[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 3
Ludwig von Mises: The Man and His Ideas
All except one of the essays in this volume were written by Austrian economist Ludwig von Mises in the four years immediately after his arrival in the United States in the summer of 1940 as a refugee from war-torn Europe. Half of them were delivered as lectures. The others were prepared as monographs on special topics. Their general theme is the problem of international reconstruction and reform in the era succeeding the Second World War.
In the Europe he had left behind, Ludwig von Mises had been one of the most celebrated—and controversial—economists of his time. Over the preceding thirty years, he had acquired an international reputation as one of the leading contributors to the Austrian School of economics and as possibly the foremost critic of the collectivist trends of the early twentieth century. In the 1920s, when the appeal of socialism in its various forms was at its zenith, Mises boldly challenged the feasibility of a fully centralized planned economy. He also questioned the long-term stability of an interventionist or mixed economy as a sustainable “middle way” between a free market system and a socialist, centrally planned economy. And he forcefully argued that only a system of laissez-faire capitalism—of genuine capitalism—could successfully assure freedom and prosperity.
At the same time, he developed his analysis of alternative systems of social and economic order in the wider context of a philosophical and methodological approach that ran counter to the Marxist, positivist, and historicist prejudices of the time. He insisted that social analysis had to have as its starting point a general theory of individual human action and choice. It could not be successfully constructed on the basis of mythical racial, class, or nationalistic aggregates.
An understanding of Mises’s arguments on these subjects, as well as his [ix] work as an influential economic policy analyst in the Austria between the two world wars, is essential if one is to appreciate his ideas on postwar reconstruction and reform. In 1920, Mises published “Economic Calculation in the Socialist Commonwealth,” which he expanded into a comprehensive treatise on Socialism in 1922.In 1927, he published Liberalism, which was followed two years later by Critique of Interventionism. In these important books, he offered a detailed and consistent defense of free-market capitalism in opposition to the regulated economy and socialism.
For Mises, one of the greatest accomplishments of mankind has been the discovery of the higher productivity arising from a division of labor. The classical economists’ analysis of comparative advantage—under which specialization in production increases the quantities, qualities, and varieties of goods available to all participants in the network of exchange—is more than merely a sophisticated demonstration of the mutual gains from trade. As Mises was to later express it, the law of comparative advantage actually is the law of human association: The mutual benefits resulting from specialization of activities constitute the origins of society and the development of civilization.
The rationality of the market economy lies in its ability to allocate the scarce means of production in society for the most efficient satisfaction of consumer wants in a complex system of division of labor—that is, to see to [xi] it that the means at individuals’ disposal are applied to the most highly valued uses, as expressed in the free choices those individuals make in the marketplace. Of course, this requires some method of discovering the alternative uses for which scarce means might be employed and their relative value in their competing uses. Mises explained that competitively determined market prices, in an institutional setting of private ownership over the means of production, provide the only reliable method for solving this problem. On the market for consumer goods, buyers express their valuations for commodities in the form of the prices they are willing to pay. Similarly, on the market for producer goods, entrepreneurs express their appraisals of the relative future profitability of using factors of production in manufacturing various goods through the prices they are willing to pay.
Market prices, expressed through the common denominator of money, are what make economic calculation possible. The relative costs and expected revenues from alternative productive activities are compared and contrasted with ease and efficiency. The competitive processes of the market tend to assure that none of the scarce factors of production is applied for any productive purpose for which there is a more highly valued use (as expressed in a rival entrepreneur’s bid for their hire). The value of the goods desired by consumers is imputed back to the scarce means of production through the competitive rivalry of entrepreneurs. Thus the means available in society are applied to best serve people’s ends.
Mises’s crucial argument against all forms of socialism and interventionism is that they prevent the effective operation of this market process and thus reduce the rationality of the social system. The triumph of socialism—with its nationalization of the means of production under government control and central planning—meant the irrationalization of the economic order. Without market-based prices to supply information about the actual opportunity costs of using those resources (as estimated by the competing market actors themselves) decision-making by socialist central planners is inevitably arbitrary and “irrational.” The socialist economy is, therefore, fundamentally anti-economic.
Interventionism does not abolish the market economy. Instead, it introduces various forms of onerous controls and regulations that deflect production from the paths that would have been followed if entrepreneurs, in the search for profits through the best satisfaction of consumer demand, had been left free to fully follow their own judgments concerning the use and disposal of the factors of production under their control. Price controls, [xii] in particular, distort competitively determined relationships between selling prices and cost prices, resulting in severe misallocations of resources and misdirected production activities.
One other major contribution by Mises during his years in Europe was his pioneering work on monetary theory and policy. Before the first World War he published The Theory of Money and Credit(1912). In this book, he applied the Austrian theory of marginal utility to the problem of explaining the value of money on the basis of individuals’ demands for holding cash balances. He also developed a dynamic sequence analysis, enabling him to explain the process by which changes in the quantity of money bring about redistributions of wealth, relative price changes that modify the allocation of real resources among various sectors of the market, as well as how monetary changes introduced through the banking system can distort interest rates in such a way as to generate business cycles. One of the conclusions that Mises reached in his analysis of monetary processes is that business cycles are not a phenomenon inherent in the market economy. Rather, they are caused by government mismanagement of the monetary and banking system. He later restated and refined his arguments relating to monetary policy in Monetary Stabilization and Cyclical Policy.
A wider theme of Mises’s writings in the period between the world wars is the philosophical and methodological foundations of economic science. In a series of essays written in the 1920s and early 1930s he argued that economics belongs to a more general science of human action, which he came to call “praxeology.” He stated that economics begins with the concept of intentionality and purposefulness, and that this makes economics—and its methods of analysis—different from the approaches followed for the study of the physical sciences. At the same time, the logic of action and choice, which economists take as their starting point for [xiii] analysis of market phenomena, has universal properties and characteristics concerning the human condition from which the general laws of economics can be derived. As a result, Mises strongly opposed the highly popular positivist and historicist ideas of his time. The essays in which he developed these ideas on the methodology of the human sciences were published as a collection in 1933.
Besides his writings on capitalism, socialism, interventionism, and the monetary order, Mises also attempted to influence the course of events in Austria as a policymaker. Beginning in 1909, he was employed in the department of finance at the Vienna Chamber for Commerce, Trade, and Industry as an economic analyst. In this capacity he evaluated and made recommendations about various legislative proposals in the areas of banking, insurance, monetary and foreign-exchange policy, and public finance. In the years between the two world wars, he was a senior secretary with the Chamber, enabling him to argue with some authority on the economic policy issues confronting the Austrian government.
