Richard Ebeling, “Introductions to the Selected Works of Ludwig von Mises (2000-12)” Part 2

[Editor’s Note: this lengthy piece, by Richard Ebeling, primarily based on the “lost papers” of Ludwig von Mises that he and his wife, Anna,  discovered in a formerly secret KGB archive in Moscow, Russia, is well worth reading as it shows Mises’s brilliance for understanding the problems of his time as well as purely abstract economics.]

Introduction to Volume 2

The “Lost Papers” of Ludwig von Mises

All of the articles and essays contained in this volume were written by Austrian economist Ludwig von Mises during the twenty years between the two world wars, from 1918 to 1938. The common themes running through most of them concern the monetary disorder and inflation that followed the breakup of the Austro-Hungarian Empire at the end of the first World War; the monetary, fiscal, and interventionist problems in Austria and Europe in general in the 1920s and 1930s, including during the Great Depression; and the collectivist policies and ideas that were leading Europe down the road to the Second World War. Also included from this period are articles on the Austrian economists, the methodology of the social sciences, and the problem of economic calculation under socialism.

They all were originally written in German and about a quarter of them have never been published before. Virtually all are taken from the “lost papers” of Ludwig von Mises.

In the years between the two world wars, Ludwig von Mises was one of the most famous and controversial economists on the European continent.[1] Born in Lemberg, Austria-Hungary on September 29, 1881, Mises entered the University of Vienna in 1900 and was awarded a doctoral degree in 1906. In 1909, the Austrian Chamber of Commerce in Vienna hired Mises as one of its economic staff members. In 1913, he was given the title of Privatdozent, permitting him the right to teach at the University of Vienna as an unsalaried lecturer, with promotion to the title of Professor Extraordinary in 1918.


Over the next twenty-seven years, until his emigration to the United States in July 1940, Ludwig von Mises caused firestorms of controversy. In 1912, he published The Theory of Money and Credit, in which, besides its many other theoretical contributions, Mises formulated what became known as the Austrian theory of the business cycle. Inflation and depression were not inherent to a capitalist economy, but were the result of government control and mismanagement of the monetary system through manipulation of market rates of interest.[2]

It was an article he published in 1920,[3] and which two years later he expanded into the book-length treatise Socialism, that caused the whirlwind of debate that surrounded him for the rest of his life. In this work, Mises demonstrated that the central planners of a socialist state would have no way of knowing how to use the resources of the society at their disposal for least-cost and efficient production. Without market-generated prices, the planners would lack the necessary tools for “economic calculation.” The reality of the promised socialist utopia would be poverty, economic imbalance, and social decay. Furthermore, Mises argued that any type of collectivism that was applied comprehensively would result in a terrible tyranny, since the state would monopolize control over everything needed for human existence.[4]

In 1927, Mises published Liberalism, in which he presented the [xv] classical liberal vision of the free and prosperous society, one in which individual freedom would be respected, the market economy would be free, open and unregulated, and government would be limited to the primary functions of protecting life, liberty and property.[5] He followed this work with Critique of Interventionism in 1929, a collection of essays in which he tried to explain that the interventionist-welfare state was not a “third way” between capitalism and socialism, but a set of contradictory policies that, if fully applied, would eventually lead to socialism through incremental increases in government regulation and control over the economy—and that Germany in the 1920s was heading down a dangerous political road that would lead to the triumph of national socialism.[6]

Not surprisingly, both Marxists and Nazis viewed Ludwig von Mises as a serious intellectual enemy. In fact, in 1925, the Soviet journal Bolshevik published an article calling him a “theorist of fascism.”[7]What was Mises’s “crime” deserving of such a charge? In a 1925 article on “Anti-Marxism,” Mises had written that Marxist Russia and a “national socialist” Germany would be natural allies in a war in Eastern Europe—thereby anticipating the infamous Nazi-Soviet Pact of August 1939, which served as the prelude to the beginning of the Second World War.[8]

By the early 1930s, Mises understood that a Nazi victory in Germany would threaten Austria. As a classical liberal and a Jew, he could be sure that after a Nazi takeover of Austria, the Gestapo would come looking for him. So when in March 1934 he was offered a way out by William E. Rappard, cofounder and director of the Graduate Institute of International Studies in Geneva, Switzerland, who offered him a position as Professor of International Economic Relations, Mises readily accepted and moved to Geneva in October 1934.[9]


Mises kept his apartment in Vienna, where he and his mother had been living since 1911. After she died in April 1937, he returned the apartment to the owner of the building but continued to sublet a room from the new tenant. In this room he stored his papers, manuscripts, family and personal documents, correspondence, and files of his own and other writers’ articles, as well as much of his personal library, which included more than two thousand volumes.

On March 12, 1938, the German army crossed the Austrian border. When Adolf Hitler arrived in Vienna on March 15 he announced that his native Austria had been incorporated into Nazi Germany. Over the next several weeks the Gestapo arrested tens of thousands of Viennese. An estimated seventy thousand were soon imprisoned or sent to concentration camps. Among the immediate victims were the Jews of Vienna, who were harassed, beaten up, tortured, murdered, and humiliated by being made to scrub the streets of Vienna on their hands and knees with toothbrushes while being surrounded by tormenting crowds of onlookers.[10] The new Nazi regime soon began a methodical program of appropriating the 33,000 Jewish-owned businesses and enterprises in Vienna.[11] Among those that the Gestapo came looking for soon after the Anschluss was Ludwig von Mises.

Towards the end of March 1938, the Gestapo came to Mises’s Vienna apartment. He was safe in Switzerland, but the Nazis boxed up everything in his room and carried it away. A year later, on March 4, 1939, Mises sent out a letter of “information” to friends in Europe, explaining what had happened to his possessions:

From 1911 until the death of my mother, I resided at 24 Wollzeile, Apartment 18 (Vienna, I). Upon her death I returned the apartment to the [xvii] owner of the building, who rented it out to the physician, Dr. Joseph Reitzes. However, I kept one room in the apartment as his subtenant. In this room I had my library, as well as my personal correspondence, my family papers, diplomas and other important documents. Furthermore, I had there silver tableware, and a considerable number of other silver items—large platters, candelabras, etc. finally, there was some linen. At the end of March 1938 the Gestapo forcibly entered my locked room and hauled away the contents in twenty-one boxes. Then my room was sealed. In September or October, the rest of the objects in the room were taken away by the Gestapo. Dr. and Mrs. Reitzes have meanwhile left Vienna, and no correspondence from them has reached me. From what I have heard, the Gestapo gave them strict orders not to get in touch with me. In August of last year, I learned from Baron Richthofen that my possessions were in the hands of the Gestapo. When my lawyer, Dr. Rintelen, inquired about what had become of my possessions, he was reportedly given the answer that they could not be found anywhere. My personal library includes about 2,500 books, 1,500 pamphlets and reprints. These works deal with such subjects as economics, economic policy, financial questions, economic conditions in various countries, all varieties of socialism, world and Austrian history, economic history, jurisprudence, philosophy, and belles-lettres.

Mises then listed the collections of books, journals and papers that had been among the property taken away by the Gestapo.[12]

Until his death on October 10, 1973, at the age of 92, Mises believed that everything had been destroyed—either by the Nazis or in the chaos of the war. Considering the manner in which the Nazi regime had earlier burned books as a symbolic rejection of ideas opposed to their own, this was, perhaps, a reasonable assumption.[13] However, Mises’s papers had not [xviii] been destroyed. Instead, they had been kept by the Nazis and ended up in Czechoslovakia, along with most of the other documents, papers, and archival collections the Nazis had seized in various German-occupied countries during the war.

During the first days of May 1945, as the war in Europe was reaching its end, the Soviet army, having conquered eastern Germany, began its conquest of the Czech region of Bohemia. Reaching the small town of Halberstadt, the Soviet soldiers began to fan out and occupied the railway station. On a track siding were twenty-four boxcars that the Nazi authorities had been preparing to evacuate to territory still under their control. When Soviet officials opened the boxcars, they found them stuffed with documents, files, dossiers, and personal and professional papers that the Gestapo had looted from France, Belgium, Austria, Holland, Poland, and many other countries, including Germany itself. Among these literally millions of pages of stolen documents were the “lost papers” of Ludwig von Mises.

This massive cache of material was turned over by the Soviet army to the KGB, who reported the find and its apparent content to Stalin. Stalin ordered the boxcars to be transported to Moscow, where a special building was constructed in the early 1950s to store and preserve these papers. They included 20 million documents from twenty countries. From the outside, the building looked like an ordinary residential complex. It had no nameplate on the door, and only the bars on the windows suggested that it was something other than what it appeared. For the next forty-five years the only people allowed access to the documents stored in the building were members of the KGB and the Soviet Ministry of Foreign Affairs. The employees—all KGB archivists—were forbidden to tell even their families where they worked and were restricted from meeting with foreigners, or even eating at restaurants patronized by foreigners in Moscow.

Each of the archival collections had been carefully studied and organized by the KGB. Mises’s papers were divided into 196 files containing approximately 8,000 items. In 1951, the KGB prepared an index to his papers, with a one-paragraph description of each file. The entire collection was labeled “Fund # 623—Ludwig Mises.”

With the collapse of the Soviet Union in 1991, the documents were declassified and the archive was opened on a limited basis under its new name, the Moscow Center for Historical and Documental Collections. Even foreign researchers could now request to see parts of the collection.

I first heard a rumor that Mises’s papers might be in Moscow in the summer of 1993. My wife and I were in Vienna looking for archival [xix] material about Mises’s life and career. A friend in the Austrian Chamber of Labor, Dr. Gunther Chaloupek, told me that some German diplomats had been in Moscow looking for material about antifascist Germans from the interwar period and had come across a reference to Mises’s name among the indexes to captured documents they were permitted to examine.

In 1994, I found Mises’s “information” letter from 1939 among Friedrich A. Hayek’s papers at the Hoover Institution at Stanford University, so I now had an idea of exactly how and what the Nazis had stolen. It was only in July 1996 that I found out the exact location of Mises’s “lost papers.” I went to the Holocaust Museum in Washington, D. C., hoping that the researchers there could tell me whether, by chance, a Gestapo file on Mises had survived the war. No one could locate such a file. However, I asked a research staff member whether they could find out if any of Mises’s papers were now in Russian hands. She introduced me to a senior researcher, Karl Modek, who specialized in Holocaust material relating to the Soviet Union. Opening a spiral binder containing a full list of the material stored at the Moscow Center for Historical and Documental Collections, he turned to the pages listing the fund numbers and the names of collections in the archive. There it was: “Fund # 623—Ludwig Mises.”

Since the archive had been open to researchers since 1991, the question arises as to why the existence of Mises’s papers had not come to light earlier, and why hadn’t anyone taken the time to examine them and obtain copies? An answer was provided by Kurt Leube, former personal assistant to Friedrich Hayek.

