# The Czechoslovak Review/Volume 3/The Paper Crown

The Paper Crown
By J. J. KRÁL.
The crowns of St. Wenceslas and St. Stephen have both been lost to the Hapsburgs by the great war. The paper crown alone remains to remind the people of the former Dual Monarchy of their past allegiance, for the paper crown is still the common medium of exchange in the republics which have arisen on the ruins of the Danubian Empire. It is not a pleasant reminder; though quite plentiful—the paper crowns are numbered by the billion—it is more of a liability than an asset and constitutes a serious problem for the new states.
The crown of 100 hellers was made the monetary unit of Austria-Hungary by the law of August 2, 1892, which introduced the gold standard into the monarchy. The law provided that one kilogram of fine gold should be coined into 3,280 crowns, the crown being thus equivalent in value to 20.3 cents in United States money or 1.0501 francs in the currency of the Latin Monetary Union. Only pieces of 10 and 20 crowns were coined in gold at first; later on pieces of 100 crowns were added. Pieces of 1, 2 and 5 crowns were coined in silver, but were legal tender to limited amounts only—the one-crown piece only to the amount of 50 crowns.
The principal circulating medium however, was paper: notes issued by the Austro-Hungarian Bank which were made legal tender. The notes originally were issued in denominations of 10, 20, 50, 100 and 1,000 crowns; during the war the issue was extended to include notes of a denomination as low as 2 crowns and as high as 10,000 crowns. The bank had the exclusive right to issue notes in the Empire and was required to hold a metallic reserve of gold or silver, coined or in bullion, to an amount of at least two-fifths of the total amount of banknotes in circulation. The reserve usually was much higher. At the end of 1904, for example, the stock of gold and silver held by the Bank was 1,507,560,293 crowns, or more than 86 per cent of the note circulation which totaled 1,751,301,080 crowns. It was provided that, in case the amount of notes in circulation exceeded the amount required to cover them by 600 million crowns, the Bank should pay a tax of 5 per cent. The profits of the Bank were to be divided between the share holders and the Governments of Austria and Hungary according to a complicated schedule which possesses only an historical interest just now. The system worked well in times of peace, but collapsed under the stress of war when restrictive legislation was repealed by ministerial orders and the Bank relieved of its duty to protect its issues or even to make reports of its condition. No reports were issued during the first three years of the war.
The Austro-Hungarian Bank has its principal offices in Vienna and Budapest. In 1913 it had 56 branches in Austria, 42 in Hungary and three in Bosnia-Herzegovina. In addition it had 81 agencies (Nebenstellen) in Austria and 103 in Hungary. In 1912 its notes in circulation totaled 2,816 million crowns, that amount decreasing to 2,494 million at the end of 1913 and 2,160 ​million on July 23, 1914, just before the outbreak of the war. During the war the note circulation increased enormously, while the stock of gold and silver gradually dwindled to one-fifth of the amount held at the beginning of the war. The Austrian as well as the Hungarian Government borrowed freely from the Bank, until the presses could no longer keep pace with the demand for notes, and other institutions began to issue notes, with the consent of the Bank in Vienna, without its consent in Prague. At the end of 1914 the circulation reached 5,200 million crowns; a year later it stood at 7,200 million; at the end of 1916, it was 10,890 million, and at the end of 1917, was reported at 18,440 million. At the present time it is estimated at 34,000 million crowns, or about 680 crowns per head of population, if the number of inhabitants of the former Monarchy be taken at fifty million. The war had destroyed the Monarchy and broken it up into its component parts; there was no longer any Austria-Hungary, but the Austro-Hungarian Bank continued to issue notes in denominations as high as 10,000 crowns as if nothing had happened.
At the end of 1913 the bank held 261,545,000 crowns in silver and 1,240,973,000 in United States currency. When the war broke out, the stock of gold and silver was $311,963,000, representing 63.4 per cent. of the combined total of deposits and notes in circulation. During the war the metallic reserve diminished rapidly, as large amounts of the precious metals had to be exported to Germany and the neutral countries in payment for imports. By the end of 1917 the reserve had dwindled down to $64,657,000, representing only 1.6 per cent. of the combined liability for deposits and notes in circulation. The gold holdings were only 265 million crowns, and the bank held commercial paper to the amount of only 22 million crowns. The metallic reserve has probably wholly disappeared since that time—such is the opinion of the Vienna correspondent of the Berliner Boersen-Zeitung of December 3, 1918—and the only assets now held by the bank are Government obligations and treasury bonds, issued to it directly by the Governments of Austria and Hungary or pledged with it as collateral by private parties. The bank would loan 75 per cent. of the nominal value on war bonds, but as many of the borrowers would give fictitious names, such loans really were sales of the securities at a 25 per cent. discount.
