UNIVERSITY OF CENTRAL PUNJAB

Report

Course instructor: Prof Bader

Subject Title: Economics

Course Objective: Hyper Inflation In Austria

Submitted By:

Amal Amjad
Mina

Date Of Submission: 19/02/2020

Remarks:____________ Checked By:___________

 Prof Bader
 Table of Content
1. Inflation.
2. Types of Inflation.
 Creeping Inflation:
 Walking Inflation:
 Galloping Inflation:
 Hyperinflation:
 Stagflation:
 Core Inflation:
 Deflation:
 Wage Inflation:
 Asset Inflation:
3. Hyper Inflation in Austria.
4. Causes
5. Effects
 INFLATION:
Inflation is a quantitative measure of the rate at which the average price
level of a basket of selected goods and services in an economy increases
over a period of time. It is the constant rise in the general level of prices
where a unit of currency buys less than it did in prior periods. Often
expressed as a percentage, inflation indicates a decrease in the
purchasing power of a nation’s currency.
Types of inflation:
There are four main types of inflation, categorized by their speed. They
are creeping, walking, galloping and hyperinflation. There are specific
types of asset inflation and also wage inflation.
1: Creeping Inflation:
Creeping or mild inflation is when prices rise 3% a year or less.
According to the Federal Reserve, when prices increase 2% or less it
benefits economic growth. This kind of mild inflation makes consumers
expect that prices will keep going up. That boosts demand. Consumers
buy now to beat higher future prices. That's how mild inflation drives
economic expansion. For that reason, the Fed sets 2% as its target
inflation rate.
2: Walking Inflation:
This type of strong, or pernicious, inflation is between 3-10% a year. It
is harmful to the economy because it heats up economic growth too fast.
People start to buy more than they need, just to avoid tomorrow's much
higher prices. This drives demand even further so that suppliers can't
keep up. More important, neither can wages. As a result, common goods
and services are priced out of the reach of most people.
3: Galloping Inflation:
When inflation rises to 10% or more, it wreaks absolute havoc on the
economy. Money loses value so fast that business and employee income
can't keep up with costs and prices. Foreign investors avoid the country,
depriving it of needed capital. The economy becomes unstable, and
government leaders lose credibility. Galloping inflation must be
prevented at all costs.
4: Hyperinflation:
Hyperinflation is when prices increased rapidly more than 50% a month.
It is very rare. In fact, most examples of hyperinflation have occurred
only when governments printed money to pay for wars. Examples of
hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s,
and Venezuela in the 2010s. The last time America experienced
hyperinflation was during its civil war.
5: Stagflation:
Stagflation, or recession-inflation, is a situation in which the inflation
rate is high, the economic growth rate slows, and unemployment
remains steadily high. It presents a dilemma for economic policy, since
actions intended to lower inflation may exacerbate unemployment.
6: Core Inflation:
The core inflation rate measures rising prices in everything except food
and energy. That's because gas prices tend to escalate every summer.
Families use more gas to go on vacation. Higher gas costs increase the
price of food and anything else that has large transportation costs. The
Federal Reserve uses the core inflation rate to guide it in setting
monetary policy. The Fed doesn't want to adjust interest rates every time
gas prices go up.
7: Deflation:
Deflation is the opposite of inflation. It's when prices fall. It's
caused when an asset bubble bursts. That's what happened in housing in
2006. Deflation in housing prices trapped those who bought their homes
in 2005. In fact, the Fed was worried about overall deflation during the
recession. That's because deflation can turn a recession into a
depression. During the Great Depression of 1929, prices dropped 10% a
year. Once deflation starts, it is harder to stop than inflation.
8: Wage Inflation:
Wage inflation is when workers' pay rises faster than the cost of
living. This occurs in three situations. First, is when there is a shortage
of workers. Second, is when labor unions negotiate ever-higher wages.
Third is when workers effectively control their own pay.
A worker shortage occurs whenever unemployment is below 4%. Labor
unions negotiated higher pay for auto workers in the 1990s. CEOs
effectively control their own pay by sitting on many corporate boards,
especially their own. All of these situations created wage inflation.
Of course, everyone thinks their wage increases are justified. But higher
wages are one element of cost-push inflation. That can drive up the
prices of a company's goods and services.
9: Asset Inflation:
An asset bubble, or asset inflation, occurs in one asset class. Good
examples are housing, oil and gold. It is often overlooked by the Federal
Reserve and other inflation-watchers when the overall rate of inflation is
low. But the subprime mortgage crisis and subsequent global financial
crisis demonstrated how damaging unchecked asset inflation can be.
 Hyper Inflation in Austria
The Habsburg Monarchy and the Coming of World War I
In the summer of 1914, as clouds of war were forming, Franz Joseph
(1830–1916) was completing the 66th year of his reign on the Habsburg
throne. During most of his rule Austria-Hungary had basked in the
nineteenth-century glow of the classical-liberal epoch. The constitution
of 1867, which formally created the Austro-Hungarian “Dual
Monarchy,” ensured that every subject in Franz Joseph’s domain had all
the essential personal, political, and economic liberties of a free society.
The Empire encompassed a territory of 415,000 square miles and a total
population of over 50 million. The largest linguistic groups in the
Empire were the German-speaking and Hungarian populations, each
numbering about 10 million. The remaining 30 million were Czechs,
Slovaks, Poles, Romanians, Ruthenians, Croats, Serbs, Slovenes,
Italians, and a variety of smaller groups of the Balkan region.