In 1994, Mr. Leube also had heard that Mises’s papers appeared to have survived in Russia. He found out that some Austrian researchers, including Gerhard Jagschitz of the University of Vienna and Stefen Karner of the University of Graz, had traveled to Moscow and seen the indexes to Austrian documents captured by the Soviet army. They confirmed that they had seen an index to Mises’s papers. Mr. Leube had asked them to examine the files and describe their contents, but they replied that their own research schedule did not permit the time to do so.

In March 1997, Dr. Mansur Mukhamedjanov, then Director of the Moscow Center for Historical and Documental Collections, delivered a speech at Hillsdale College and explained:

The Ludwig von Mises fund was accessible to researchers. But from the time when the archive has been opened, not one researcher looked into or worked with the materials of this fund. Russian economists who are involved in working out the concept of market reform never showed any interest in Mises’s fund. I don’t think they even know about its existence. Foreign researchers were interested in anything but Mises. Some of them probably saw the index and knew that such a fund existed, but nobody, I repeat, nobody ever showed any interest or desire to look into the documents. Our careful records show that no researchers ever requested “Fund # 623—Ludwig Mises.”

Mises’s Vienna papers remained unexamined until my wife, Anna, and I traveled to Moscow in October 1996. From October 17 to 27, we spent every working day examining each of the files. We arranged the photocopying or microfilming of virtually the entire collection of papers, manuscripts, articles, correspondence, personal documents, and related materials. They now have been rearranged and computer-cataloged and are restored in the Ludwig von Mises Library Room at Hillsdale College.

The articles and essays in the present volume contain material from Mises’s “lost papers” covering the period from between the two world wars.[14] They offer a view of a different side of Ludwig von Mises in comparison to many of his other works that have been more readily available from this period of his life.


The Economist as the Historian of Decline

In the months immediately after he arrived in the United States in the summer of 1940, Ludwig von Mises set down on paper his reflections on his life and contributions to the social sciences. It is less an autobiography and more a restatement of his most strongly held ideas in the context of the times in which he had lived in Europe. It carries in it a tone of despair and dismay about the direction in which European civilization seemed to be moving at the end of the first four decades of the twentieth century. In clear anguish and frustration, he summarized how he viewed his efforts as an economist in Europe in general and Austria in particular during those years between the two world wars:


Occasionally I entertained the hope that my writings would bear practical fruit and show the way for policy. Constantly I have been looking for evidence of a change in ideology. But I have never allowed myself to be deceived. I have come to realize that my theories explain the degeneration of a great civilization; they do not prevent it. I set out to be a reformer, but only became the historian of decline.[15]

His activities between 1918 and 1938 were divided into two categories: his scholarly writings, and his work as an economic policy analyst and advocate for the Vienna Chambers of Commerce, Crafts, and Industry. The reader of The Theory of Money and Credit, Socialism, Liberalism, and Critique of Interventionism easily would have a conception of Mises as primarily a wide-ranging and interdisciplinary economic and social theorist who was especially concerned with advancing various aspects of monetary and general economic theory in the context of critically evaluating the ideological and policy trends of his time.

This view of Mises would also be easily reinforced from reading his economic treatise, Human Action, a massive work that represents the capstone of his thinking on a vast number of subjects.[16] He writes on a large canvas that incorporates a theory of human knowledge; the conception of the origin and structure of human society; the foundations and construction of a theory of the competitive market process; the nature of money, interest, capital, and the business cycle; and a detailed critique of the socialist, interventionist, and welfare-statist alternatives to the market order.

Some of the articles and essays included in the present volume show him as a clear and concise expositor of these general and critical ideas. In the context of the Austria of this time, however, they also show Mises as a contemporary policy analyst focusing on a variety of specific political, economic, and monetary problems in the wake of the first World War. In these writings he is an advocate of particular policies, reforms, and institutional changes meant to move his native Austria in the direction of freer markets, a more stable monetary order, and a less distorting fiscal regime.

His efforts in these areas of public policy grew out of his position at the Vienna Chamber of Commerce, where he first worked in October 1909 [xxii] as an assistant for the drafting of documents, later becoming a deputy secretary in 1910. Mises was promoted to Leitenden Kammerssekretärs (first secretary) of the Vienna Chamber when he returned to his duties after serving as an officer in the Austrian army during the first World War. He was in charge of the Chamber’s finance department, which was responsible for banking and insurance questions, currency problems, foreign exchange regulations, and public finance and taxation. He also consulted on issues relating to civil, administrative, and constitutional law. Indeed, because of his wide interests and knowledge, practically every facet of the Chamber’s activities concerning public policy and regulation fell within his expertise.[17]

Mises also was assigned special tasks. From November 1918 to September 1919, he was responsible for financial matters relating to foreign affairs at the Chamber. From 1919 to 1921, he was in charge of the section of the Austrian Reparations Commission for the League of Nations concerned with the settling of outstanding prewar debt.[18] After he accepted [xxiii] the appointment as professor of international economic relations at the Geneva Graduate Institute of International Studies, he went on extended leave from the Chamber, though he continued to return to Vienna periodically to consult on various policy matters until February 1938.[19]

At the Chamber, Mises explained, “I created a position for myself.” While always having a superior nominally above him, he came to operate on his own with the assistance of a few colleagues. Though he felt that his advice was not often taken, he viewed himself as “the economist of the country” whose efforts were “concentrated on the crucial economic political questions,” and as “the economic conscience” of Austria in its postwar period.

Friends often suggested to him that he could have had more of a positive impact on Austrian economic policy if he had been willing to give a little and modify his principled stance on various issues. Yet Mises’s only regret, as he looked back on his years at the Chamber, was that he often felt that he compromised too much, though he stated that he had always clearly understood that in politics compromise was inevitable. The challenge was to “give” on the less important issues so as to have a better chance to succeed on the essential ones. This is how he viewed the positions he often took within the Chamber in an effort to get the organization to publicly back policies that he considered crucial at various times during these years.[20]

By the time he left Vienna for Geneva in October 1934, however, Mises believed that he had done little more than fight a series of rearguard actions to delay the decay and destruction of his beloved Austria. “For sixteen years I fought a battle in the Chamber in which I won nothing more than a mere delay of the catastrophe… Even if I had been completely successful, Austria could not have been saved,” Mises forlornly admitted. “The enemy who was about to destroy it came from abroad [Hitler’s Nazi Germany]. Austria could not for long withstand the onslaught of the National-Socialists who soon were to overrun all of Europe.” Still, he had no regrets over the efforts he had made. “I could not act otherwise. I fought because I could do no other.”[21]

To appreciate Mises’s frustration and sense of failure in having begun, as he expressed it, with the hope of being a reformer and instead ending up in the role of a historian of decline requires an appreciation, however [xxiv] brief, of the history of Austria between the world wars. Familiarity with this period will also serve to place into their appropriate context most of the articles and essays included in the present volume, writings through which Mises had clearly attempted to influence the course of events in his native land.

Austria Between the Two World Wars[22]

Austria-Hungary under the Habsburg monarchy had been a vast, polyglot empire in Central and Eastern Europe encompassing a territory of approximately 415,000 square miles with a population of 50 million. The two largest linguistic groups in the empire were the German-speaking and Hungarian populations, each numbering about 10 million. The remaining 30 million were made up of Czechs, Slovaks, Poles, Romanians, [xxv] Ruthenians, Croats, Serbs, Slovenes, Italians, and a variety of smaller groups of the Balkan region.

During the last decades of the nineteenth century and the opening decade and a half of the twentieth century, the empire increasingly came under the strain of nationalist sentiments from these various groups, each desiring greater autonomy and some forcefully demanding independence. The first World War brought the 700-year-old Habsburg dynasty to a close[23] The war had put severe political and economic strains on the country. Power was centralized in the hands of the military command, civil liberties were greatly curtailed, and the economy was controlled and regulated.[24] Yet the more that power was concentrated and the more that the fortunes of war turned against the empire, the more the national groups, most insistently the Hungarians and then the Czechs, Croats, and Poles, demanded self-determination to form their own nation states.[25]

The empire formally began to disintegrate in October 1918, when first the Czechs declared their independence, followed by the Hungarians and the Croats and Slovenes. In early November 1918, the last of the Habsburg emperors, Karl Franz Josef, stepped down from the throne, and on November 12, a provisional national assembly in Vienna proclaimed a republic in German-Austria, as this remnant of the empire was now named. Yetin the second article of the document of independence, it was stated that “German-Austria is an integral part of the German Republic.” Thus the new Austria was born—reduced to 52,000 square miles with a population of 6.5 million inhabitants, one-third of whom resided in Vienna— with a significant portion of the population not wishing their country to be independent but unified (an Anschluss) with the new republican Germany.

For almost five months after the empire had politically broken apart, the Austro-Hungarian National Bank continued to operate as the note-issuing central bank within German-Austria, Czechoslovakia, and Hungary. The Czechs, however, increasingly protested that the Bank was expanding the money supply to cover the expenses and food subsidies of the German-Austrian government in Vienna. In January 1919, the new [xxvi] Yugoslavian government declared that all notes of the Austro-Hungarian Bank on their territory would be stamped with a national mark, and only such stamped money would then be legal tender. The Czech government announced the same in late February 1919. The Czech border was sealed to prevent smuggling of notes into the country, and the notes within Czechoslovakian territory were stamped between March 3 and 10. Soon after, both Yugoslavia and Czechoslovakia began to issue their own national currencies and exchange the stamped Austrian notes for their new monetary units.

In Hungary the situation was more chaotic. In March 1919, a Bolshevik government took power in Budapest and began printing huge quantities of small-denomination notes with Austro-Hungarian Bank plates in their possession, as well as larger notes of their own design, causing a severe inflation. The Bolshevik government was overthrown in August 1919 by invading Romanian armies.
The Austrian Bank notes were not embossed with a national stamp until March 1920, and a separate national currency was introduced in Hungary in May 1921.

The Austrian government, in response to the monetary decisions of the Yugoslavians and Czechs, began their own official stamping of Austro-Hungarian Bank notes within its territory between March 12 and 24, 1919.[26] However, the limiting of notes considered legal tender in the new Austria did not end the problem of monetary inflation. In a matter of weeks after the declaration of the Austrian Republic, the coalition government made up of the Social Democrats, the Christian Socialists, and the Pan-German Nationalists began the introduction of a vast array of social welfare programs. They included a mandatory eight-hour work day, a guaranteed minimum one-to two-week holiday for industrial employees, a continuation and reinforcement of the wartime system of rent controls in Vienna, centrally funded unemployment and welfare payments, and price controls on food supplies that were supplemented with government rationing and subsidies.[27] The cost for these latter programs was huge and kept growing. In 1921, half of the Austrian government’s budget deficit was caused by the food subsidies.[28]

To cover these expenditures, the Austrian government resorted to the printing press.[29] Between March and December 1919, the paper money of the Austrian Republic increased from 831.6 million crowns to 12.1 billion crowns. By December 1920, it had increased to 30.6 billion crowns; by December 1921, to 174.1 billion crowns; by December 1922, to 4 trillion crowns; and to 7.1 trillion crowns by the end of 1923. Prices rose dramatically through this period. A cost-of-living index, excluding housing (with July 1914 = 1), stood at 28.37 in January 1919; by January 1920, it had risen to 49.22; by January 1921, it had gone up to 99.56; in January 1922, it stood at 830; by January 1923, it had shot up to 11,836; and in April 1924, it was at 14,850.