A review of documents and memoranda he prepared for the Vienna Chamber of Commerce during the 1920s and early 1930s shows his consistent emphasis on the desirability of freeing the Austrian economy of high taxes and tariffs, foreign-exchange controls, industrial regulation and price controls, and the excessive power of special interest groups, especially trade unions to control labor markets. The general consensus of economists and others who knew Mises during this period is that he was extremely influential in moderating collectivist and inflationary policies in Austria. For [xiv] example, he was instrumental in preventing the full nationalization of the Austrian economy by a socialist government immediately after the end of the first World War. He successfully helped to redirect public and political opinion to bring the Great Austrian Inflation to an end in 1922. And in the aftermath of this monetary disaster, he played an important role in the writing of the statutes and by-laws of the National Bank of Austria, which was reconstructed under the auspices of the League of Nations in 1923.
Mises’s early activities at the Chamber were interrupted in 1914 when his reserve unit in the Austro-Hungarian army was called up for active service in the first World War. For part of the next four years, he served as an artillery officer on the Russian front. Three times he was decorated for bravery under fire. Following the signing of the Treaty of Brest-Litovsk between imperial Germany and Lenin’s new Bolshevik government that ended the war on the Eastern front in March of 1918, Mises was appointed the officer in charge of currency control in Austrian-occupied Ukraine. His headquarters were in Odessa. Later in the same year he was transferred to duty in Vienna to serve as an economic expert for the Austrian General Staff. In this role he was responsible for preparing memoranda on inflation, war industry, war finance, and related issues. With the end of the war, Mises returned to civilian life. Besides his duties with the Vienna Chamber of Commerce, he was appointed in late 1918 as director of the League of Nations Reparations Commission for the settlement of prewar debts and war claims. He held this position until 1920.
In 1913, Mises had been granted the right to teach at the University of Vienna as a Privatdozent, or unsalaried lecturer; in 1918, he was promoted to the title of Professor Extraordinary. Except during the war, he taught a course at the university almost every semester until 1934, thus influencing a new generation of young Viennese and foreign scholars. He also cofounded and served as vice president of the Austrian Economic Society. In 1920, Mises began a Privatseminar, or private seminar, that normally met twice a month from October to June at his Chamber office. This seminar brought together a group of Viennese scholars in economics, political science, philosophy, sociology, and law, many of whom went on to become world-renowned scholars in their respective fields. Almost [xv] to a man, the participants recalled that the seminar was one of the most rigorous and rewarding experiences of their lives.
One other singularly important activity of Mises during this period was his founding of the Austrian Institute for Business Cycle Research in 1926. With the future Nobel laureate, twenty-seven-year-old Friedrich A. Hayek, as the first director, the Institute was soon internationally recognized as a leading center for economic forecasting and policy analysis in Central Europe. Shortly after it was founded the Institute began to be commissioned by the League of Nations to prepare reports and studies on the economic situation in Central and Eastern Europe. When, in 1931, Hayek accepted an appointment at the London School of Economics, another young Austrian economist, Oskar Morgenstern, assumed the position of Institute director. Morgenstern remained the director until 1938, when Nazi Germany annexed Austria. Mises served as the Institute’s vice president until 1934.
In March of 1934, William E. Rappard, cofounder and director of the Graduate Institute of International Studies in Geneva, Switzerland, wrote to Mises in Vienna inquiring if he would be willing to accept a visiting professorship in international economic relations. Mises accepted the appointment and assumed his responsibilities at the Graduate Institute in October of 1934. Shortly after arriving in Geneva, he began a project he had in mind for many years, namely the writing of a comprehensive treatise on economics. Apart from his light teaching responsibilities (one course and one seminar a semester), most of his time during the next six years was devoted to this project. In May of 1940, as Europe was falling under the dark cloud of Nazi occupation, this monumental work,Nationalökonomie, was published in Switzerland. It served as the basis for his later English-language treatise, Human Action, published in 1949.
In June of 1940, Mises resigned from his position at the Graduate Institute. On July 4, he left Geneva for the United States. After a harrowing journey across France and Spain to Lisbon, Portugal, he embarked on an ocean liner on July 24, and he arrived in New Jersey on August 2, 1940.
Mises’s first years in the United States—the period when the essays in this volume were written—were not easy ones. He experienced great difficulty in finding a permanent teaching position, partly because of his age (he was fifty-nine years old when he arrived) and partly because of the intellectual climate that then prevailed. His was a voice for an older classical liberalism and free-market capitalism that was out of step with the popular trends of socialism, interventionism, and Keynesian economics embraced by a large majority of American academics and policymakers.
However, Mises was supported through research grants generously supplied by the Rockefeller Foundation as well as an affiliation with the National Bureau of Economic Research. He completed two works that were both published in 1944: Omnipotent Government: The Rise of the Total State and Total War and Bureaucracy. A third book, written shortly after his arrival in the United States,Government and Business, remained unpublished until just recently, when it appeared under the titleInterventionism: An Economic Analysis.
Not until 1945 was Mises appointed to an academic post as a visiting professor in the Graduate School of Business at New York University, a position he retained until his retirement in 1969 at the age of eighty-eight. During almost a quarter of a century of teaching in the United States, he was able to train a new American generation of “Austrian” economists. He also published a number of significant books, including [xvii] Planning for Freedom, The Anti-Capitalistic Mentality, Theory and History: An Interpretation of Social and Economic Evolution, The Ultimate Foundation of Economic Science, and The Historical Setting of the Austrian School of Economics.
When Ludwig von Mises died on October 10, 1973, at the age of ninety-two, there is no doubt that he left a profound and lasting legacy as an economic theorist and a champion of liberty.
Economic Nationalism in the Period Between the Two World Wars
The catastrophe of the Second World War was, in Mises’s view, the logical culmination of the political and economic policies of the 1920s and 1930s. Having after 1914 abandoned the principles and practice of economic liberalism and free trade, Europe (and the world in general) had created a political environment in which social conflict within countries and war between nations was almost inevitable.