Austria-Hungary’s Wartime Inflation and Postwar Political

Disintegration
Like all the other European belligerent nations, the Austro-Hungarian
government immediately turned to the printing press to cover the rising
costs of its military expenditures in the First World War. At the end of
July 1914, just after the war had formally broken out, currency in
circulation totaled 3.4 billion Austrian crowns. By the end of 1916 it had
increased to over 11 billion crowns. And at the end of October 1918,
shortly before the end of the war in early November 1918, the currency
had expanded to a total of 33.5 billion crowns. From the beginning to the
close of the war the Austro-Hungarian money supply in circulation had
expanded by 977 percent. A cost-of-living index that had stood at 100 in
July 1914 had risen to 1,640 by November 1918.
But the worst of the inflationary and economic disaster was about to
begin. Various national groups began breaking away from the Empire,
with declarations of independence by Czechoslovakia and Hungary, and
the Balkan territories of Slovenia, Croatia, and Bosnia being absorbed
into a new Serb-dominated Yugoslavia. The Romanians annexed
Transylvania; the region of Galicia became part of a newly independent
Poland; and the Italians laid claim to the southern Tyrol.
The last of the Habsburg emperors, Karl, abdicated on November 11,
1918, and a provisional government of the Social Democrats and the
Christian Socials declared German-Austria a republic on November 12.
Reduced to 32,370 square miles and 6.5 million people—one-third of
whom resided in the city of Vienna—the new, smaller Republic of
Austria now found itself cut off from the other regions of the former
empire as the surrounding successor states (as they were called) imposed
high tariff barriers and other trade restrictions on the Austrian Republic.
In addition border wars broke out between the Austrians and the
neighboring Czech and Yugoslavian armies.

Postwar Austria and Socialist Redistributive Policies

Within Austria the various regions imposed internal trade and tariff
barriers on other parts of the country, including Vienna. The rural
regions hoarded food and fuel supplies, with black marketer’s the
primary providers of many of the essentials for the citizens of Vienna.
Thousands of Viennese would regularly trudge out to the Vienna
Woods, chop down the trees, and carry cords of firewood back into the
city to keep their homes and apartments warm in the winters of 1919,
1920, and 1921. Hundreds of starving children were seen every day
begging for food at the entrances of Vienna’s hotels and restaurants.
The primary reason for the regional protectionism and economic
hardship was the policies of the new Austrian government. The Social
Democrats imposed artificially low price controls on agricultural
products and tried to forcibly requisition food for the cities from the
countryside. The rural population resisted the food-requisitioning police
units sent from Vienna, sometimes opposing the confiscation of their
harvests with armaments.
The only thing that saved even more starvation was the effectiveness of
a huge black market that got around the network of price controls and
the provincial government restrictions that attempted to prevent the
exporting of food to Vienna. Housewives in the Vienna would refer to,
“My smugger,” meaning the regular black market provider of the
essentials of life, and of course at prices far above the artificial prices set
by the socialist government in the capital.