The foreign-exchange value of the Austrian crown also dramatically fell during this period. In January 1919, one dollar could buy 16.1 crowns on the Vienna foreign-exchange market; by May of 1923, a dollar traded for 70,800 crowns.[30]

Adding to the monetary and financial chaos was the virtual political disintegration of what remained of Austria. Immediately after the declaration of the Austrian Republic, political power devolved to the provinces [xxviii] and the local communities, which showed little loyalty to the new national government and great animosity towards the capital city of Vienna. They soon blocked the provincial borders, imposing passport and visa restrictions for entering and exiting their territories. Some of the provinces in 1919 even entered into independent negotiations with Switzerland and Bavaria about possible political incorporation into these neighboring countries. A primary motivation for this provincial “nationalism” or “particularism,” however, was the food and raw materials crisis.

The imperial government had forcefully requisitioned food from the agricultural areas of German-Austria during the war. The new republican government in Vienna continued the practice of forced requisition at artificially low prices, using a newly formed Volkswehr [People’s Defense Force] to seize the food supplies sold in Vienna at controlled prices for ration tickets. The provincial governments used their local power to prevent the export of their agricultural products to Vienna at these below-market prices. Vienna, however, received food from the countryside through a vast black-market network that operated throughout the country.

time after the armistice by the Allied powers but mostly imposed by the Czechs, Hungarians, and Yugoslavians. Coal supplies throughout 1919 and early 1920 were hard to come by. The Czechs and Hungarians refused to supply coal unless they received actual manufactured goods as payment in trade. The inability to acquire coal and other essential raw materials resulted in Austrian and especially Viennese industry grinding to a halt, with no way to produce the goods necessary to pay for the resources required for production. Throughout 1919 and part of 1920, Vienna was on the verge of mass starvation, with food and milk rations almost nonexistent except for the very young. Only relief supplies provided by both the Allied powers and private charities saved thousands of lives in the city.[31].

In October 1920, a new constitution was promulgated as the law of the land. Written primarily by the Austrian legal philosopher Hans Kelsen, it defined the lines of authority between the central government and the [xxix] provinces. The provinces were given wide powers at the local and regional level, but the supremacy of the federal authority over essential political and economic matters that the constitution established ended the provincial nationalism and “particularism.”

One new element resulting from the constitution was that the city of Vienna was now administratively recognized as having a separate “provincial” status. Thus, neither the surrounding province of Lower Austria nor the federal government located in Vienna had jurisdiction over the affairs of the city. From 1920 until 1934, the city became known as “Red Vienna.” Throughout the interwar period, Austrian politics were dominated by the battle between the Social Democrats and the Christian Socialists. The Social Democrats, while rejecting the Bolshevik tactic of dictatorship to achieve their ends, were dedicated to the ideal of marching to a bright socialist future. But outside of Vienna (where they consistently won a large electoral majority) they were thwarted in this mission by the Christian Socialists, who held the majority in the Alpine provinces of Austria and therefore in the National Assembly that governed the country as a whole. The Christian Socialists based their support in the agricultural regions of the country where there was a suspicion and dislike for socialist radicalism. The Christian Socialists, however, were willing to use, in turn, domestic regulations, trade restrictions, and income transfer programs to benefit segments of the rural population at the expense of the larger municipalities, and especially Vienna.

The battle between these two parties had first been fought out in 1921 and 1922, when government expenditures and the mounting increases in the money supply to pay for them were threatening runaway inflation and a financial and economic collapse. After several appeals to the Allied powers, the League of Nations extended a loan to the Austrian government to repay outstanding debts left over from the war and temporarily to cover current expenditures. In return the League supervised a demanding austerity plan that required sizable cuts in government spending, including the ending of the expensive food subsidies for the urban population and the firing of 80,000 civil servants. In addition, the League assisted in the construction of a new Austrian National Bank, for which Mises played a central role in the writing of the charter and bylaws.

In Vienna the Social Democrats remained determined to press on with creating a model socialist community. Huge sums of money were spent in the 1920s on building dozens of schools, kindergartens, libraries, and hospitals in the “working class” districts of the city. They also [xxx] constructed vast new housing complexes, sometimes built literally like fortresses ready to be defended against any counterrevolutionary attacks; one of the most famous of these complexes was Karl Marx Hof. In other parts of the city rent controls kept the cost of apartment housing artificially low at the expense of the landlords. Municipal social and medical insurance programs provided cradle-to-grave protection—including free burials —for the constituents of the Social Democratic Party in Vienna.

To pay for these programs and projects, the Social Democrats imposed a “soak the rich” tax system. Various progressive tax devices were introduced on income, consumption, “entertainment,” and “luxury” expenditures, as well as on rents, business enterprises, and capital assets within the boundaries of the city’s jurisdiction. One newspaper referred to the city’s fiscal system as “the success of the tax vampires,” especially since to cover these municipal expenditures the tax base and rates soon enveloped a large portion of Vienna’s middle class as well as “the rich.”

Parallel to the electoral combat between Social Democrats and the Christian Socialists were paramilitary battles around the country as well. In 1919 and 1920, under the threat of foreign invasion—especially by Yugoslavian armed forces along Austria’s ill-defined southern border—and the plundering expeditions of private gangs and the government’s Volkswehr attempting to forcibly seize food supplies from the rural population, the farming communities created a Heimwehr [Home Defense Force]. It soon became the paramilitary army of the Christian Socialists. In turn, the Social Democrats created theSchutzbund [Protection League] as their private armed force. Armed with war surplus and other weaponry, they both had training camps, parades, and military drills, and held maneuvers in the countryside during which they would sometimes clash in actual combat.

One of the most serious of these clashes occurred in January 1927, in a town near the Hungarian border southeast of Vienna. In the fighting several people were killed, including a small child. In July 1927, three members of the local Heimwehr where the combat occurred were put on trial in Vienna but soon were acquitted. Mobs from the “working class” districts of the city, who were led by known communists, rampaged through parts of the center of Vienna; they burned down the federal palace of justice, requiring the police to use deadly force to put down the violence. In response, the Social Democratic mayor of the city declared the police incompetent and set up a new parallel police force, the Wiener Gemeindewache [Vienna Municipal Guard], manned mostly by recruits from the Social Democrats’Schutzbund, and all at the taxpayers’ extra expense.


Throughout the 1920s, Austria lived a precarious economic existence. Heavy taxes and domestic regulations hampered private investment in the country with both the private sector and the municipal authorities dependent upon foreign lenders and domestic credit expansion for financing many of their activities. Indeed, the burden of rising taxes and social insurance costs, increasing wage demands by labor unions, and tariff regulations actually resulted in capital consumption in the Austrian economy through the 1920s.[32] In a report for the Austrian government that Ludwig von Mises had coauthored in 1931, it was shown that between 1925 and 1929 taxes had risen by 32 percent, social insurance by 50 percent, industrial wages by 24 percent, agricultural wages by 13 percent, and transportation costs by 15 percent—while an index of the prices of manufactured goods bearing these costs had increased only 4.74 percent between 1925 and early 1930.[33]

This was the political and economic situation in the country as Austria entered the Great Depression in 1929. Austria’s crises in the early [xxxii] 1930s were both political and economic. Between 1929 and 1932, Austria had four changes in the government, with finally Engelbert Dollfuss becoming chancellor in May 1932. The economic crisis became especially severe in May 1931. One of Austria’s old imperial-era banks, the Credit-Anstalt, had taken over the Boden-KreditAnstalt in October 1929. The latter bank had branches throughout central Europe and suffered heavy financial losses through most of 1929 into 1930. To sustain the Boden-KreditAnstalt and its own financial position, CreditAnstalt borrowed heavily in the short-term market. In May 1931, panic set in that CreditAnstalt would not be able to meet its financial obligations, precipitating a run on the bank. At the same time, there was a rush to exchange Austrian schillings for foreign currencies and gold.

The Austrian government responded by passing a series of emergency measures between May and December 1931. Concerned about continuing losses of hard-currency reserves, the Austrian government instituted foreign-exchange controls. Distortions, imbalances, and corruption resulting from that law led to three revisions during the first year, each one loosening the controls a little more. The controls were phased out by 1934, after the Austrian government received loans from a group of foreign sources.[34]

In June 1931, Austria had appealed for financial assistance to provide funds needed to stem the massive loss of gold and foreign exchange.[35] The Bank of England and the Bank for International Settlements in Basil, Switzerland, extended credits to the Austrian National Bank. In August 1931, the Austrian government appealed to the League of Nations for a loan, as it had in 1922. The loan agreement was finally signed almost a year later in July 1932. It supplied funds to repay the credits extended by the Bank of England and the Bank for International Settlements. Refinancing of the loan a short time later at a lower rate of interest significantly reduced Austria’s total foreign debt.

But the events that were to seal Austria’s fate were being played out in [xxxiii] the political arena. The League loan, like the one in 1922, required a League representative to supervise the allocation and use of the funds and insisted upon austerity measures to reduce the government expenditures, in addition to a renewal of the pledge against an Anschluss with Germany.[36] The Social Democrats and Pan-German Nationalists in the Austrian Parliament unsuccessfully attempted to block passage of the loan bill, an action which left a bitter and tense relationship between these two parties and Dollfuss’s Christian Socialists.

In March 1933, a procedural argument arose during a parliamentary vote and the leading members of each of the major parties stepped down from the rostrum, bringing the proceedings to a halt. The next day, Chancellor Dollfuss used this as an excuse to suspend the parliament and announce that he was going to rule by decree. Tensions continued to mount for the next year until finally the situation exploded into civil war. Based on information that units of the Schutzbund, the paramilitary arm of the Social Democratic party, were going to initiate a coup attempt, the Christian Socialists’ Heimwehrattempted to disarm them in several cities around the country, including Linz. When fighting broke out, the Austrian army was called into action to put down the combat.

In Vienna, the Social Democrats called for armed insurrection in “selfdefense” against the “reactionary” forces of the Austrian army and the Heimwehr. For four days, deadly and destructive fighting went on in the outer districts of Vienna, with hundreds either killed or wounded and the government forces using artillery pieces to bombard Social Democratic strongholds. When the fighting ended, the Social Democratic forces were completely defeated. Most of the party’s leadership fled the country, and the party was declared illegal.