In a social setting of free-market capitalism, in which governments basically confined themselves to the equal protection of each person to his liberty and property before the law, sectional and national conflicts were practically nonexistent. Directed by the incentives of market opportunities, every individual found his place in the social system of division of labor. Labor, capital, and commodities migrated to those places offering the most attractive returns. Production and employment were localized where market profitability suggested the greatest productive advantage.
Moreover, in such a free-market setting, rivalries between competitors [xviii] were private affairs in which their only weapons were cheaper and better products to capture more consumer business. With governments limited to the protection of life and property, national boundaries were merely administrative lines on maps with no economic significance. Men, money, and goods moved freely and unhindered by politically imposed barriers.
In the generally free-market order before 1914, most of the world’s monetary system was based on a market-based commodity: gold. Though governments through national central banks relegated to themselves control over the money supply, they managed the monetary system by the “rules” of the gold standard. The quantity of money was determined by the profitability of gold mining based on the demand for gold for monetary as well as commercial uses. The purchasing power of money was set by the market forces of supply and demand, and only to a relatively limited extent by the manipulations of governments pursuing various and sundry political goals.
It is always easy to look back at earlier times and to picture them nostalgically as “golden ages” from which the present represents a tragic fall. In fact, however, the period before the first World War possessed many of the characteristics summarized in Mises’s conception of a world of free trade and free markets. It is true that even before the first World War destroyed this epoch of classical liberalism, the world had been returning to policies of governmental intervention and trade restrictions, with imperial Germany in the lead. Nonetheless, the era before 1914 was a world characterized by what Gustav Stolper called the epoch of the “three freedoms”: freedom of movement for men, for goods, and for money. In addition, the world enjoyed an unprecedented level of peace. Conflicts and even wars did occur, but, under the classical liberal ideal of individual freedom, private property, and limited government, wars—especially in Europe—were [xix] few in number, short in duration, and restrained in their damage to life and property.
The First World War ushered in an era of economic planning, price and production controls, foreign-exchange regulations, restrictions on international trade, capital movements, and migration, and a flood of paper-money inflations to cover the costs of war. When the war ended on November 11, 1918, the world had to reconstruct the political and economic landscape. The political map of Europe was radically redrawn, with the German, Austro-Hungarian, and Russian empires carved up to make a tapestry of new and differently shaped nation-states in Central and Eastern Europe. But with the emergence of political nationalism came the rise of economic nationalism. Each of the new successor states imposed tariff barriers and artificially stimulated the creation of greater agricultural or industrial sectors in their economies. These policies were enacted through subsidies, monopoly rights of production and sale, import and export regulations and quotas, tax incentives, foreign exchange controls, and restrictions on the free movement of capital and labor.
Each of these nations of Europe considered that political independence required a corollary: economic independence. The ideal of “autarky” —economic self-sufficiency—increasingly became the basis upon which the governments of these countries judged the appropriateness of any economic policy.Domestic and foreign economic policies by one country became the cause for suspicion and planned counter-policy by its [xx] neighbors. Nor did the countries of Western Europe fully return to the freer policies that prevailed before 1914; they, too, retained various forms of the controls that had been implemented during the war. Consequently, a climate of antagonism, fear, and economic warfare came to dominate the arena of international politics.
Furthermore, whereas the gold standard had formed the basis of the monetary system of virtually all major countries before the first World War, in the postwar era monetary nationalism joined economic nationalism as the new currency order of the world. Under the prewar gold standard, a unit of each nation’s currency was fixed as a certain quantity of gold, exchangeable on demand at that ratio at any representative bank. Through this common gold connection, the national currencies of the world were bound into a unitary and international monetary order.
After the monetary chaos of the immediate postwar period, during which some currencies, like Germany’s, were literally destroyed by hyperinflation, there was an attempt to return to monetary stability and a weaker form of the gold standard. Most governments, however, were unwilling or unable to follow the “rules of the game” required under the gold standard. Money was no longer a market-based medium of exchange through which were facilitated the domestic and global transactions of private trade and investment. Instead, money was increasingly viewed as a tool of national economic policy. Money’s domestic purchasing power and external foreign-exchange value were things to be manipulated by governments to further “national purposes.” With the advent of the Great Depression in 1929, these tendencies merely continued and intensified.
There were half-hearted attempts to restore international trade and [xxi] monetary order in the 1920s and 1930s, but they all failed. The forces of political and economic nationalism, the emerging idea of economic planning, the pragmatic politics of interventionist policies to foster the special interests of domestic groups, and the formal abandonment of the gold standard in favor of purely fiat monies exacerbated the disintegration of the international economic order. In the 1930s, governments increased their subsidies and protectionist supports to industry and agriculture, their interference in the management and control of private enterprise, their monetary and fiscal manipulations to influence domestic output and employment, their taxing policies to modify the distribution of wealth, and their regulation of foreign trade and foreign-exchange rates. The benefits of a free international economic order were forgotten.
With the growth of political and economic nationalism came political [xxii] and economic tyranny. Dictators emerged all across the face of Central and Eastern Europe. Freedom was under attack as never before in modern times. Political and economic nationalism in Europe finally culminated in the barbarism and destruction of World War II.
International Reconstruction and Reform after the Second World War
Even before the worst carnage of the war had occurred, economists, political scientists, historians, sociologists, and men of practical politics had begun to ask themselves how the world had reached such a state of disorganization and chaos and how the era to come after the war could be made better. At first, when the outcome of the war was still uncertain, the analysis often focused on what the alternative international orders might look like were the postwar world to be primarily totalitarian or democratic, or if there were to be a division of the globe between the two rival political systems. As the war progressed, it became clear that the Western democracies would triumph, with fascist and Nazi totalitarianism unconditionally defeated. Accordingly, the world was faced with the serious need to reconstruct the international political and economic order. A general consensus existed, especially among economists, that the world required a reversal of the economic nationalism and protectionism that had plagued the interwar period. There was plenty of evidence that such policies only [xxiii] led to economic disaster and political tension. The postwar world would desperately need the benefits of free trade and the advantages of an international division of labor.
