the prices of consumer goods and to adjust wages and salaries to make them consistent with the new price levels. The first of these agreements (August 1947) negotiated between the organizations of industry, commerce, agriculture, and labor (which served as a model for subsequent agreements) provided for prices as well as wages to be increased by 35-100 per cent, to a level approximately 200 per cent above that prevailing in April 1945.
The Price-Wage Agreements did not fulfill the hopes that were based on them. They did help to lay the foundation from which to start the reconstruction effort (roughly coinciding with the Marshall Plan) but in the major battle against inflation they provided only a short breathing spell. From 1948 to 1951, prices and wages rose annually by an average of 35 per cent. For this, investment and credit policies were largely to blame. Investment was directed largely into basic industries (thus failing to relieve the shortage of consumer goods), while credit policy did not prevent a considerable monetary expansion. Moreover, the Price-Wage Agreements, following one another in such quick succession, carried within themselves the seeds of an inflationary price-wage spiral.
Foreign Aid and Balance of Payments
In the immediate postwar period, Austria’s gross national product (GNP) in real terms fell to about half its prewar level. Between 1946 and 1948 it rose from 60 per cent to 90 per cent of the prewar level, and by 1951 it had risen to about 130 per cent. The rapid recovery and growth of production after the war was largely the result of massive foreign aid. Between 1945 and 1951, Austria received about $1.4 billion worth of foreign aid, some 90 per cent of which was contributed by the United States. This foreign aid covered the annual balance of payments deficit on goods and services account, which, during the inflationary period, ranged from $200-300 million annually.
After the breakdown in 1945, foreign trade was resumed in 1946, and in the fourth quarter of that year the volume of exports reached 13 per cent of the prewar level and that of commercial imports 10 per cent. As production increased, more goods became available for export, but the expansion of exports was relatively slow. In 1948 and 1949 the value of exports still covered only half of the value of imports, while the other half consisted of foreign aid deliveries and credits. In 1950 and 1951 (partly as a result of the foreign trade boom at the time of the Korean war) exports began to exceed the prewar level; but it was only with the return of prosperity to Western Europe and the unification of the Austrian exchange rate system in May 1953 (involving a devaluation for commercial transactions) that exports were greatly stimulated. In 1954, the volume of exports was 54 per cent higher than in 1937. On the import side, with foreign aid providing for the greater part of food and raw material requirements, the volume of imports surpassed the prewar level in 1949, but thereafter tended to decline until 1953. Foreign trade thus represents a success story among the difficulties and setbacks on other fronts. It can be explained to some extent by shifts in the economic structure of Austria. Since 1938 some industries (especially mining, oil, iron and steel, hydroelectric power, and chemicals) have been greatly expanded, and owing to the increased productivity of agriculture (as a result of mechanization) Austria has achieved a higher degree of self-sufficiency in food production than before the war.
Changes in the Exchange Rate System
One of the most important factors contributing to the postwar recovery and expansion of Austria’s foreign trade was the adjustment of the exchange rate system.
At the end of World War II, the rate of 10 schillings per U.S. dollar was first established for military purposes only at the time of the Allied Occupation. This rate was not adopted by the Austrian authorities as the official commercial exchange rate until October 1946. This official exchange rate was maintained, but proved to be inappropriate, and most transactions were conducted at considerably depreciated rates. Exporters sold designated portions of their proceeds at the official rate, and only importers of essential goods were able to obtain exchange at this rate. In these circumstances exporters and importers traded allocations with one another, and these “gray market” transactions, as well as various kinds of barter arrangements, led to a great multiplicity of effective exchange rates.
The first steps toward a modification of the exchange rate structure were taken in 1948 soon after Austria had become a member of the Fund. The urgent need for an exchange reform was clear; but consultations about the reform between the Austrian authorities and the Fund revealed that the complexity of the situation called for a gradual solution of the problem. It was not possible to establish immediately a single unitary exchange rate. Moreover, while the exchange rate adjustment for the schilling was under consideration (November 1949), the economic effects of the devaluation of the pound sterling and other important currencies (which had taken place in September 1949) could not be fully determined. Therefore, it was decided, as a provisional measure, to establish a multiple exchange rate system for the schilling consisting of three official exchange rates (S 14.40, S 21.36, and S 26.00 per U.S. dollar). From November 25, 1949, exporters had to sell 40 per cent of their exchange proceeds at the basic rate of S 14.40 per U.S. dollar and were permitted to retain the remaining 60 per cent of their proceeds for their own import needs or to sell this remaining portion to the Austrian National Bank or to an authorized foreign exchange dealer at the premium rate of S 26 per U.S. dollar. Consequently, the effective export rate (mixed rate) was S 21.36 per U.S. dollar. On the import side, the basic rate of S 14.40 per U.S. dollar was applicable to essential imports, the rate of S 21.36 per U.S. dollar to semiessential imports, and the premium rate of S 26 per U.S. dollar was applied to invisibles and capital transactions.