Then in July 1934, a group of Austrian Nazis, inspired by Hitler’s rise to power in Germany the preceding year, attempted a coup. They seized the Chancellery building, captured and killed Dollfuss, and proclaimed a National Socialist government. They were swiftly defeated by forces loyal to the Austrian government, as was another Nazi-led uprising in the region [xxxiv] of Styria at the same time. When Mussolini declared Italy’s intention to preserve Austria’s independence by sending military forces to the Brenner Pass at the Italian-Austrian border, Hitler repudiated his Austrian followers (for the time being).

Kurt von Schuschnigg became chancellor following Dollfuss’s death, a position he held until March 1938, when Nazi Germany annexed Austria. Thus ended Austria’s tragic twenty-year history between the two world wars.


Monetary Disorder, Inflation, and Interventionist State (1918–32)

The first three chapters in this volume were written in 1918, before the end of the first World War. At this time, Mises was serving as an economic consultant to the Austrian General Staff in Vienna. The chapters look forward to a return to peace, but they contain nothing suggesting the actual cataclysm of events that were to follow. In his article, “The Quantity Theory,” Mises restated the basic principles behind the quantity theory of money and emphasized that it had been the abuse of the printing press that had caused the wartime inflation. The task ahead would be to end the inflation and restore the soundness and stability of the Austrian currency when the fighting stopped.

In response to questions raised by two commentators, Mises made clear in “On the Currency Question” that monetary theory as a social-scientific endeavor offered no answer to the question as to which policy was best to follow in the postwar period. One option would be to end the printing of bank notes and allow the value of the Austrian crown to stabilize in terms of its then-current depreciated market value in exchange for gold and foreign currencies. A new fixed rate of exchange could be established, Mises suggested, say, one year from the day the war ended. If, on the other hand, there were a strong preference to return to the status before the war began in 1914, including a restoration of the prewar foreign-exchange value of the Austrian crown, it would be necessary for the government to run a budget surplus and pay off its debt to the Austro-Hungarian Bank, which would then take the bank notes out of circulation. The monetary contraction would have to continue until the value of the crown had once again risen to its prewar parity.


Mises emphasized that such a monetary deflation would have various disruptive social consequences in the transition to the higher foreign-exchange rate for the crown. Whether to contract the money supply or stabilize the value of the crown at its depreciated value was a political question that economic theory could not answer, other than to explain the consequences that were likely to follow from either course of action.[37]

In the spring of 1918, following the Treaty of Brest-Litovsk that ended the war on the eastern front that imperial Germany and Austria-Hungary had waged with the new Bolshevik government in Russia, Mises served as the officer in charge of currency control in Austrian-occupied Ukraine, with his headquarters in Odessa. An independent Ukraine had been declared in Kiev during this time, and in “Remarks Concerning the Establishment of a Ukrainian Note-Issuing Bank,” Mises outlined the institutional rules that should be followed by a Ukrainian central bank. All bank notes issued and outstanding should be at all times covered with gold or foreign exchange redeemable in gold equal to one-third of the bank’s liabilities. Bank assets in the form of secure, short-term loans should back the remaining two-thirds of the notes in circulation. Mises admitted that there were particular institutional and historical circumstances that would have to be taken into consideration in setting the conditions under which certain types of borrowers might have access to the lending facilities of the Ukrainian central bank. But what was crucial for Ukraine to have a sound monetary system were ample reserves for redemption of bank notes on demand and limits on the term-structure of the loans made by the bank.

These first essays have an almost surrealistic quality to them in suggesting a postwar period in which there would be a calm, stable, and relatively smooth transition to a restructured monetary system as a complement to the return to a tranquil peacetime economy. Instead, the problems that Mises attempted to grapple with in the essays that followed [xxxvi] concerned an actual situation of monetary disintegration, high inflation, political disorder, and general economic chaos.

The next three essays, “The Austrian Currency Problem Prior to the Peace Conference,” “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” and “The Reentry of German-Austria into the German Reich and the Currency Question,” were all written in the first half of 1919. They deal, respectively, with distinct but interrelated questions: how shall a previously unified monetary system be separated into different national currencies; how might the private banking sector create a transition to a new currency after government mismanagement of the monetary system will have brought about a sudden inflationary collapse of the currency; and how shall two separate national currency systems be unified or reunified into a single monetary regime?

In “The Austrian Currency Problem Prior to the Peace Conference,” Mises outlined alternative possibilities that might be followed in establishing a new monetary order in the wake of the collapse of the Austro-Hungarian empire and its unified currency system. He discussed the possibilities of maintaining a common single-currency area with a single central bank, or a monetary union with independent central banks, or completely independent national currencies issued and managed by separate central banks. Mises assumed that none of the newly independent “successor states” would opt for the first alternative. Thus the issue at hand was how all the people presently holding notes issued by the Austro-Hungarian National Bank would convert them into units of the respective new national currencies. He suggested that those residing in the respective successor states should have the freedom of converting their old notes into either the national currency of the new country in which they resided or into the currency of any other of the successor states, as they found most convenient and useful. The same free choice of currency conversion also should be available to those holding quantities of the old notes in countries outside the territory of the former empire. The additional problem to which the currency conversion would be tied was the distribution of the Austro-Hungarian prewar and wartime debt among the successor states. Mises offered a detailed formula of how the distribution of this debt and the conversion of the old notes into new currencies might be reasonably balanced without an undue financial burden on any one of the new countries.

But in the spring of 1919, a far greater problem that confronted the [xxxvii] new Austria was the danger of runaway or hyperinflation. With state spending seemingly out of control because of the welfare-redistributive programs introduced by the Social Democratic and Christian Socialist coalition government, and especially because of the cost of subsidized food for the urban populations, the monetary system seemed headed for a collapse. Mises was cautious to say that it was neither certain nor inevitable that such a currency collapse had to occur. But if it did, Austria—and particularly Vienna, with its large urban population—could be faced with social disintegration, food riots, and mass destruction and theft of property as the value of the medium of exchange fell to zero. Government would have lost all legitimacy and trust in relation to monetary matters. It was to solve this problem that Mises presented his proposal, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation.”

It would fall on the shoulders of the private sector—banks and businesses—to devise the mechanism to bridge the gap between any dramatic and rapid collapse of the old currency and the spontaneous shift to the use of alternative monies by the citizens of the society. Thus, Mises presented a plan for these elements in the private sector to use export revenues and sales of assets to accumulate cash reserves of small-denomination units of Swiss money to use as the temporary, emergency medium of exchange. It would be used to pay salaries and pensions and to loan to the government and other employers in the market so that the population would have access to a medium of exchange they could have confidence in accepting and using for survival. This only would be necessary until normal export sales and capital transfers supplied over time the required quantities of gold or foreign currencies to be used as the permanent substitute monies in a post-inflationary Austrian economy. Mises also explained the process by which private banks could form an informal consortium to jointly cover the costs and clearings of providing this emergency alternative currency.

While Mises alluded to the possibility of a private monetary order without a central bank in the wake of a currency collapse, realistically central banking was and would remain the prevailing monetary regime. The question then arose as to whether the new Austria should have its own independent central bank and national currency or instead should be integrated into a common currency area with the new Germany. This also related, in the long run, to whether or not there should be political unification,Anschluss, between Germany and Austria, which is the theme of [xxxviii] “The Reentry of German-Austria into the German Reich and the Currency Question.” [38]

If Austria were to be integrated into a common monetary system with Germany, certain preconditions were essential for the unification. first and foremost, both countries would have to renounce inflationary monetary policies if there were to be a stabilization of their respective currency’s value for purposes of conversion and unification. But this was not likely to be possible until and unless both countries brought an end to deficit spending, which usually was the impetus for monetary expansion to cover the government’s spending in excess of tax revenues. Therefore, also essential for currency unification would be the establishment of parallel sets of fiscal-policy rules to govern taxing and spending in the two countries.

For the transition to a common currency, Mises suggested the German mark could first be introduced as a “core” or reserve currency in Austria, with a specified ratio of exchange at which the Austrian bank would be obliged to redeem Austrian notes for German marks, and vice versa. Increases and decreases in the number of units of Austrian currency in circulation would be dependent upon deposits or withdrawals of marks from the Austrian banking system. The Austrian National Bank would no longer be an independent authority that determined the quantity of money in the country (similar to the currency boards in a number of countries around the world). final unification would then come through the German central bank redeeming all Austrian bank notes for marks at a specified ratio of conversion, after which there only would be one monetary system and one currency in use in both countries.

At the same time Mises was considering the currency question, he was working through the Chamber of Commerce to eliminate a major stumbling block to Austrian economic recovery through international trade. In “Foreign-Exchange Control Must Be Abolished,” he argued that exchange [xxxix] control limited the ability of importers to acquire required raw materials and goods for the production of manufactured exports and placed insufferable delays and hurdles in the way of entrepreneurial adjustment to changing market opportunities.

This problem was matched by the economic disintegration of trade between the provinces and regions making up the new Austria, a theme that Mises took up in his essay, “Vienna’s Political Relationship with the Provinces in Light of Economics.” The cause, he argued, was preferential abuse of the fiscal structure through the system of differential tax incidence borne by the rural areas in comparison to the urban population, and Vienna in particular. The price controls on food supplies and the government’s subsidies for Vienna residents at the financial expense of the farmers reinforced the tension. Far worse, considering that Vienna was on the verge of mass starvation, was the loss of the bourgeois spirit of enterprise and work that is both the hallmark and the necessity of city life. Attempting to live off the output of the rural areas by means of either begging or the use of arms would only drive a deeper wedge between the regions of Austria, threatening a further political breakup of what remained of the country. Free trade and division of labor on the basis of market prices was the only path to salvation if the new Austria were to survive.

Mises discussed the fiscal problems of Austria further in his two articles, “Direct Taxation in City and Country” and “Viennese Industry and the Tax on Luxury Goods.” Both during and after the war, the tax burden had been shifted from the agricultural sectors to the urban industrial and commercial centers of the country; consequently, the manufacturing capital of the society was being consumed, which was seriously reducing Austria’s productive capability. In Vienna, the socialist city government had imposed heavy taxes on “luxury goods.” Mises warned that these taxes threatened the income-earning capacity of the city, particularly in relation to the tourist industry and the specialized goods for which Austria had built up an international reputation in its export trade.