There were some who forcefully called for a revival of classical liberal ideals for domestic and international economic reconstruction and reform. But such voices for a return to pre–World War I classical liberalism were in a small minority. The general view among proponents of a new international economic order was that an unregulated and unplanned market economy was a thing of the past—and would be undesirable even if it were feasible. Under the influence of Keynesian economics and the apparent “advantages” of wartime planning, the majority of economists expected that, in peacetime, governments would still extensively intervene in and regulate the market economy. They asserted with confidence, in the words of Howard Ellis, that “governments have definitely accepted welfare economics as a basic policy; and it is altogether unlikely that any nation will again leave to the vagaries of unregulated international competition the crucial matter of total effective demand for its products and its manpower.” As Charles E. Merriman, a supporter of this new consensus, said: “Planning is coming. Of this there can be no doubt. The only question is whether it will be democratic planning of a free society, or totalitarian in character.”
The ideal was the so-called “middle way” between laissez-faire and a totally planned economy. But a middle way necessarily involved a [xxiv] pre-eminent position for governments in regulating prices and production, and in managing domestic aggregate employment and output and the price level through various monetary and fiscal methods. If a world economic order were to be reconstructed, governments would have to be the overseers and coordinators, meshing their internal plans with any intergovernmental policies for international trade, investment, and exchange-rate stability.
International organizations, therefore, became the vehicle for intergovernmental planning and coordination: the International Monetary Fund, the International Trade Organization, the International Bank for Reconstruction and Development, the World Bank, and numerous agencies surrounding the United Nations. The creation of these organizations involved a radically different ordering of international economic relationships. Before 1914, international trade and investment were mostly private matters of business and commerce, with the leading governments securing the political and legal framework within which private enterprises went about their market-oriented affairs.After the Second World War, the new [xxv] international order was to be based on planned, regulated, and intergovernmentally managed trade.
It is true that, for the first two decades after the end of the Second World War, the Western world experienced a degree of economic prosperity and stability unknown in the period between the world wars. Freer trade was the hallmark of postwar international commerce in comparison to the aggressive economic nationalism of the interwar era. But it was governments, through the international organizations established after the war, that determined the degree and form that trade and investment patterns assumed. Additionally, the apparent stability of foreign-exchange rates and the international monetary order were punctuated with periods of crisis and disorder because of national inflationary policies.
The period following the Second World War was also deeply affected by the protracted tensions and conflicts of the Cold War. Communism and central planning became the new ideals of the emerging Third World countries. Consequently, some feared that freedom and democracy would perish in the ideological contest with Marxism around the globe. Even Western economists looked at the trends of growth in Gross National Product in the United States and the Soviet Union in the 1950s and 1960s and concluded, by extrapolation, that before the end of the century the revolutionary center of communism might very well outstrip the world’s bastion of capitalism in production and standards of living.
The world has turned out differently from what many had either anticipated or feared in the 1960s and 1970s. Notwithstanding the regime in China, communism officially died in 1991 with the collapse of the Soviet Union. The former Soviet-bloc countries are implementing some market-style reforms through privatization. Western and Central Europe [xxvi] are moving toward economic integration. Third World countries have begun turning away from central planning and have entered the epoch of market-oriented industrialization and computerization. But bureaucrats and politicians still manipulate the global marketplace. The welfare state still remains entrenched in the Western world. Through central banks, monetary central planners still control and manipulate the currencies of every country. Economic crises due to governmental mismanagement of monetary, fiscal, and foreign-exchange institutions still erupt. Much of the world still subscribes to the policies of the interventionist state and the mentality of the social engineer.
Mises’s Proposals for International Economic Reconstruction and Reform
In the first five essays in this collection—delivered as lectures at Yale University, New York University, and Columbia University—Ludwig von Mises explored the causes of Europe’s decline into war and destruction in the years between the two world wars, and the general ideological and policy changes that were needed for a return to peace and prosperity in the postwar period. He argued that the reconstruction of the international economic order could be fully successful only if the nations of the world abandoned the ideology of economic nationalism. There could be neither domestic nor international peace as long as governmental policy had as its objective the bestowing of privileges and favors on some at the expense of others. Mises explained that economic nationalism is the foreign policy corollary of internal interventionism for the purpose of bestowing such privileges and favors.
Generally speaking, less efficient producers who are unable to devise ways of meeting the competition of their more efficient rivals in the domestic market turn to the government for protection and financial assistance to maintain their market position and to limit or prohibit the ability of their rivals within the country to compete against them. In the arena of international trade, less efficient producers turn to their respective governments to limit or prohibit foreign rivals from competing in their domestic market. The purpose of economic nationalism is to impose “harm” on foreign producers who otherwise would have profited from better [xxvii] satisfying the wants of consumers than some domestic manufacturers and suppliers.
By politicizing the market rivalries of private producers, international trade becomes one of “affairs of state.” Foreign producers and investors came to be viewed as “enemies” to defeat or take advantage of through political means. The tools of “economic warfare” between countries guided by economic nationalism are tariffs and import quotas, export subsidies, foreign-exchange controls and manipulations, and taxes and regulations on foreign investors. The results, insisted Mises, are international tensions and hostilities that narrow or even destroy the international division of labor. finally, he warned that actual war can grow out of economic nationalism if one of the “combatants” in these trade conflicts believes he is strong enough to defeat an opponent and capture his resources, raw materials, and markets. Mises pointed out that the distinctive feature of economic nationalism in Germany under the Nazis was the German political leadership’s confidence it could use military force to conquer Lebensraum (“living-space”) for the German people—living space in terms of resources, land, markets, and military security in a world in which other nations were also attempting to close off their markets for the exclusive advantage of their own citizens.
Mises was not surprised that in the 1930s collective security had failed to frustrate the territorial ambitions and conquests of Europe’s tyrants. Considering that the various nations of Europe viewed each other as rivals and even “enemies” in the arena of economic warfare, it was unlikely that they could successfully unify their political and military efforts to prevent Nazi, fascist, and Soviet aggrandizement.
Furthermore, as Mises explained, political and economic problems in Central and Eastern Europe contained a distinctive quality not present to the same extent in Western Europe. Almost all the countries in the eastern half of Europe were made up of “mixed” populations of diverse linguistic, religious, and ethnic backgrounds. Interventionist policies in these countries were frequently used as tools for discrimination against minorities. Taxing, regulatory, licensing, and trade policies were often applied as devices to impose economic disadvantages upon some of these national [xxviii] minorities for the economic benefit of more politically influential groups. Social peace within the borders of these nations was impossible as long as economic nationalism was the prevailing ideology.