A further simplification of the exchange rate structure was introduced in October 1950: the rate of S 14.40 per U.S. dollar was abolished, the commercial rate of S 21.36 per U.S. dollar became applicable to all trade transactions, and the premium rate of S 26 per U.S. dollar was retained for nontrade transactions, i.e., capital transactions and certain invisibles. Thus, only two official exchange rates were in effect. On January 1, 1952, the system of “retention quotas,” under which exporters had been allowed to retain a percentage of their export proceeds, varying for different commodity groups, was abolished. It was replaced by preferential treatment for Austrian export industries in the allocation of foreign exchange for imports of raw materials, semifinished products, and machinery.
On May 4, 1953, the authorities took the final step toward unification of the exchange rate structure by eliminating the commercial rate of S 21.36 per U.S. dollar and adopting the former premium rate of S 26 per U.S. dollar as the par value for the Austrian currency. At the beginning of 1959 the schilling became externally convertible, and on August 1, 1962—when practically all the remaining exchange restrictions on current transactions and quantitative import restrictions had been eliminated—Austria accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement.
Of all the weapons which Austria employed against inflation in 1951-53 the most effective was monetary policy: imposition of gradually increasing liquidity requirements prescribed for the commercial banks and other credit institutions, several increases in the discount rate, and limitation of the National Bank’s rediscounting operations. Of these measures, the increases in interest rates appear to have been more immediately effective than the increases in liquidity requirements. The monetary policy was supplemented by a policy of voluntary wage restraint on the part of trade unions and voluntary price restraint on the part of business firms. Budgetary policy aided the stabilization effort mainly by the considerable reduction in public investment expenditures. The fact that disinflationary measures in Austria coincided with the recession of the world-wide Korean boom also helped.
Domestic disinflation helped the balance of payments in 1952, but even more so in 1953, after the unification of the exchange rate structure, which for most purposes was tantamount to a devaluation. In both 1952 and 1953 the volume of imports declined, but much more conspicuous was the rise in the volume of exports, especially when the exchange rate adjustment made exports more profitable.
On the domestic side, the disinflationary policy had a temporarily depressing effect. The increase in the GNP, previously quite substantial, virtually came to a halt in 1952; in 1953 it increased again, but at a much lower rate than during the period 1948-51. Investment declined sharply, especially in 1953. Industrial output ceased to expand in 1952 and in 1953 fell considerably below its potential, which caused a substantial rise in unemployment. This was to some extent a consequence of the time required to shift resources from domestic to export and import-competing industries. The large increase in exports did not materialize until a year after domestic stabilization had been achieved.
The period of disinflation came to a close toward the end of 1953. The renewed economic expansion which followed was largely a consequence of the improvement in the balance of payments. The balance of payments surplus was caused primarily by the booming foreign demand for Austrian goods and services, especially tourism, and the resulting large increase in official reserves provided the banks with the additional liquidity required to stimulate the expansion of production activity in Austria in 1954. Domestic investment and consumption were, however, also stimulated by monetary and fiscal measures designed to counteract the undesirable effects of the preceding disinflation on production and employment.
In 1955 Austria achieved full employment and since then economic expansion—under conditions of stability—has continued at a remarkable pace. GNP (in real terms) has risen at an average rate of some 5 per cent, the volume of trade has increased by more than one half, and the balance of payments on goods and services account has remained in equilibrium. The trade deficit, though increasing, has been covered mostly by rising net receipts from tourism, and the capital account has shown a considerable surplus. As a result, official reserves (including the IMF gold tranche) increased from $325 million at the end of 1953 to $1,322 million at the end of December 1965.
The Austrian economy—with real GNP as well as the volume of exports and imports more than twice as high as before the war—is now fully employed, enjoying an unprecedented degree of prosperity; and as a result of Austria’s strong balance of payments and reserve position, the schilling has become one of the hardest European currencies. Thus—in the face of a very discouraging history—the Austrian stabilization of the early 1950’s has achieved a sustained and remarkable success.