Yet the greatest threat facing Austria, Germany, and many other countries over the next three years was worsening inflation, as Mises described in “A Serious Decline in the Value of the Currency,” “The Abolition of Money in Russia,” and “Inflation and the Shortage of Money.” In the latter essay, Mises emphasized that as inflation accelerates people start anticipating future declines in the value of money and rush to reduce their cash holdings before money’s value falls even more. Prices start rising faster [xl] than the increase in the quantity of money, creating the illusion of a “shortage of money.” If the monetary authority tries to compensate for this by expanding the money supply at an even faster rate, this will only succeed in reinforcing popular inflationary expectations and speed up the currency’s race to its collapse.[39]

With the currency reform in Austria in 1922 and the monetary reconstruction in Germany after the inflationary destruction of the mark in 1923, plus the end to inflation in a number of other countries, Europe turned once more to a gold standard. Yet, as Mises argued in his 1924 essay, “The Return to the Gold Standard,” the battle to end inflation now was replaced with a debate over the most appropriate monetary system. Mises explained the merits of a gold standard, most especially the fact that a gold-based currency removed direct control of the printing press from the grasping hand of government. He also critically evaluated the counterproposals of Irving fisher and John Maynard Keynes for “managed currencies,” the value of which would be manipulated by government to stabilize the price level or assure a desired level of employment and output.

Equally worrisome, Mises argued in his essays, “Restoring Europe’s State finances,” “Changes in American Economic Policy,” and “Commercial and Bureaucratic Business Management,” was the direction of government spending, regulation, and nationalization of enterprises. The governments of Europe threatened the longer-term prosperity of their countries with burdensome levels of taxation and spending to finance income-transfer programs and to subsidize bankrupt state enterprises that should, in fact, either be privatized or shut down. Even in America, the bastion of free enterprise, political currents were moving in the direction of increasing government intervention and regulation. Those who hoped that state enterprises could be made profitable by introducing business-management styles into their operation failed to see fully the difference between an enterprise guided by the profit motive and one designed to pursue costly and inefficient “social” ends.


The Political Economy of the Great Depression (1931–36)

This continuing drift toward government intervention, regulation, and planning was accelerated and intensified with the start of the Great Depression in 1929. In an ideological environment dominated by socialist and interventionist leanings, Mises tried hard to defend the market order in a series of articles on “The Economic Crisis and Capitalism,” “The Gold Standard and Its Opponents,” “The Myth of the Failure of Capitalism,” “Interventionism as the Cause of the Economic Crisis,” “Planned Economy and Socialism,” and “The Return to Freedom of Exchange,” as well as in “Two Memoranda on the Problems of Monetary Stabilization and Foreign-Exchange Rates.”[40]

The economic crisis through which the world was passing, Mises explained, was not caused by the market economy but was due to the monetary and credit-expansion policies of the previous years that had brought about a misdirection of resources and a malinvestment of capital. An economic adjustment was unavoidable once the inflationary policies had come to an end, but the severity and duration of the economic crisis was being caused by interventionist policies that prevented the necessary changes in the structure of relative prices and wages to bring the economy back into balance. Instead, governments supported inefficient industries and fostered trade-union resistance to cuts in the level of money wages. The result was idle resources and unemployment. Perversely, all of the disastrous effects resulting from these interventionist policies were being used to claim that it was capitalism that had failed. The new ideal of “planning” that was being advocated in place of the market economy was merely a new name for socialism, and government direction of a society’s economic activities would merely lead to worse economic consequences.

The gold standard, Mises said, was being opposed and overthrown as a complement to the regime of interventionism so governments could have a free hand to manipulate the value of money; he attempted, at the same time, to refute many of the arguments against the gold standard. Through devaluation and monetary depreciation, the goal was to restore [xlii] full employment by lowering workers’ real wages by increasing the prices of goods and services while trying to keep money wages at their initial level or at least not rising as fast as prices were going up. At the end of the day, Mises argued, such a policy would fail. Nor could national prosperity and balance be restored through the introduction of foreign-exchange control. Artificially fixing the price at which a currency might be bought and sold, and putting control over the allocation of foreign exchange in the hands of the government, only intensified the distortions and imbalances in both the domestic and international markets.

Austrian Economic Policy and the Great Depression (1927–35)

In his native Austria, Mises considered that economic policy was continuing to follow the wrong direction even before the Great Depression set in. In “The Balance Sheet of Economic Policies Hostile to Property” and “Adjusting Public Expenditures to the Economy’s financial Capacity,” he emphasized that taxes and government expenditures were strangling the Austrian economy. One indication of this was that the trade balance was in deficit because of foreign borrowing to compensate for capital consumption in the country. At the heart of the country’s problems was a wrongheaded conception that said that, while in the private individual’s budget expenses must be restrained by income, on the government balance sheet taxes should be adjusted to cover any level of expenditures considered desirable. This was a road to ruin, Mises warned, because there were always rationales for government to spend more money and never reduce any existing spending. This attitude had to be turned around to the view that it is the amount of taxes collectable without threatening the capital, standard of living, and growth of the economy to which government spending needed to conform.

Another element in Austria’s policy irrationalities, Mises explained, was its labyrinth of layered and redundant government bureaucracies and regulations at the municipal, provincial, and federal levels. Government administration and regulation needed to be streamlined, simplified, and reduced. This in itself would not only make the economy more flexible and competitive, but also reduce the size and cost of government.

With the start of the Great Depression and the collapse of the [xliii] CreditAnstalt Bank in Vienna in May 1931, Mises’s focus became the financial and economic crisis into which Austria had now fallen. He offered his policy prescriptions in five papers written in 1932 that he prepared for meetings of the Vienna Chamber of Commerce: “Foreign-Exchange Control and Some of Its Consequences,” “An Agenda for Alleviating the Economic Crisis,” “An International Loan as the ‘Breathing Room’ for Austrian Economic Reform,” “On Limiting the Adverse Effects of a Proposed Increase in the Value-Added Tax,” and “Foreign-Exchange Policy.”

To try to save the CreditAnstalt, the Austrian National Bank had extended credits for which there was no gold backing as required by the bank’s reserve requirements; to stop the run on its reserves, the bank had ended redemption on demand. The value of the Austrian schilling fell on the foreign-exchange markets. The government’s response was to institute foreign-exchange control pegged at the former gold-parity rate. Mises explained that this would not bring about recovery in the market or restore balance in the international trade accounts. Instead, it would artificially induce even more imports and stymie the sale of exports—the exact opposite of what the government said it wished to do in terms of the country’s balance of trade. The inconsistencies and contradictions in the foreign-exchange control system manifested itself in the fact that, as the year went on, the government was forced to loosen the restrictions on the sale and purchase of foreign currencies and allow more market-based allocation and pricing of foreign exchange. The only lasting cure, Mises insisted, was to immediately abolish the entire network of controls and return to a free market in foreign-exchange dealings.

The fundamental cure for Austria’s problems in the world economic crisis required, among other things, the restoration of redemption of the Austrian currency at the legal gold parity. To do so, the Austrian National Bank had to reverse the monetary and credit expansion it had been following. Mises clearly stated that this monetary deflation had to be instituted as quickly as possible before the entire structure of prices and wages in the country had fully adjusted to the depreciated value of the schilling. At that point, returning to the legal gold parity would necessitate a wrenching adjustment of prices and wages downwards that might not be possible.

Equally crucial to a return to economic balance and the path to prosperity were reductions in government spending to alleviate the strain on the private sector from a state budget that was pushing the country to live beyond its means. It was government spending that was creating the [xliv] pressure for tax increases, which Mises considered a serious danger to Austrian business. If certain taxes were raised, he maintained, they should at least be imposed in a way that did not unduly discriminate against some sectors of the economy for the benefit of others.

When the Austrian government applied for and received an international loan from the League of Nations to facilitate a solution to its financial difficulties, Mises endorsed it, but only if it was understood and used as a “breathing space” for actual and real institutional reform in the government’s taxing and spending practices. Otherwise, Austria would be merely digging its financial grave even deeper.

At the end of 1934, as Mises was departing for Geneva, Switzerland, to take up his teaching appointment at the Graduate Institute of Economic Studies, he wrote “The Direction of Austrian financial Policy: A Retrospective and Prospective View.” Democratic government had ended in Austria, a brief civil war had been fought and had crushed the Social Democrats, and now Mises hoped that a new calm in the country could serve as the backdrop for returning to the path of economic reform and recovery. He reviewed the course of Austrian economic policy during the preceding fifteen years since the end of the first World War, and emphasized that what the country still needed was less government spending and taxing, more flexibility in the country’s price and wage structure, a stable currency, and acceptance that as a small nation in a large global economy Austria had to adjust to the international conditions of supply and demand. Sadly, in under four years, Austria’s fate would be sealed for the duration of the Second World War.

The Political Economy of Irrationalism, Autarky, and Collective Security on the Road to War (1935–38)

From his new vantagepoint in Geneva at the Graduate Institute, Mises was freed from the everyday affairs of Austrian economic policy that had been the focus of his attention at the Vienna Chamber of Commerce.[41] As he wrote in the foreword to the first edition of Human Action, “In the serene atmosphere of this seat of learning …I set about executing an old plan of mine, to write a comprehensive treatise on economics.”[42]


Still, he devoted his attention to the political, ideological, and economic currents in Europe and periodically commented on them. In “The Cult of the Irrational,” prepared for a Hungarian publication, Mises challenged those who argued against the liberal market economy and for nationalism and protectionism on the basis that there is more to public policy than logic and reason. Humanity’s only tool for evaluating the reasonableness of any course of action is rationality, Mises insisted, otherwise it is blind in deciding what alternatives are more likely to yield the ends desired. Furthermore, if people were, in fact, driven by irrational forces of national “belonging” to prefer those goods that were domestically manufactured, then why did governments need to use their power to prevent their citizens from purchasing foreign commodities?[43]

This led Mises to warn of “Autarky: The Road to Misery.” Self-sufficiency neither guaranteed security nor provided prosperity. European civilization was based and dependent upon the international division of labor. Abandoning it would only lead to societal decay and destruction.[44] In “The League of Nations and the Raw-Materials Problem,” Mises explained that a country’s prosperity did not require “ownership” of mines and raw materials and land in other parts of the world. The market economy brought all of the means of production around the globe to everyone’s service through trade. If the League of Nations was to prove its worth as a force for peace, then it had to challenge the argument that wars were inevitable among nations for control of the resources of the world.


Finally, in “Guidelines for a New Order of Relationships in the Danube Region,” Mises explained that the nations of Eastern Europe had no hope of avoiding being the plundered pawns of their larger, stronger, and aggressive neighbors unless they turned away from their respective policies of political and economic nationalism. They needed to form a political and economic union that would guard their freedom from external enemies and finally secure liberty and prosperity within their territories.[45]


Austrian Economics

In two essays that he wrote in the 1930s and 1920s, respectively, Mises briefly summarized what he considered to be some of the more important contributions and insights of the Austrian economists, including the theory of marginal utility and the formation of prices for both final goods and the factors of production. He also stated that the ideas of the Austrians still contained insights that could be useful in public policy. At the University of Vienna, Mises had attended the seminar of Eugen von Böhm-Bawerk, who was one of the most famous of the Austrian economists. Mises’s short memorial piece on the tenth anniversary of Böhm-Bawerk’s death shows just how much he considered his old teacher to have contributed to both economic theory and policy.[46]


Methodology of the Social Sciences

In the spring of 1933, Ludwig von Mises published a collection of essays, Epistemological Problems of Economics, devoted to questions of methodology in economics and the social sciences in general.[47]They dealt with the issue of whether economics is an a priori and deductive science that is able to derive qualitative and logical laws of human action and market relationships, or a discipline constructed on the basis of empirical observation, historical induction, and quantitative analysis.