Antagonisms in Central and Eastern Europe were reinforced by the politics of national self-determination, according to which countries coveted territories belonging to their neighbors on the basis of the idea that all peoples speaking the same language should be unified within the same nation-state. But precisely because linguistic and ethnic groups in this part of Europe were so intermingled within geographic areas, no redrawing of boundaries could successfully separate peoples in such a way that nationalistic tensions could be eliminated or even significantly minimized. The only answer, Mises declared, was a return to the political philosophy of classical liberalism and a consistent free-market capitalism, under which social and economic relationships would be depoliticized.
Mises warned that the end of the Second World War would find Europe economically destroyed. Capital would have been consumed and ill maintained as a result of the war. The infrastructure of the society—roads, bridges, railways, housing—would be ruined or in a state of disrepair. The quantity and quality of the work force would be weakened due to the conflict, lowering the productivity of labor. Agriculture would be less productive. Postwar Europe would be much poorer than before the conflict. In such a setting, Europe would no longer be able to afford the politics of redistribution and the economics of intervention and nationalism.
Work, savings, investment, and capital formation would be essential. A reconstitution and reintegration of Europe within the global division of labor would be imperative. For this to happen, Mises wrote, three changes needed to occur in the European mentality. The first required change concerned the attitude that economic policy was only about achieving short-run goals. Practical politics in the earlier decades of the twentieth century had been geared to providing immediate benefits to various groups that could be satisfied only by undermining the long-run prospects and prosperity of society. In the new postwar era, Mises argued, taxes could no longer be confiscatory. International debts could no longer be repudiated or diluted through currency controls or foreign-exchange rate manipulations. Foreign investors could no longer be viewed as victims to be violated or plundered through regulation or nationalization.
The countries of Europe would have to think about and design their economic policies from a long-term point of view. To avoid reliance solely [xxix] on internal savings, Europe would desperately need infusions of foreign capital. But attracting private foreign investors—which in the postwar period primarily meant private American investors—would require a secure system of property rights, strict enforcement of market contracts for both domestic and foreign businessmen, low and stable taxes, reduced and limited government expenditures and balanced budgets, and a stable, noninflationary monetary system. Only then would governments have done everything in their power to create the political and economic environment most conducive for participants in the market to begin and achieve economic recovery. Consistent with a leading theme expressed in many of his writings, Mises emphasized that the prime movers in the social system of division of labor were the entrepreneurs—the creators and coordinators of the market process—whose central role needed to be appreciated and given unrestricted freedom of action. The ideology of anti-capitalism, therefore, had to be rejected in its entirety.
The second change required of European thinking, Mises wrote, concerned the attitude that politics should be geared toward special interest groups. Earlier in the twentieth century, governments had increasingly used their regulatory and fiscal powers to prevent the market forces of supply and demand (and the market forces of profit and loss) from determining success and failure in the economy. Instead, government interventions had maintained less efficient producers by placing barriers in the way of new and innovative entrepreneurs, by fixing prices at nonmarket-determined levels, and by imposing tariff and other trade walls against foreign competitors. Economic reconstruction required the acceptance that such short-sighted “producer policies” are counter to the economic wellbeing of the society. The essential function of market competition is to continuously discover each participant’s comparative advantage and, therefore, most economically appropriate place in the system of division of labor. Market prices are the mechanism through which the opportunity costs of using resources (including labor) and the relative profitabilities of alternative lines of production are discovered for purposes of assuring the greatest satisfaction of consumer demands.
Mises warned that postwar Europe would be too poor to afford the waste and misuse of its scarce factors of production. The purpose of production is consumption. The use and value of the means has to reflect the importance and value of the ends for which they are applied. This requires a “consumer-oriented” policy in which production would be constantly [xxx] adjusted to actual and changing demand and supply conditions in the market. The only rational policy for reconstruction and rising standards of living, therefore, is unhampered free-market competition.
The third of Mises’s recommendations for a change in European thinking concerned the ethics of the redistributive state. Mises emphasized several times in these first essays that Europe’s problem at the end of the Second World War would be moral and spiritual. The “dependency state” had become the ideal and demand of large segments of the European population. Governments had been expected to be the guarantor of employment and profits, and the provider of income and security. The redistribution of wealth, rather than its creation, had become the hallmark of “progressive economic policy.” But, in truth, he wrote, governments can supply none of these in the long run. Employment and profits arise out of savings, investment, work, and intelligent direction of production to serve consumer demands by market-selected entrepreneurs. Governments can provide and secure income for some only by taxing and redistributing the income and wealth of others. Such redistributive policies weaken incentives, retard the formation of capital, and consume the private wealth accumulated in the past. The inevitable results from such policies are stifled growth and a diminished standard of living.
Europe’s moral and spiritual decay, in the early twentieth century, was due to a declining sense of individual responsibility, a loss of the understanding that the truly “social” requires relationships of peaceful and voluntary cooperation through the market, and a growing illusion that society can long endure in a setting of plunder, confiscation, group conflict, and war. Consequently, Mises wrote, the revival of prosperity and a sustainable future of material and cultural improvement could not be imported from or subsidized by foreign sources. In other words, the economics, politics, and ethics of the free and prosperous society could only come from within each nation—from a change in the minds and ideas of each nation’s citizens.
Government-to-government aid and loans or government-subsidized and government-guaranteed investments to private enterprise would merely perpetuate the interventionist myths of the past that had brought so much misery, poverty, crises, and war. International organizations for intergovernmental cooperation in matters of money, finance, and trade, Mises concluded, are unworkable in the long run if the member governments continue to function on the basis of interventionism and economic nationalism. His reasoning was that each nation would try to use [xxxi] governmentally directed organizations to further its own “interests” at the expense of other countries. If, on the other hand, each nation were to adopt and follow the precepts of classical liberalism and economic liberty in domestic and foreign trade policies, such international organizations would be unnecessary. If the major nations of the world were to practice free trade in both their domestic and foreign affairs, international order would emerge out of the peaceful and mutually beneficial relationships of private transactors in the marketplace. Intergovernmental agreements and international bureaucracies, Mises concluded, are not a substitute for sound policies of economic freedom at home.
The various proposals for intergovernmental monetary coordination during the war years, eventually instituted through the Bretton Woods Agreement and the establishment of the International Monetary Fund and related organizations, were viewed by Mises, therefore, as misplaced solutions to the fundamental problem of international monetary order. His reasons for this view and his alternative proposal are presented in “A Noninflationary Proposal for Postwar Monetary Reconstruction” and “The Main Issues of Present-Day Monetary Controversies.”