It is estimated that notes to the amount of 24 billion crowns are in circulation in former Austria and 10 billion in Hungary. It would be more correct, however, to say that those amounts of notes are outstanding rather than in circulation. For it is a fact that, notwithstanding the enormous amount of notes printed, there is a shortage of currency in Austria-Hungary. The people are hoarding the notes! The presses are still working, the supply of notes is overabundant, and yet there is a scarcity of notes in circulation. It is rather difficult to explain this apparent paradox. It has been suggested that the people are afraid of bank robberies in these unsettled times; that they hope to escape taxation by hoarding; or that they see no opportunities for safe investments. The last explanation seems to be the true one, for the first loan issued by the new Czechoslovak Republic at 4 per cent. at par, was largely oversubscribed. It is to be remembered also that while the prospects of redemption are no better for the notes than for the war bonds of the old Governments, the notes have the advantage of being the only circulating medium available. They will remain in circulation for at least a year, and this certainly gives them a fictitious value irrespective of the uncertainty of redemption.
At home, the excessive issues of bank notes naturally aggravated the evil of high prices; abroad they accelerated the fall of Austro-Hungarian exchange, due primarily to an adverse economic balance. With the exception of Russia and Turkey, the Danubian Monarchy shows greater increases in the prices of necessities during the war than any other country, belligerent or neutral. The increase in prices for the period July–December, 1917, as compared with the prices prevailing in July, 1914, has been estimated at 273 per cent. for Vienna, as against 119 per cent. for Germany, 122 per cent. for Norway, 103 for Great Britain, 95 for Switzerland, 92 for France, 91 for Sweden, 70 for Italy, 60 for Canada, and 50 for the United States. Later data are not available for Austria, but it is well known that in all other countries the prices have since been increasing, until November, 1918, when the increase in Great Britain reached 133 per cent.
​Throughout the war the economic balance—the balance of payments between the Monarchy and other countries—has been adverse to Austria-Hungary. According to data recently published by the Pester Lloyd the value of imports into Austria-Hungary during the four and a half years from January, 1914, to July, 1918, was 19,574 million crowns, and the value of exports only 7,652 million, showing an adverse balance of trade of 11,922 million crowns. The balance of payments on foreign investments was likewise against Austria-Hungary, though it is not possible to estimate it accurately.
Under such conditions the exchange value of the paper crown in neutral markets naturally declined largely during the war. In Switzerland, for example, the crown was quoted at a discount of 13.30 per cent. at the end of 1914, and in the course of the following years, the discount increased successively to 36.20, 49.17, 50, and 70 per cent. A hundred crowns at par will purchase 105.01 francs; on December 15, 1918, the exchange rate for 100 crowns in Switzerland was only 30.31 francs, a loss of 71.13 per cent.
In Denmark the Austro-Hungarian crown was quoted, at the end of the years 1915–1918, at the successive discounts of 35.20; 49.08; 47.10, and 66.04 per cent. In Sweden the year 1918 closed with a quotation showing a loss of 70.24 per cent. In the Netherlands, the crown was quoted at a discount of 70 per cent. on December 14, 1918. The crown was at a discount even in Germany and Finland, although the currencies of those countries were considerably below par in other countries.
As the Swiss market is the most important of the neutral markets for Austria-Hungary, it is interesting to compare the rates at Berne. On December 15, 1918, the crown was quoted at 0.3031 francs, and the dollar at 4.865 francs. From these figures it is evident that in Switzerland on that date a dollar would purchase 16.05 crowns, so that the exchange value of the crown may be estimated at 6.22 cents in United States currency.
Depreciating currency ordinarily hampers importation and stimulates exportation, the latter in turn contributing to improve the exchange. It can hardly be expected, however, that the new countries will soon be able to resume exportation on a scale large enough to effect an improvement of exchange. Whatever steps are to be taken by the several governments for the rehabilitation of the currency must be taken jointly, as the banknotes are circulating in all the countries of the former Monarchy. During the Christmas holidays of 1918, representatives of Bohemia, Poland, German Austria and Hungary attended a meeting of the board of directors of the Austro-Hungarian Bank at Budapest, and an agreement was reached that the affairs of the bank should be liquidated in the course of the present year and the bank go out of existence December 31, 1919. In the mean time the new States are to establish their own banks of issue. The liquidation is to be carried out by Mr. Maz von Rapp, a former manager of the Loan Branch of the Deutsche Bank, who was installed on January 1, 1919, as general manager of the Austro-Hungarian Bank.
It is estimated that about 10 billion crowns of the banknotes are held by citizens of the Czechoslovak Republic, and a suggestion has been made that the States retire about 500 million crowns of the paper at current rates annually while introducing gradually a gold standard currency, with the franc as unit. Gold is now being collected throughout Bohemia, and measures appear to have been taken to prevent a further influx of notes from other countries, but the retirement of the paper crown will doubtless be slow and difficult. It will have to be accomplished, however, if trade is to be saved from the evils of a fluctuating currency.