Mises’s position was that economics is inherently an axiomatic-deductive science that derives its insight through introspective reflection, on the basis of which it is able to formulate the logic of action and choice. History is the study of actual actions undertaken and their intended and unintended consequences. However, to do history there first must be a theory of what it means for man to choose: to weigh alternatives, compare costs and benefits, to make evaluations at “the margin,” and to act once a goal in mind has been decided upon. But insight into the logic of action and choice cannot be derived from empirical experience. We discover them, their meaning, and their logical implications, by looking inside ourselves and asking what it means for a person to “act.”

In June 1933, Mises had been asked to contribute a short essay for a volume in honor of the German scholar, Christian Eckert, on “The Logical Problem of Economics.” The volume never appeared because of the “new environment” under the Nazi regime. The unpublished essay, among Mises’s “lost papers,” explored the similarities between positivism and historicism, in spite of their apparent antagonism toward each other. The crucial element, Mises argued, is to understand the difference between the logic of economic theory and the logic of historical analysis—and that, while they are distinct, they are not in conflict with one another.

In June 1937, Mises delivered a lecture at a philosophy conference in Paris on “The Logical Character of the Science of Human Action.” In a nutshell Mises stated his general position on the nature of the social sciences. He emphasized that knowledge in the human sciences is derived from a fundamentally different source—introspection and reflection on the meaning and implications of “action”—from the basis of knowledge in the natural sciences, which comes from empirical investigation and [xlviii] laboratory experimentation. Inanimate matter does not assign meanings to its movements or to the other objects around it. A person most certainly does do these things, and this is what makes one’s movements and doings “actions,” which can only be formally comprehended through introspective reflection.

Economic Calculation under Socialism

After the appearance of Mises’s treatise on Socialism in 1922, a large number of works were written by socialists and others who challenged or questioned his argument that the abolition of private property, market competition, and money prices for the factors of production under central planning made impossible any rational economic calculation for an efficient allocation and use of the resources of society. In the 1932 revised edition of Socialism, Mises added comments and replies to some of his critics. Human Action contains a refined restatement of his critique of socialist planning in the context of criticisms that had been made since that revised edition of Socialism.

In addition, he wrote two articles in the 1920s in direct response to his critics, “New Contributions to the Problem of Socialist Economic Calculation” (1923) and “Recent Writings Concerning the Problem of Economic Calculation under Socialism” (1928), neither of which has been previously published in English. In the first and longer article, Mises pointed out that those who challenged his argument either in fact ended up conceding his main thesis or were confused and misunderstood what the debate was about. He devoted the most attention to writings of the economic anthropologist Karl Polanyi and the Christian socialist Eduard Heimann, as well as to the arguments of a group of Soviet economists and German socialists, including Karl Kautsky and Otto Leichter.

In the 1928 article, Mises discusses the writings of Jacob Marschak, Otto Neurath, and the Russian economist Boris Brutzkus. In Brutzkus’s work Mises finds a reinforcement of his own argument against socialism in the context of the failure of the Soviet experiment with planning during the period of War Communism in Russia between 1918 and 1922.[48]


Also among Mises’s “lost papers” was an unpublished manuscript on “Economic Calculation under Commercial Management and Bureaucratic Administration.” It was written in longhand on the back of the pages of one of his reports for the Chamber of Commerce presented in July 1932. Mises explained that only where there is private property in the means of production and a goal of profit maximization by the enterprise can there be fully rational economic calculation. The very nature of bureaucratic administration is that among its chief goals are management of the public enterprise for purposes other than profit maximization. As a consequence, to restrain expenditures and prevent any arbitrary discretion on the part of the bureaucratic personnel, the public enterprise must be made to follow precisely defined and delimiting rules and regulations concerning all facets of its activities. In other words, there is no escape from it being managed “bureaucratically.” The more government imposes regulations that steer private enterprises away from their market tasks of satisfying consumer demand in the pursuit of profits, the greater becomes the bureaucratic element in all economic activities. Thus, the choice society faces is profit-oriented businesses or bureaucratically directed enterprises. There is no sustainable alternative in between.[49]

The final piece in the present volume, included as an appendix, is the 1925 article by Soviet economist F. Kapelush on “‘Anti-Marxism’: Professor Mises as a Theorist of Fascism,” which appeared in the Soviet journal Bolshevik. It provides a taste of the tone, style, and mode of argumentation by many Soviet scholars in response to antisocialist writings during this time. Readers may draw their own conclusions about the intellectual caliber of some of Mises’s opponents in the Soviet Union.[50]



The essays in this volume, and his other writings from the period between the two world wars, closed off a chapter in the life of Ludwig von Mises. After 1940, when he was living in America, Mises wrote with a different purpose in mind than had been the case to a great extent during the 1920s and 1930s. In America he was not concerned with unraveling and critically arguing against particular policies or offering in their place specific policy prescriptions in the constantly changing currents of political life. He was [li] not obliged to speak as a representative of a coalition of interests, as he had at the Vienna Chamber of Commerce, sometimes having to temper his arguments in the name of winning the endorsement of the Chamber members so he could advance what he considered “sound policy.”

That “liberation,” as Mises called it, had already begun for him when he moved to Geneva in the autumn of 1934. He was free to address himself to wider and more fundamental issues that he had certainly dealt with in many of his writings in the earlier years, but which he had not had the time or the intellectual autonomy to write about without distraction. The majority of his writings, especially after his arrival in America, tend to be written against the backdrop and in the context of fundamentals and first principles. Even his writings touching on various policy problems of the day, such as inflation or price controls, always focus the discussion on general principles or broad historical examples and lessons to be learned from the human experiences of the past.

By contrast, in most of the essays in the present volume, what is offered is Mises having to apply these general principles and historical lessons to questions concerning what is to be done now, in the practical circumstances of the time. They represent, in many instances, examples of “applied” Austrian economics by the person who, besides Friedrich Hayek, is usually considered the twentieth-century exemplification of “the Austrian approach.”

A monetary order is disintegrating. How do you disentangle one monetary regime into several? A country is faced with a monetary collapse due to hyperinflation. How do you prepare for the transition to a substitute currency? Two monetary systems may be combined into one. What are the specific policy and institutional prerequisites for the change to a unified monetary system? Tax incidence and price controls are bringing about the breakup of a country into separate regions. What economic policies would reintegrate them? Layers of bureaucracy and divided political authority burden a society with excessive government expenses and regulations. How do you streamline the administrative structures to reduce both? State-run enterprises are run along costly and bureaucratically inefficient lines. What would have to be done to make them profitable, efficient, and flexible to economic circumstances, and what methods will not work in bringing this about? An economic crisis results in currency devaluation and the imposition of foreign-exchange control. Do you reverse the devaluation, and if so in what time frame should it be introduced? What are the consequences of the exchange-control system, and what are the prerequisites for a full restoration of stability in the foreign-exchange market?

These were the questions, besides others, that Mises was called upon [lii] to discuss and solve in terms of policy prescriptions in those years in Vienna between the two world wars.

We saw that Mises, in clear frustration in the months after he arrived in America, lamented that in Austria he had started out hoping to be a reformer but instead ended up being a historian of decline. But precisely because of this, these essays offer us a clearer understanding of precisely why it was that in the countries of Europe between 1918 and 1938, inflation, interventionism, socialism, and economic nationalism led to stagnation, social disruption, a Great Depression, and finally to a new world war.

In spite of his pessimism, Mises was not a fatalist. He said more than once in his writings that trends can change, that they had changed in the past and could change again in the future.[51] With this in mind, after coming to the United States he devoted a sizable amount of time to working out the political and economic policies and reforms that could bring about a rebirth of freedom and prosperity in Europe after the Second World War.[52]

Likewise, from the perspective of these first days of the twenty-first century, Mises’s writings from his earlier period offer important instructions for the present and the future. Within each of these articles and essays criticizing the direction of economic and social policy are also ideas and prescriptions for free-market oriented alternatives in the areas of monetary and fiscal policy, government regulation and planning, and the social institutional order, ideas which would move a society along the path that leads to freedom and prosperity. I would suggest that is precisely how Mises would want the modern reader to view these writings. He stated this very clearly in the preface he prepared for the 1932 second edition of Socialism:

I know only too well how hopeless it seems to convince impassioned supporters of the Socialist Idea by logical demonstration that their views are preposterous and absurd. I know too well that they do not want to hear, to see, and above all to think, and they are open to no argument. But new generations grow up with clear eyes and open minds. And they will approach things from a disinterested, unprejudiced standpoint, they will weigh and examine, will think and act with forethought. It is for them that this book is written.[53]

These articles and essays, originally penned for audiences more than sixty and seventy years ago in the context of the policy controversies of those times, were, therefore, also written for us. They are warning signs and guideposts left behind by one of the greatest economists of the twentieth century to assist us in thinking about and designing better policies for our own times.

Endnotes to Volume 2

[1.] For expositions of Mises’s ideas on the rationality of human action, the theory of social order, and the market economy and alternative economic systems, see Richard M. Ebeling, “A Rational Economist in an Irrational Age: Ludwig von Mises,” in Richard M. Ebeling, ed., The Age of Economists: From Adam Smith to Milton Friedman (Hillsdale, Mich.: Hills-dale College Press, 1999), pp. 69–120; Richard M. Ebeling, “Planning for Freedom: Ludwig von Mises as Political Economist and Policy Analyst,” in Richard M. Ebeling, ed., Competition or Compulsion? The Market Economy versus the New Social Engineering (Hillsdale, Mich.: Hillsdale College Press, 2001), pp. 1–85; and Israel M. Kirzner, Ludwig von Mises: The Man and His Economics (Wilmington, Del.: ISI Books, 2001).

[2.] Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd. revised ed., [1924; 1953] 1980). For an exposition of the Austrian theory of money and the business cycle in the context of the Great Depression and in contrast to the Keynesian approach, see Richard M. Ebeling, “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run,” in Richard M. Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2000), pp. 15–110. For a comparison of Mises’s theory of money and the business cycle with that of the Swedish economists during this period, see Richard M. Ebeling, “Money, Economic fluctuations, Expectations and Period Analysis: The Austrian and Swedish Economists in the Interwar Period,” in Willem Keizer, Bert Tieben, and Rudy van Zip, eds., Austrian Economics in Debate(London/New York: Routledge, 1997), pp. 42–74.

[3.] Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” [1920] in F. A. Hayek, ed., Collectivist Economic Planning (London: Routledge & Sons, 1935), pp. 87–130; reprinted in Israel M. Kirzner, ed., Classics in Austrian Economics: A Sampling in the History of a Tradition, Vol. 3: “The Age of Mises and Hayek” (London: William Pickering, 1994), pp. 3–30.