The interwar period had seen the demise of an international monetary system. The gold standard that prevailed prior to the first World War had been destroyed by governments wishing to use the printing press to finance their wartime expenditures. The half-hearted attempts to reconstruct the gold standard in the 1920s had been a failure because governments were no longer willing to allow the supply and value of money to remain outside of their direct and discretionary control. Whether to finance current expenditures to satisfy special interest groups or to inflate the general level of prices to influence employment and production in the domestic economy, monetary manipulation was a vital tool in the quest for the attainment of short-run policy goals.
If the world after the Second World War was to once again have a sound monetary system, each country would have to begin the process “at home.” The determinates behind the quantity and value of money would have to be put beyond the immediate reach of governments. Historically, the only monetary regime that had succeeded to any great extent in doing this was the gold standard. Therefore, Mises proposed a return to a gold standard.
The first step toward a sound monetary system for any country, Mises argued, would be to balance the government’s budget, so that the pressure to increase the money supply to cover current expenditures would [xxxii] be relieved. The second step would be the adoption of a 100 percent gold reserve system. The existing money supply would be frozen, and any additions to the supply of money in the form of currency or bank demand deposits would occur only through a new deposit of a sum of gold. The ratio of currency or bank deposit money to be issued on the basis of a new gold deposit would be temporarily set by the market price between dollars and gold plus a margin of 10 percent. The third step, instituted at the same time as the second, would be the abolition of all restrictions on a free market for gold and foreign-exchange dealings. The fourth and final step would occur after a period of time during which foreign-exchange markets would have established a fairly stable rate of exchange between, for example, dollars and gold. At that point, a new gold parity for the dollar would be legally fixed between gold and the total quantity of currency and bank deposit money in the U. S. economy. After that, dollars would be fully redeemable on demand in gold. Currency and deposit money would be fully backed, dollar for dollar, with a sum of gold held as a 100 percent reserve at currency-issuing and deposit-issuing institutions.
Mises was not unique or alone in proposing a 100 percent reserve banking system. In the 1930s, a number of economists proposed such an institutional change. However, these proponents advocated a 100 percent fiat money system managed and controlled by the government. The government would have the task of consciously changing the total quantity of money in circulation to maintain a particular policy target—usually price-level stabilization. Mises’s proposal, in contrast, had the precise goal of removing government from the monetary process except for the initial role in establishing the monetary “rules of the game”: a 100 percent gold reserve requirement on all banking institutions, redemption of all currency and deposits by those institutions on demand at the specified gold parity, and a free foreign-exchange market on the basis of the gold [xxxiii] standard. The quantity of money and its value (or purchasing power) over goods would be determined by the market forces of supply and demand, not by government. Mises’s reasoning was that government simply could not be trusted with control over a monopoly printing press. Furthermore, as these two essays demonstrate, he did not believe that it was in government’s power or ability to successfully manage the monetary system or stabilize any “targets” such as the general price level. Mises’s ultimate ideal for a monetary order most consistent with a free society was for a system of free banking based on a market-selected commodity like gold. But he considered the establishment of this ideal system to be possible only far off in the future, when there would have been a complete renunciation of socialist and interventionist ideas.
Mises knew that a sound monetary system did not require international agreements or intergovernmental monetary organizations. Any country could adopt such a gold-based monetary order independent of what other nations might do. If international agreements attempted to restrain member countries from following inflationary paths in an ideological environment in which national governments had the desire to continue abusing their monetary powers, the result would be tensions, conflicts, crises, and a final collapse of the intergovernmental monetary system. The disintegration in 1971 of the Bretton Woods system of fixed exchange rates under a system of national currencies open to governmental manipulation strongly suggests that Mises was correct in his judgments.
The one essay in this collection written by Mises before his arrival in the United States is “A Draft of Guidelines for the Reconstruction of Austria.” It was prepared in May of 1940 for Otto von Habsburg, former archduke of Austria, shortly before Mises’s departure from Geneva. It diagnoses the reasons for Austria’s political and economic problems in the 1920s and 1930s and presents the reforms and policy changes that would have to be implemented for Austria’s rebirth and revival as a prosperous and [xxxiv] independent nation in the postwar period. Because Austria is a small country with various economic disadvantages in comparison with other, larger nations better endowed with resources and fertile land, Mises recommended that the country adapt to the international trade environment. Austria should find its place in the global system of division of labor and acquire through imports the food, raw materials, and capital it needed from other countries by exporting those industrial goods for which it had a comparative advantage.
But, Mises asked, given the inevitable state of postwar poverty under which Austrians would be living, how would the incentives be created to begin the process of economic recovery? The answer is that domestic regulations would have to be abolished, labor markets would have to be freed from trade-union domination and control, government expenditures and redistributionist policies would have to be drastically cut back, nationalized industries would have to be privatized, Austrian businessmen driven from their homeland by anti-Semitism and Nazi policies would have to be invited back and made welcome in their own country, the multiple levels of bureaucratic administration throughout the country would have to be reduced and streamlined, the monetary system would have to be based on gold, and international economic relations would have to be guided by the idea of free trade. The only permissible trade restrictions would be retaliatory tariffs against specific countries that might discriminate against or prohibit Austrian goods from being sold in their markets.
Crucial to Austrian recovery and reconstruction, Mises wrote, would be fiscal policy. The fostering of savings, investment, and capital formation would be imperative. He proposed the end of all direct income taxation. Instead, the primary sources of all government revenues would be, first, general consumption taxes, including: (a) excise taxes on alcoholic beverages and tobacco products, (b) sales taxes, but only on final goods sold to the consuming public, and (c) a playing-card stamp tax. Second, there should be wealth taxes on consumption, including: (a) a progressive tax on higher consumption levels, based on housing expenditures (excluding those in the lower-income housing categories), (b) a tax on ownership of higher-priced automobiles for private use, and (c) a tax on lottery winnings. Third, there should be business and employment taxes, including: (a) a moderate tax on net profits paid out to shareholders of corporations and partners in limited partnerships, when the annual disbursements exceed six percent of capital assets, (b) administrative fees for patent rights, registration of brand names, and other official stamps, and (c) a wage tax [xxxv] paid by employers to cover social insurance programs, but which would not be deducted from wages. Mises stressed that, except for the wage tax and the net profits tax, all earnings would be exempt from direct taxation. This would create the fewest disincentives to income and wealth creation.
