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Chapter 18 The Claims of Note Holders upon Liquidation of the Bank The notes issued by the Austro-Hungarian Bank from the beginning of the war were only pro forma banknotes; in reality, they were government notes. In order to avoid the unfavorable impression that issuing government notes would have made on the general public, the regime chose not to finance the war with its own notes, as it had done in 1866; instead, it inserted the Austro-Hungarian Bank as an intermediary between the issue of notes and the treasury. The notes made available by the Austro-Hungarian Bank to finance government expenditures were backed by nothing more than the various state securities that were the basis upon which the Bank directly and indirectly issued credit to the state. The only promise that the holders of these notes had by this procedure was that the state would redeem those securities by withdrawing from circulation a quantity of banknotes representing the equivalent of the value of the loans that had been granted to the state. That the Bank was inserted as an intermediary into this process more 1. [This article originally appeared in German in two parts in Neue Freie Presse (February 25 and 26, 1921).—Ed.] 2. [This refers to the Austro-Prussian War of 1866, also known as the Seven Weeks War, between Prussia on the one side and Austria, Bavaria, Hanover, and a number of other smaller German states on the other. The Prussian victory resulted in Austria being excluded from the German Confederation that was then dominated by Prussia. The Austrian government financed most of its war expenditures through a huge monetary expansion through the issue of government notes. The supply of paper money was increased from 80 million florins in circulation before the war to 300 million at its end.—Ed.] 3. [From July 1914 to October 1918, the Austro-Hungarian money supply increased by 977 percent , from 3.4 billion crowns in circulation at the start of the First World War to 33.5 billion crowns at the end.—Ed.] the claims of note holders upon liquidation of the bank  253 for purposes of outward appearances than for any legitimate reasons was shown by the regulations that aimed at restricting the Bank’s profits from the issuance of these additional banknotes; instead, the proceeds were funneled back into the government treasury. A special tax was imposed on the Austro-Hungarian Bank on December 30, 1917, on top of those peacetime regulations that assured the state a large share of the proceeds from the Bank’s business. It is clear, therefore, that the holders of the notes issued by the Austro-Hungarian Bank can make no claim against the Bank other than that the legal status of the notes may not be set aside or that the holders of these notes are offered the possibility of converting their notes into a new legal form of payment. To view the holders of the notes as “creditors” of the Bank who can claim a specific amount of metallic money at a fixed rate of exchange would involve a complete misunderstanding of how the current monetary policy developed. It is true that it is written on the notes of the Austro-Hungarian Bank that the Bank is obliged to pay the bearer in legal metallic money. This wording has been on the notes in use in Austria-Hungary for decades, in spite of the fact that the Bank was exempt from redeeming its notes in metal. It was retained on the new notes issued after August 1, 1914, because of the desire not to change the customary appearance of the bills. Every note holder knew, however, that this promise had no real meaning. It is clear that no one would have thought that any note represented a claim to a specific amount of the gold supply held by the Bank. If the note holders were to be given something more than what is due them by exchanging their existing notes at their current purchasing power for a new legal means of payment, they would be receiving something that increased the value of those notes above their current purchasing power. For the individual note holder who had acquired them without the expectation of receiving such an extra sum, this would mean nothing less than receiving an unanticipated gift. There is no doubt, of course, that holders of the notes of the AustroHungarian Bank were most severely harmed by the...

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