[4.] Ludwig von Mises, Socialism (Indianapolis: Liberty Fund, [1951] 1981). For an exposition of Mises’s critique of socialist planning in the context of the critics of socialism who preceded him, see Richard M. Ebeling, “Economic Calculation under Socialism: Ludwig von Mises and His Predecessors,” in Jeffrey M. Herbener, ed., The Meaning of Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1993), pp. 56–101.

[5.] Ludwig von Mises, Liberalism: The Classical Tradition (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1927] 1996).

[6.] Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1929] 1996). For an exposition of some aspects of the Austrian ideas on interventionism, see Richard M. Ebeling, “The Free Market and the Interventionist State,” in Richard M. Ebeling, ed., Between Power and Liberty: Economics and the Law (Hillsdale, Mich.: Hillsdale College Press, 1998), pp. 9–46.

[7.] F. Kapelush, “‘Anti-Marxism’: Professor Mises as a Theorist of Fascism,” Bolshevik, No. 15 (August 15, 1925), pp. 82–87. This article has been translated from the Russian and is included as an appendix to the present volume.

[8.] Ludwig von Mises, “Anti-Marxism,” [1925] Critique of Interventionism, pp. 71–95.

[9.] See Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,”Ideas on Liberty (January 2000), pp. 33–41.

[10.] See Joachim C. Fest, Hitler (New York: Harcourt Brace Jovanovich, 1973), pp. 549–50; Ian Kershaw, Hitler, 1936–1945: Nemesis (New York: W. W. Norton, 2000), pp. 84–85; and Getta Sereny,The German Trauma: Experiences and Reflections, 1938–2000 (London: Penguin Press, 2000), pp. 6–8. (Getta Sereny, who was a teenager in Vienna at the time of the German occupation, is the stepdaughter of Ludwig von Mises.)

[11.] See Saul Friedlander, Nazi Germany and the Jews, Vol. I: The Years of Persecution, 1933–1939* (New York: HarperCollins, 1997), pp. 242–44. For a more detailed account of the events in Austria following the Nazi annexation of the country, see Dieter Wagner and Gerhard Tomkowitz, Anschluss: The Week Hitler Seized Power (New York: St. Martin’s Press, 1971); and Walter B. Maass, Country Without a Nation: Austria under Nazi Rule, 1938–1945 (New York: Frederick Unger Publishing Co., 1979).

[12.] See also Ludwig von Mises, “Bemerkungen über die ideologischen Wurzeln der Währungskatastrophe von 1923” [Remarks on the Ideological Roots of the Monetary Catastrophe of 1923] in Freunduesgabe zum 12. Oktober 1959 für Albert Hahn [Friendly Presentations on the Occasion of Albert Hahn’s Seventieth Birthday] (Frankfurt am Main: Fritz Knapp, 1959), pp. 54–58. Here Mises remarked that he kept notes of his conversations with members of the Verein für Sozialpolitik [Association for Social Policy] on various theoretical and methodological questions, adding “I kept these notes in my apartment in Vienna, which I had maintained after my move to Geneva in 1934. These and other documents disappeared after the Nazis plundered my apartment” (p. 55).

[13.] That Mises believed that his papers had been destroyed by the Nazis or in the war was told to me in conversation with his widow, Margit, in 1979.

[14.] A companion volume will be published by Liberty Fund that contains material from this collection that relates to Mises’s writings before and during the first World War, his family background, his service in the Austrian army during the first World War, his teaching at the University of Vienna, his private seminar, and his correspondence.

[15.] Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, [1940] 1978), p. 115.

[16.] Ludwig von Mises, Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996).

[17.] See Alexander Hortlehner, “Ludwig von Mises und die Österreichische Handelskammerorganisation” [Ludwig von Mises and the Austrian Chamber of Commerce],Wirtschaftspolitische Blätter, No. 4 (1981), pp. 141–42.

[18.] The February 1925 issue of Friedensrecht, Ein Nachrichtenblatt über die Durchführung des Friedenvertrages Enthaltend die Verlautbarungen des Österreichischen Abrechnungsamtes [The Laws for Peace, A Newsletter for the Execution of the Peace Treaty, Containing Announcements of the Austrian Office for the Settlement of Accounts], pp. 9–10, reported

the separation of Professor Dr. Mises from the board of directors of the Office of Accounts [for the settlement of prewar debts]. Due to his responsibilities as a deputy director in the offices of the Vienna Chamber of Commerce, Crafts, and Industry, he has had to resign from his activities in the Office of Accounts. As an economic theorist, Professor Mises has made a name for himself in the German-speaking scientific world far beyond the boundaries of Austria. His wide knowledge and his accurate, clear way of thinking are combined with an extraordinary, practical understanding and a detailed knowledge of the economic life in Vienna and Austria. Given Austria’s present economic and financial difficulties, that the arranging of the debentures for the settlement of prewar debts has been facilitated under such comparatively favorable conditions we owe to his farseeing and able handiwork. With foresight into the requirements necessary for success, he sketched out the rules for the committee overseeing the settlement of the debentures. And it was his proposals for the issuance of the debentures that were adopted by the consortium of nations. It was just as important and beneficial for the work of the Office of Accounts that Mises applied, in a strictly objective way, his knowledge of the economic situation in the selection of the Office’s personnel. Already as a staff member of the Chamber of Commerce, he had won the confidence of wide circles in the business world, and he has kept that confidence in his work with the Office of Accounts.

[19.] Mises, Notes and Recollections, pp. 76 & 91.

[20.] Ibid., pp. 74–75.

[21.] Ibid., pp. 91–92.

[22.] The following summary of the course of Austrian political and economic history between 1918 and 1938 is taken mostly from the following works: J. van Walre de Bordes, The Austrian Crown: Its Depreciation and Stabilization (London: P. S. King and Son, 1924); Otto Bauer, The Austrian Revolution (New York: Bert Franklin, [1925] 1970); W. T. Lay-ton and Charles Rist, The Economic Situation in Austria: Report Presented to the Council of the League of Nations (Geneva: League of Nations, 1925); The financial Reconstruction of Austria: General Survey and Principal Documents(Geneva: League of Nations, 1926); Carlile A. Macartney, The Social Revolution in Austria (Cambridge: Cambridge University Press, 1926); Leo Pasvolsky, Economic Nationalism of the Danubian States(New York: Macmillan Co., 1928); John V. Van Sickle, Direct Taxation in Austria (Cambridge, Mass.: Harvard University Press, 1931); Malcolm Bullock, Austria, 1918–1919: A Study in Failure (London: Macmillan Co., 1939); David F. Strong, Austria (October 1918–March 1919): Transition from Empire to Republic (New York: Octagon Books, [1939] 1974); Antonin Basch, The Danubian Basin and the German Economic Sphere (New York: Columbia University Press, 1943); Mary MacDonald, The Republic of Austria, 1918–1934: A Study in the Failure of Democratic Government (Oxford: Oxford University Press, 1946); Friedrich Hertz, The Economic Problem of the Danubian States: A Study in Economic Nationalism (London: Victor Gollancz, 1947); K. W. Rothschild, Austria’s Economic Development Between the Two Wars (London: Frederick Muller, 1947); Charles A. Gulick, Austria: From Habsburg to Hitler, 2 Vols. (Berkeley: University of California Press, 1948); Klemens von Klemperer, Ignaz Seipel: Christian Statesman in a Time of Crisis (Princeton, N.J.: Princeton University Press, 1972); Eduard Marz, Austrian Banking and financial Policy: Credit-Anstalt at a Turning Point, 1913–1923 (New York: St. Martin’s Press, 1984); David Clay Large, Between Two fires: Europe’s Path in the 1930s (New York: W. W. Norton, 1990); Helmut Gruber, Red Vienna: Experiment in Working Class Culture, 1919–1934 (Oxford: Oxford University Press, 1991); and Gordon Brook-Shepherd, The Austrians: A Thousand-Year Odyssey (New York: Carroll & Graf Publishers, 1996).

[23.] See Edmond Taylor, The Fall of the Dynasties: The Collapse of the Old Order, 1905–1922 (New York: Doubleday, 1963), pp. 69–96 & 337–56.

[24.] See Joseph Redlich, Austrian War Government (New Haven, Conn.: Yale University Press, 1929).

[25.] On the nationalist currents in Austria-Hungary, see Oscar Jaszi, The Dissolution of the Habsburg Monarchy (Chicago: University of Chicago Press, 1929).

[26.] On the introductions of separate currencies within the successor states of the former Austro-Hungarian Empire, see John Parke Young, European Currency and finance, Vol. II (Washington, D. C.: Government Printing Office, 1925), on Austria, pp. 9–25; Czechoslovakia, pp. 55–77; and Hungary, pp. 103–24.

[27.] Eduard Marz, Austrian Banking and financial Policy: Creditanstalt at a Turning Point, 1913–1923, pp. 290–317. On the effects of rent controls in Vienna in the 1920s, see F.A. Hayek, “The Repercussions of Rent Restrictions,” [1930] in Rent Control, A Popular Paradox (Vancouver: Fraser Institute, 1975), pp. 67–83.

[28.] Budget deficits in nominal terms grew from 2.7 billion crowns in 1919 to 137.7 billion crowns in 1922. The deficits averaged between 40 and 67 percent, as a fraction of total federal government expenditure in Austria during this period of time. See Kurt W. Rothschild, Austria’s Economic Development Between the Two Wars, p. 24.

[29.] In 1925, at a meeting of the Verein für Sozialpolitik [Society for Social Policy], Mises told the following story: “Three years ago a colleague from the German Reich, who is here in this hall today, visited Vienna and participated in a discussion with some Viennese economists. Everyone was in complete agreement concerning the destructiveness of inflationist policy. 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 bank notes. Throughout the land, a large number of industrial enterprises were idle; others were working part-time; only the printing presses stamping out notes were operating at full speed. Let us hope that industry in Germany and Austria will once more regain its prewar volume and that the war- and inflation-related industries, devoted specifically to the printing of notes, will give way to more useful activities.” See Bettina Bien Greaves and Robert W. McGee, eds., Mises: An Annotated Bibliography (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1993), p. 35.

[30.] J. van Walre de Bordes, The Austrian Crown: Its Depreciation and Stabilization, pp. 48–50, 83, 115–39.