Such, he concluded, is the path to economic recovery for a small country like Austria. But Mises pointed out there were problems unique to Central and Eastern Europe because of their mixed populations of numerous linguistic, ethnic, and religious groups. The essay “An Eastern European Democratic Union: A Proposal for the Establishment of a Durable Peace in Eastern Europe” is Mises’s suggestion for solving these problems in a world still in the grip of political and economic nationalism.
In two of his earlier works, Nation, State, and Economy and Liberalism, Mises dealt extensively with the problem of nationality and national self-determination. He emphasized that among the principles of classical liberalism is the right of self-determination and freedom of association. In classical liberal thought, this means the self-determination of the individual. Each individual has, in principle, the right to decide of which political entity he will be a member. But, because of administrative constraints, the practical meaning of this principle is that the citizens within districts and regions, and even towns and villages, should have the right of plebiscite to express their preference to remain part of the nation-state to which they presently belong, to join some other nation-state, or to form a new state of their own.
Unfortunately, during the nineteenth and twentieth centuries this idea had been distorted to mean “national self-determination,” that is, that all peoples belonging to the same linguistic or ethnic group should belong to the same nation-state, regardless of the actual wishes of the individual residents within a geographical area. This idea of national self-determination has been the cause of many of the tensions, antagonisms, and conflicts within and between nations in Europe. And it served as the rationale for Hitler’s insistence on the annexation of parts of countries adjoining Nazi Germany that contained German-speaking peoples.
Mises noted that the problem of nationalist antagonisms is exacerbated in an ideological setting of interventionism. Governments become the tools for linguistic and ethnic groups seeking to use the power of the state for their own benefit through discriminatory laws and policies against others. The only way to protect against such a political environment is to create a vast political and economic union. Mises proposed such a union for all the countries of Eastern Europe from the Baltic Sea to the Aegean Sea, including Estonia, Latvia, Lithuania, Poland, Czechoslovakia, Austria, Hungary, Romania, Yugoslavia, Bulgaria, Albania, Greece, and the part of Germany east of the Oder-Neisse Rivers. Only such a union, Mises reasoned, would have the combined strength to repel military aggression against these countries by either Germany or Russia. More important, such a union would diminish the ability of the member governments to use their domestic power to discriminate against national minorities and threaten war on their neighbors in the name of political or economic nationalism.
Mises proposed that political authority and legislative power would be reserved to a single parliamentary chamber that would have the only power to tax and upon which the member states would be dependent for disbursement of funds for administrative expenditures. The member states would retain their flags, symbols, anthems, and even embossed coins and stamps, but they would no longer have the power to pass legislation or impose laws that could infringe on a regime of private property and free trade within their jurisdictions and between the member states. Discriminatory laws against linguistic, ethnic, or religious groups would be forbidden. There would be for all citizens the freedom to move, live, and work within the boundaries of the union, and the same rights would apply to foreigners who chose to live, work, and invest in any part of this Eastern European Union.
In Mises’s view, under such a regime of free markets and free trade, no individual would or could be abused by national political power. All persons would be free to pursue the trade, profession, and occupation of their choice without political restraint and to speak and educate their children in the language and customs of their own choice. Schools would be primarily private and eligible for receiving lump-sum per-pupil tax revenues [xxxvii] as long as they were in compliance with certain basic rules and standards specified by the central government of the union.
Mises was not so naive as to expect to see the immediate acceptance and establishment of a broad political and economic union along the lines he recommended. But he believed that movement toward this goal was the only way to introduce restrictions on the interventionist power of national governments. And, indeed, the only rationale for such a union was to bring about the implementation of the ideals of the free market and free trade. Unless a union were constituted for this purpose, its existence would be impossible to justify.
Under the sponsorship of the School of Economics at the National University of Mexico, Mises spent January and February of 1942 lecturing in Mexico City and other Mexican cities. In June of 1943 he prepared for an association of Mexican businessmen a detailed report, “Mexico’s Economic Problems,” in which he recommended policies that would most likely assist in fostering Mexican economic development and industrialization.
In this report, Mises maintained that the war-related trading opportunities that Mexico was enjoying with the United States were likely to end with the cessation of the conflict. Mexico, therefore, must look forward to an agenda of postwar market-oriented reforms for further economic improvement. Free trade is essential to the country’s future, he wrote, and in this context he emphasized that the benefit from trade comes from the imports obtainable at prices less costly than those incurred by alternative domestic production. Exports are the means for acquiring those imports and not an end or a good in themselves.
Anticipating one of the major schemes proposed by postwar development planners, Mises strongly criticized what he labeled the “closed door method of industrialization,” which became more widely known and popular in Third World countries after 1945 as the “import-substitution method” for development. According to this method, industrialization is to be forced through trade restrictions and high tariff barriers behind which domestic industries will be stimulated at artificially high prices far above those in the general global market. He pointed out that countries implementing this method inevitably make their own people poorer and less productive.
To the extent that imports are reduced so, too, Mises wrote, are exports. Potential foreign buyers of Mexican goods would lose the means of earning the Mexican revenue that would have provided them with the financial wherewithal to purchase Mexican exports. This would bring about a misdirection of Mexican production inconsistent with a most efficient use of the country’s resources. Mexico would be locked out from maximizing the income it could earn from exporting those goods for which it had the greatest comparative advantage in the international market. And consumers would have to pay the cost of such a method of “hothouse” industrialization through a lower standard of living due to the higher prices and lower quality of the domestic substitutes they would be forced to purchase on the Mexican market. Import-substitution methods of economic development merely represent a modern version of the eighteenth-century mercantilist fallacies.
Equally disastrous for Mexican development would be any attempt to raise Mexican wages to comparable United States levels through either government legislation or trade-union pressure. Mexico in the 1940s, Mises added, was a capital-poor country with a relatively large supply of labor. This necessarily meant that labor productivity was far lower than that of American workers. The only way that Mexican labor could compete with American labor and other competitors in the global market would be to take advantage of those opportunities in which it could be a lower-cost producer in labor-intensive lines of production. The standard of living in Mexico could permanently rise only through the normal processes of market-directed capital formation over time and through migration of a part of the labor force to other countries where wages and the marginal productivity of labor were higher. Since the latter method was generally closed off, due to immigration barriers in the United States and other countries, only the former method was available to Mexico under prevailing international conditions, Mises reasoned. Raising wages above market-determined levels could only condemn a part of the Mexican labor force to permanent unemployment or more primitive lines of employment.
