The Ambassador in Austria-Hungary (Penfield) to the Secretary of State

My Dear Mr. Secretary: At this time when American finance has become the world’s bulwark; when German, French and even British exchange on New York has fallen to the lowest figures known, the occasion seems opportune to advise you of the present contrast between American credit and Austrian credit.

In normal times the dollar’s parity in Austrian currency is about 4 crowns and 93 hellers. Today it is 7 crowns and 25 hellers. Stated simply this means that the American dollar enjoys a premium of practically 47 per cent.

The depreciation of Austria’s money is a sore subject with officialdom, and many are the theories and conjectures brought forward to explain it. Most people say that the exchange on America is purely a matter of supply and demand, and let it go at that. I have no aptitude for finance, but my training makes me confident that the [Page 649] fall in the world’s estimate of Austria’s paper money is that it has but a small gold reserve to back it up, and this reserve is growing less with the efflux of every day. I have not seen a gold coin in circulation in Austria for years.

When the war began it was a fact that Austria-Hungary was in a bad way financially, as a sequel of two neighboring Balkan wars that had had a paralysing effect on business.

This paper currency of Austria, lacking adequate support in the bullion vaults, cannot have much purchasing power outside the Monarchy, naturally. Hence the Government and individuals are compelled to pay in gold or its equivalent for everything purchased abroad. Throughout the period of the war vast quantities of fibres, metals and foodstuffs have been purchased in neutral countries, and of course everything has to be paid for in gold. This means an unceasing drain, and this is my explanation of why the paper money of Austria-Hungary has lost its standing.

I have it on fair authority that financial officials of the Austro-Hungarian Government have been assigned the task of studying the creation of new monopolies to increase the public revenue immediately the war ceases, with instructions to obtain data from governments where the sale of matches and salt are monopolies. In addition to the intention of dealing with these requisites for the benefit of the public exchequer, the Austro-Hungarian Government is contemplating a monopoly in illuminating and lubricating oils. At the present time the refiners in Austria-Hungary have to pay a tax of 13 crowns per 100 kilogrammes on oils with a specific gravity lighter than 880. It is said that there is to be an increase in the selling price of cigars, cigarettes and tobacco—the Government’s present monopoly, and that spirits and beer will shortly be made to yield greater revenue than at present.

At the outbreak of the war certain tax measures were inaugurated, such as an extra charge of two hellers upon the publisher’s price per copy of an extra newspaper issue, and ten hellers on every prescription compounded at a chemist’s shop. These taxes have created a vast amount of irritation, to say the least, by a public condemning them as trivial and unworthy of a great Power.

With the Serbian King in flight and what remains of his Government moving weekly from one place of safety to another, the inquiry of the hour in Vienna is “What is to be the future of Serbia?” Some argue that it will either be attached to the Austro-Hungarian Monarchy or at least be governed from Vienna. The wiseacres agree that Germany cannot want it; hence it must become Austrian, they argue.

An American medical man who visited certain prison camps in Hungary recently asked why Serbians were given liberties denied to [Page 650] Russian prisoners, and was told by the officer in charge that it was because in a few months Serbia would be a part of Francis Joseph’s Monarchy and it was wise to secure the good will even of men who now are prisoners.

Many people in Vienna pretend to believe that Serbia has ceased to exist as a political entity, for of course the country can have no other destiny than becoming a part of or a vassal of Austria-Hungary.

No one capable of dispassionately weighing cause and effect can believe this for a moment, for in all probability when the smoke of war is dispelled and the Peace Congress has finished its work Serbia will still be found on the map of Europe. But it will probably be a Serbia decreased in area, and under a dynasty unrelated to the house of Kara-Georgévitch, of which King Peter is the head. I cannot venture to predict who will be called to the throne, but with half an eye one can see that a German prince or Austrian archduke could hardly find the job an agreeable one.

There is some ground for believing that Belgrade and a strip of Danubian territory may be kept by Austria-Hungary for the sake of political glory, notwithstanding that in the anxious days immediately preceding Francis Joseph’s declaration of war against Serbia his ambassadors at St. Petersburg and London declared “officially and solemnly” that their Government had no desire for territorial gain in Serbia and that it would not touch the existence of the Kingdom And it likewise is a fact that four days prior to the declaration of war against Serbia Count Berchtold, then Austro-Hungarian Minister for Foreign Affairs, emphatically assured the Russian Chargé d’Affaires in Vienna that his Government would not claim Serbian territory, that the Monarchy entertained no thought of conquest in punishing the people who inspired the assassination of Archduke Francis Ferdinand.

That was a year and a half ago and much water has flown [sic] beneath the bridges of Vienna since the words were uttered. But in all likelihood there can be no important change in the Government’s intentions.

Naturally Bulgaria will expect territorial reward for her timely assistance to Germany and Austria-Hungary, and will want a goodly slice of Serbia. She will certainly demand Macedonia.

The greatest difficulty of governing Austria-Hungary in normal times is the presence of many discordant races, with more trouble coming from the Southern Slavs than all the other races combined, unless it be from the Czechs in Bohemia. It can scarcely be believed, consequently, that Austria-Hungary would wish to incorporate a [Page 651] purely Slav nation in its national family. But this Monarchy is sure to have a voice in the administration of Serbia, and probably a dominant voice in choosing its ruler, in my opinion.

The man in the street asks with some pertinence why Austria-Hungary feels that it must go further with its debilitating conflict, when the declared purpose of going to war was solely the punishment of Serbia. A land having at the outset of the conflict but four million people, of whom at least a quarter must be dead, to say nothing of the devastated country with its population bleeding and homeless, would seem to have received all the “punishment” it could stand.

Since these speculative remarks on the future of Serbia were drafted, I have been visited by Count Berchtold, whom I induced to express his opinions on the subject. He is firm in his judgment that for Austria-Hungary to have a dominant voice in administering Serbia would tend to subdue the rebellious spirit of the Southern Slavs dwelling in Hungary, Bosnia and Herzegovina, inasmuch as the race might then be controlled at its source, and further propaganda could not be spread among the kinsfolk of Serbians in Hungary. Count Berchtold states his belief that when the war is ended there will be fewer small Governments in Europe.

I am [etc.]

Frederic C. Penfield