[31.] See Lord Parmoor, et al., The Famine in Europe: The Facts and Suggested Remedies (London: Swarthmore Press, 1920), especially the contributions about the situation in Austria by Friedrich Hertz, “What the Famine Means in Austria,” pp. 17–26; Dr. Ellenbogen, “The Plight of German Austria,” pp. 39–48; and Friedrich von Wieser, “The fight Against the Famine in Austria,” pp. 49–56

[32.] See Mises, Socialism, p. 414: “Capital consumption can be detected statistically and can be conceived intellectually, but it is not obvious to everyone. To see the weakness of a policy which raises the consumption of the masses at the cost of existing capital wealth, and thus sacrifices the future to the present, and to recognize the nature of this policy, requires deeper insight than that vouchsafed to statesmen and politicians or to the masses who have put them in power. As long as the walls of the factory building stand, and the trains continue to run, it is supposed that all is well with the world. The increased difficulties of maintaining the higher standard of living are ascribed to various causes, but never to the fact that a policy of capital consumption is being followed.” On the theory of capital consumption, see F. A. Hayek, “Capital Consumption,” [1932] in Money, Capital, and fluctuations: Early Essays (Chicago: University of Chicago Press, 1984), pp. 136–58.

[33.] Bericht über die Ursachen der Wirtschaftsschwierigkeiten Österreichs [A Report on the Causes of the Economic Difficulties in Austria] (Vienna: 1931): For a summary of some of the report’s conclusions and related data on capital consumption and the shortage of capital in Austria during this time, see Friedrich Hertz, The Economic Problem of the Danubian States, pp. 145–68; Nicholas Kaldor, “The Economic Situation in Austria,” Harvard Business Review (October 1932), pp. 23–34; and Fritz Machlup, “The Consumption of Capital in Austria,” The Review of Economic Statistics (January 15, 1935), pp. 13–19, especially p. 13, n. 2: “Professor Ludwig v. Mises was the first, as far as I know, to point to the phenomenon of consumption of capital. As a member of a committee appointed by the Austrian government…he also emphasized comprehensive factual information.” The process of capital consumption due to economic miscalculation under inflation was explained by Mises immediately after the war in his work Nation, State and Economy: Contributions to the Politics and History of Our Time(New York: New York University Press, [1919] 1983), pp. 161–63; and also in his The Theory of Money and Credit, pp. 234–37.

[34.] For accounts of Austria’s experience with foreign-exchange controls between 1931 and 1934, see Howard S. Ellis, Exchange Control in Central Europe (Cambridge, Mass.: Harvard University Press, 1941), pp. 27–73; and Oskar Morgenstern, “The Removal of Exchange Control: The Example of Austria,” International Conciliation, No. 333 (October 1937), pp. 678–89.

[35.] For a summary of the economic events in Austria in 1931 and 1932, see Vera Micheles Dean, “Austria: A Nation Paralyzed,” Current History (December 1932), pp. 303–7.

[36.] In March 1931, the German and Austrian governments signed a protocol for the establishment of an Austro-German customs union. Under opposition from the governments of Great Britain, France, Italy, and Czechoslovakia, the customs union was prevented from operating after the World Court at the Hague found it to be inconsistent with the international agreements that Austria had signed in 1922. See Mary Margaret Ball, Postwar German-Austrian Relations: The Anschluss Movement, 1918–1936 (London: Oxford University Press, 1937), pp. 100–185.

[37.] See Mises, Notes and Recollections, p. 66: “Toward the end of the war, I published a short essay on the quantity theory in the journal of the Association of Banks and Bankers, a publication not addressed to the public. The censor did not approve my treatment of the inflation problem. My tame academic essay was rejected. I had to revise it before it could be published. The next issue immediately carried critical responses, one of which, as far as I can remember, came from bank director Rosenbaum.”

[38.] When he looked back at this period immediately after the first World War in his 1940 Notes and Recollections, Mises wrote on the issue of Austrian unification with Germany: “The situation [of Austria’s apparently paralyzed political and economic situation after the first World War] sometimes made me vacillate in my position on the annexation program. I was not blind regarding the danger to Austrian culture in a union with the German Reich. But there were moments in which I asked myself whether the annexation was not a lesser evil than the continuation of a policy that inescapably had to lead to catastrophe” (p. 87). Yet in certain passages of his essays written in 1919, it is clear that at the time Mises was persuaded that unification with Germany was a “political and moral necessity.”

[39.] For Mises’s detailed analysis of the hyperinflation in Germany and the methods to end it, see Ludwig von Mises, “Stabilization of the Monetary Unit—From the Viewpoint of Theory,” [1923] in Percy L. Greaves, ed., On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978), pp. 1–49; and Mises, “The Great German Inflation,” [1932] in Richard M. Ebeling, ed., Money, Method and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 96–103.

[40.] Mises also presented an analysis of the causes and duration of the Great Depression and the policies needed to overcome the economic crisis in his monograph, “The Causes of the Economic Crisis: An Address,” [1931] in Percy L. Greaves, ed., On the Manipulation of Money and Credit, pp. 173–203.

[41.] Mises, Notes and Recollections, p. 137: “For me it was a liberation to be removed from the political tasks I could not have escaped in Vienna, and from the daily routine in the Chamber. Finally, I could devote myself completely and almost exclusively to scientific

[42.] Ludwig von Mises, Human Action: A Treatise on Economics (New Haven, Conn.: Yale University Press, 1949), p. iii. This first edition of Human Action was handsomely reprinted in 1998 by the Ludwig von Mises Institute of Auburn, Alabama, with an introduction by Jeffrey M. Herbener, Hans-Hermann Hoppe, and Joseph T. Salerno that tells the history of how the volume came to be published in the United States. In Geneva, between 1934 and 1940, Mises had written the German-language forerunner to Human Action, entitled Nationalökonomie: Theorie des Handelns und Wirtschaftens (Munich: Philosophia Verlag, [1940] 1980).

[43.] Mises later was to call this cult of the irrational the twentieth-century “revolt against reason.” SeeHuman Action, pp. 72–91; and Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (Spring Mills, Pa.: Libertarian Press, [1944] 1985), pp. 112–16.

[44.] See also Mises’s “The Disintegration of the International Division of Labor,” [1938] in Richard M. Ebeling, ed., Money, Method and the Market Process, pp. 113–36.

[45.] Mises developed the idea of an Eastern European Democratic Union after he came to the United States. See “An Eastern Democratic Union: A Proposal for the Establishment of a Durable Peace in Eastern Europe,” [1941] in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction (Indianapolis: Liberty Fund, 2000), pp. 169–201.

[46.] For an overview of the ideas and historical significance of the Austrian School of economics, see Ludwig von Mises, “The Historical Setting of the Austrian School of Economics,” [1969] reprinted in Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 53–76; Ludwig M. Lachmann, “The Significance of the Austrian School of Economics in the History of Ideas,” [1966] in Richard M. Ebeling, ed., Austrian Economics: A Reader, Champions of Freedom Series, Vol. 18 (Hillsdale, Mich.: Hillsdale College Press, 1991), pp. 17–39; and Richard M. Ebeling, “The Significance of Austrian Economics in 20th Century Economic Thought,” in Richard M. Ebeling, ed., Austrian Economics: Perspectives on the Past and Prospects for the Future, Champions of Freedom Series, Vol. 17 (Hillsdale, Mich.: Hillsdale College Press, 1991), pp. 1–40.

[47.] Ludwig von Mises, Epistemological Problems of Economics (New York: New York University Press, [1933] 1981).

[48.] Boris Brutzkus, Die Lehren des Marxismus im Lichte der russischen Revolution [Marxian Theories in the Light of the Russian Revolution] (Berlin: Hermann Sack, 1928). This work is included as the first part of Brutzkus’s volume, Economic Planning in Soviet Russia (London: George Routledge, 1935), pp. 1–94. It has been reprinted in Peter J. Boettke, ed., Socialism and the Market, Vol. III: The Socialist Calculation Debate Revisited (London/ New York: Routledge, 2000).

[49.] Mises later further developed this theme of management under private enterprise in the market economy and state management of public enterprises in the interventionist economy and under socialism in his book, Bureaucracy (Spring Mills, Pa.: Libertarian Press, [1944] 1983).

[50.] The same year Kapelush’s article appeared, Bolshevik carried another article touching on Mises’s criticisms of socialism. See Nikolai Bukharin, “Concerning the New Economic Policy and Our Tasks,”Bolshevik, No. 8–9/10 (April 30–June 1, 1925); reprinted in Peter
J. Boettke, ed., Socialism and the Market: The Socialist Calculation Debate Revisited, Vol. I: The Natural Economy (London/New York: Routledge, 2000), pp. 588–613). Bukharin wrote:

Although bourgeois critics of the policy of the proletarian dictatorship in Russia have offered mainly nonsense and foolishness some of their comments were not so stupid and contained a relative truth. One of the most learned critics of communism, the Austrian Professor Mises, presented the following propositions in a book on socialism written in 1921–22. In agreement with Marxist socialists he declared that one must brush aside all sentimental nonsense and accept the fact that the best economic system is the one that develops productive forces most successfully. But the so-called “destructive” socialism of communism leads to the collapse of productive forces rather than their development. The collapse occurs mainly because the communists forgot the enormous role of private individualistic incentives and private initiative. True, capitalism suffers from certain defects. But capitalist competition leads to growth of productive forces and drives capitalist development forward. As a result of the growth in society’s productive forces, the lot of the proletariat improves as well. So long as the communists attempted to arrange production by commands, with a stick, their policy would lead, and already was leading, to an inevitable collapse. There is no doubt that the system of War Communism, viewed in terms of its economic essence, somewhat resembled this caricature of socialism whose destruction was predicted by all the learned economists of the bourgeoisie. Thus, when we began to reject this system and shift to a rational economic policy, bourgeois ideologists began to cry: Now you are retreating from communist ideas, they are surrendering their positions, they have lost the game, and are returning to time-honored capitalism. That is how they summarized the question. But in fact they were the ones who lost, not we… .When we crossed over to the NEP [New Economic Policy] we began to overcome in practice the above-mentioned bourgeois case against socialism. Why? Because the meaning of the NEP lies in the fact that by using the economic initiative of the peasants, of the small producers, and even of the bourgeoisie, and by allowing private accumulation, we also placed these people objectively in the service of socialist state industry and of the economy as a whole….We control the main commanding heights [heavy industry, banking, and foreign trade] we organize what is essential: then our state economy, by different means, sometimes even by competing with the remnants of private capital through market relationships, gradually increases its economic might and, in diverse ways, draws the backward economic units into its own organization, doing so, as a rule, through the market” (pp. 593–94) [emphasis in the original].

Bukharin avoided Mises’s main argument on the question of rational economic calculation and made Mises appear to have focused attention only on the issue of “incentives” under a socialist regime, while at the same time making a roundabout concession of the most important point by saying that the regime in Russia had now shifted to “market relationships,” in comparison to the earlier phase of War Communism during which private property, money, and competition had been officially abolished.

[51.] Ludwig von Mises, “Trends Can Change” [1951] and “The Political Chances for Genuine Liberalism,” [1951] in Planning for Freedom (South Holland, Ill.: Libertarian Press, 1980), pp. 173–84.

[52.] That is precisely the theme and purpose of the essays that he wrote in the early 1940s. See Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction.

[53.] Mises, Socialism, p. 13.