The Costs of Austrian Socialism and Hyperinflation

By 1921 over half the Austrian government’s budget deficit was
attributable to food subsidies for city residents and the salaries of a
bloated bureaucracy to manage an expanding welfare state. The Social
Democrats also regulated industry and commerce, and imposed higher
and higher taxes on the business sector and the shrinking middle class.
One newspaper in the early 1920s called Social Democratic fiscal policy
in Vienna the “success of the tax vampires.”
The Austrian government paid for its welfare state subsidies and
expenditures through the monetary printing press. Between March and
December 1919 the supply of new Austrian crowns increased from
831.6 million to 12.1 billion. By December 1920 it increased to 30.6
billion; by December 1921, 174.1 billion; by December 1922, it was 4
trillion; and by the end of 1923, it had increased to 7.1 trillion crowns.
Between 1919 and 1923, Austria’s money supply had increased by
14,250 percent.
Prices rose dramatically during this period. The cost-of-living index,
which had risen to 1,640 by November 1918, had gone up to 4,922 by
January 1920; by January 1921 it had increased to 9,956; in January
1922 it stood at 83,000; and by January 1923 it had shot up to 1,183,600.
The hypothetical consumer basket of goods that had cost 100 crowns in
1914 cost over one million crowns less than nine years later.
The foreign-exchange value of the Austrian crown also reflected the
catastrophic depreciation. In January 1919 one dollar could buy 16.1
crowns on the Vienna foreign-exchange market; by May 1923, one
dollar traded for 70,800 crowns.
At first the black marketeers in Vienna would accept the depreciating
Austrian crown as payment for smuggled goods from the rural areas. But
by the autumn of 1923, they would only sell for other commodities
considered of higher and more tradable value that increasingly worthless
paper money. A gold watch bought four sacks of potatoes; fifty cigars of
a superior quality purchased four pounds of pork or ten pounds of lard.
During the worst of the inflation, the Austrian central bank printing
presses were working night and day churning out the vast quantities of
the currency. At the 1925 meeting of the German “Verein für
Sozialpolitik” (the Society for Social Policy), Austrian economist
Ludwig von Mises told the audience:
“Three years ago a colleague from Germany, who is in this hall today,
visited Vienna and participated in a discussion with some Viennese
economists . . . Later, as we went home through the still of the night, we
heard in the Herrengasse [a main street in the center of Vienna] the
heavy drone of the Austro-Hungarian Bank’s printing presses that were
running incessantly, day and night, to produce new banknotes.
Throughout the land, a large number of industrial enterprises were idle;
others were working part-time; only the printing presses stamping out
banknotes were operating at full speed.”

Ludwig von Mises and Ending the Austrian Inflation

Finally in late 1922 and early 1923 the Great Austrian Inflation was
brought to a halt. This was due to a great extent to the efforts of Ludwig
von Mises. Mises was a senior economic analyst at the Vienna Chamber
of Commerce. He worked tirelessly to persuade those in political power
that the food subsidies had to end. Finally, in 1922, he was able to
arrange for several prominent business associations and the association
of labor unions in Vienna to call for the elimination the government’s
costly food subsidies at the controlled prices.
To ameliorate the differential effects that inflation was having on often
raising the prices of goods before any rise in money wages, Mises
proposed and had accepted a price indexation scheme linked to the value
of gold, so that money wages on average would rise at the same rate as
the general level of prices was going up. This would take pressure off
the government to have to compensate with expensive food subsidies in
the face of the rising cost of living, and which could be funded with no
means other than further and further increases in the paper money
supply.
Then Mises succeeded in persuading the Austrian Chancellor, Ignaz
Seipel, that continuation of the inflation would lead to the economic and
political ruin of the country. Mises warned Seipel that with an end to the
inflation there would be a “stabilization crisis” during which the
Austrian economy would have to go with an adjustment period. The
market would have to rebalance itself due to the distortions and
misdirection of labor, capital and resources that the inflation had brought
about.
Seipel accepted that fact that the readjustment consequences were
necessary if a worse disaster was to be avoided from a total collapse of
the Austrian monetary system. The Austrian government appealed for
help to the League of Nations, which arranged a loan to cover a part of
the state’s expenditures. But the strings attached to the loan required an
end to food subsidies and a 70,000-man cut in the Austrian bureaucracy
to reduce government spending.
At the same time, the Austrian National Bank was reorganized, with the
bylaws partly written by Ludwig von Mises. A gold standard was
reestablished in 1925; a new Austrian shilling was issued in place of the
depreciated crown; and restrictions were placed on the government’s
ability to resort to the printing press again.
Austria’s Short-Lived Stability before Depression and Nazi
Annexation
Unfortunately, Austria’s economic recovery was short-lived. In the
second half of the 1920s, the Austrian government again increased
expenditures, borrowed money to cover its deficits and raised taxes on
the business sector and higher income individuals. This resulted in
economic stagnation.
In 1931, Ludwig von Mises co-authored a report for the Austrian
government that showed that fiscal policy had resulted in capital
consumption. Business taxes, social insurance taxes and workers’ wages
had increased so much between 1925 and 1929 relative to the rise in
selling prices for manufactured goods that many enterprises had not had
enough after-tax revenues to replace physical capital used up in
production. Misguided Austrian fiscal policy had resulted in a partial
“eating of the seed corn.”
With the coming of the Great Depression in the early 1930s Austria
suffered a new financial crisis due to banking mismanagement. An
attempted “bailout” to save some of Vienna’s leading banks created
even more fiscal havoc with the Austrian government’s budget and a
partial moratorium on payment of Austria’s international debt. Loans
arranged through the League of Nations provided temporary stopgap
remedies to the fiscal crisis.
But overshadowing even all of the economic chaos was a political crisis
in 1933. A procedural voting dispute in the Austrian Parliament lead the
Austrian Chancellor, Engelbert Dollfuss, to suspend the country’s
constitution and impose a one-party fascist-type dictatorship. In 1934,
Austrian Nazis inspired by Hitler’s coming to power in Germany a year
earlier murdered Dollfuss in a failed coup attempt.
Four years later, in March 1938, Hitler ordered the invasion of Austria,
and the country was annexed into Nazi Germany. Austria’s previous
monetary and fiscal mismanagement soon paled in comparison to its fall
into the abyss of Nazi totalitarianism and then the destruction of World
War II.

Causes
 The reason of inflation in Austria was the world war 1

Effects.
 At the end of July 1914, just after the war had formally broken out,
currency in circulation totaled 3.4 billion Austrian crowns.
 By the end of 1916 it had increased to over 11 billion crowns.
 And at the end of October 1918, shortly before the end of the war
in early November 1918, the currency had expanded to a total of
33.5 billion crowns.
 From the beginning to the close of the war the Austro-Hungarian
money supply in circulation had expanded by 977 percent. A cost-
of-living index that had stood at 100 in July 1914 had risen to
1,640 by November 1918.
 The last of the Habsburg emperors, Karl, abdicated on November
11, 1918, and a provisional government of the Social Democrats
and the Christian Socials declared German-Austria a republic on
November 12. Reduced to 32,370 square miles and 6.5 million
people one-third of whom resided in the city of Vienna
 The new, smaller Republic of Austria now found itself cut off from
the other regions of the former empire as the surrounding successor
states (as they were called) imposed high tariff barriers and other
trade restrictions on the Austrian Republic. In addition border
wars broke out between the Austrians and the neighboring Czech
and Yugoslavian armies.
 Within Austria the various regions imposed internal trade and
tariff barriers on other parts of the country, including Vienna.
 The rural regions hoarded food and fuel supplies, with black
marketer’s the primary providers of many of the essentials for the
citizens of Vienna.
 The Social Democrats also regulated industry and commerce,
and imposed higher and higher taxes on the business sector and
the shrinking middle class.
 One newspaper in the early 1920s called Social Democratic
fiscal policy in Vienna the “success of the tax vampires.”
 Hundreds of starving children were seen every day begging for
food at the entrances of Vienna’s hotels and restaurants.
 The Austrian government paid for its welfare state subsidies and
expenditures through the monetary printing press.
 Between March and December 1919 the supply of new
Austrian crowns increased from 831.6 million to 12.1 billion.
 By December 1920 it increased to 30.6 billion;
 By December 1921, 174.1 billion;
 By December 1922, it was 4 trillion;
 By the end of 1923, it had increased to 7.1 trillion crowns
 Between 1919 and 1923, Austria’s money supply had increased by
14,250 percent.
 Prices rose dramatically during this period.
 The cost-of-living index, which had risen to 1,640 by November
1918, had gone up to 4,922 by January 1920;
 By January 1921 it had increased to 9,956;
 In January 1922 it stood at 83,000;
 By January 1923 it had shot up to 1,183,600.
 The foreign-exchange value of the Austrian crown also reflected
the catastrophic depreciation.
 In January 1919 one dollar could buy 16.1 crowns on the Vienna
foreign-exchange market;
 By May 1923, one dollar traded for 70,800 crowns.
 Investment
Years
Spending
1989 2.436948227
1990 1.526854863
1991 2.964760929
1992 2.999680444
1993 3.641871417
1994 3.479093141
1995 2.757084633
1996 2.524942863
1997 1.813918063
1998 0.986205502
1999 1.266995537
2000 0.441905227
2001 0.256349694
2002 1.364040914
2003 1.947105394
2004 1.145595667
2005 1.307552579
2006 1.73971885
2007 2.537794158
2008 1.892161069
2009 2.221175867
2010 1.956322281
2011 1.889264178
2012 0.873054962
2013 1.833410245
2014 2.054235685
2015 1.62388807
2016 2.175707237
2017 2.300978667
2018 1.667629328
2019 1.132802209