Since Mexico had long practiced protectionist, interventionist, and socialist policies, the country would have to make a transition to a regime of free markets and free trade. Those familiar with Mises’s apparently “intransigent” and “dogmatic” advocacy of laissez-faire economics may be surprised that he proposed a series of “gradualist” policies for Mexico. For example, because a number of industries had been long protected behind high tariff walls, Mises suggested a transition to free trade over a period of [xxxix] years during which tariff levels would be reduced by 10 percent a year. (In this, Mises merely followed in the tradition of many of the earlier classical economists who also called for a gradual shift to free trade so as to minimize the severity of the economic adjustment.)
While generally critical of government-sponsored and supported cooperative movements, Mises argued that full land privatization in Mexico should be supported for the poor peasantry through government assistance in forming farm-producer cooperatives and even limited but temporary state subsidies to help them get started. In the area of privatization, Mises argued that the most desirable course of action was full denationalization. But, given the ideological climate in Mexico, Mises proposed that the national railway system, for instance, be transformed into a government-owned but independent corporation; management of the rail system would operate on a for-profit basis.
Crucial and central to any economic reform project in a country such as Mexico, Mises again emphasized, would be the establishment and the strict enforcement of property rights and contract, for both Mexican and foreign investors alike. Inflationary monetary policies would have to be renounced, and a policy of free trade would have to be practiced.
Ludwig von Mises’s purpose in preparing the lectures and writing the monographs included in this volume was to restate fundamental truths at a time when many of the most important premises of sound economic thinking seemed to have been forgotten or rejected. He realized that in a world dominated by socialist and interventionist ideas this was often a thankless task. But he believed that no real change for the better was possible unless the truth was spoken.
Mises was determined to explain why, after the Second World War, economic liberty was both desirable and essential if the world was to avoid the mistakes of the past. Yet he was aware that ways had to be found to [xl] encourage a rebirth of the ideal and practice of market freedom. The first task was to explain how the world had arrived in its present state and why previous ideologies and policies had led to disaster. Next, the logic and benefits of the free-market order had to be articulated once again. finally, specific policies had to be formulated to begin the process of international reconstruction and reform.
Today the world is searching for a new international economic order, just as it was searching for one in the mid–1940s. The former communist bloc countries, including the former Soviet Union, are groping with varying degrees of success toward the establishment of a market order and democratic political regimes. The countries of Asia, Africa, and Latin America are trying to escape from socialist and neo-mercantilist experiments of previous decades. The Western industrial democracies are looking for ways to overcome the burdens of the welfare state and the regulated economy.
The world at the third millennium abounds with proposals for economic and monetary unions, international trading agreements and intergovernmental rules for investment and capital movements. But what is lacking in many, if not most, of these proposals is a clear statement of first principles and a clear conception of where any particular policies implemented should be leading in terms of a long-run vision of the free and prosperous society. Many in the public arena praise and endorse the idea of a global free-market order. But beneath the rhetoric of some alleged free-market proponents are variations on the old interventionist theme. These proponents are merely proposing islands of market activity in an ocean of regulations, controls, and political redistributions of wealth.
This is not the meaning of the free market as it was understood by Ludwig von Mises. He chose to call things by their real names and explain them in terms of their real meanings. Anything less, he believed, would be a betrayal of truth and understanding. It is perhaps appropriate, therefore, to conclude by recurring to Mises’s own thoughts on this point, which ended his lecture on “The Fundamental Principle of Pan-European Union”:
It is a thankless job indeed to express such radical and “subversive” [free-market] opinions and to incur the hatred of all supporters of the old [interventionist] system that has amply proven its inexpediency. But it is not the duty of an economist to be fashionable and popular; he has to be right. Those timid souls who fear challenging spurious doctrines and superstitions because they have the support of influential circles will never improve conditions. Let them call us “orthodox”; it is better to be an intransigent orthodox than an opportunist time-server.
Endnotes to Volume 3↩
Two other previously unpublished papers from 1943 by Mises on the related topics of “Autarky and Its Consequences” and “Economic Nationalism and Peaceful Economic Cooperation” were included in an earlier collection; see Richard M. Ebeling, ed., Money, Method, and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 137–65.
Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,”  in F. A. Hayek, ed., Collectivist Economic Planning (London: Routledge & Sons, 1935), pp. 87–130.
Ludwig von Mises, Socialism (Indianapolis: Liberty Fund,  1981); on Mises’s critique of socialism and its relation to earlier criticisms of central planning, 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.
Ludwig von Mises, Liberalism in the Classical Tradition (Irvington-on-Hudson, N.Y., and San Francisco, Calif.: Foundation for Economic Education and the Cobden Press,  1985).
Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,  1996).
Ludwig von Mises, Socialism, pp. 258–61; Human Action, A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 157–66.
Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd revised ed., [1924; 1953] 1980).
Ludwig von Mises, “Monetary Stabilization and Cyclical Policy,”  in Percy L. Greaves, ed., On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978); see Richard M. Ebeling, “Ludwig von Mises and the Gold Standard,” in Llewellyn H. Rockwell, Jr., ed., The Gold Standard: An Austrian Perspective (Lexington, Mass.: Lexington Books, 1983), pp. 35–59; and Richard M. Ebeling, “Variations on the Demand for Money Theme: Ludwig von Mises and Some Twentieth Century Views,” in John W. Robbins and Mark Spangler, eds., A Man of Principle: Essays in Honor of Hans F. Sennholz (Grove City, Pa.: Grove City College Press, 1992), pp. 127–38.
Ludwig von Mises, Epistemological Problems of Economics (New York: New York University Press,  1976); for an exposition and analysis of Mises’s ideas on the logic of human action and his comparative study of capitalism, socialism, and interventionism, 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, Champions of Freedom Series, Vol. 26 (Hillsdale, Mich.: Hillsdale College Press, 1999), pp. 69–120; Mises’s theory of human action was influenced by the phenomenological method of Edmund Husserl and the sociological approach of Max Weber; see Richard M. Ebeling, “Austrian Subjectivism and Phenomenological Foundations,” in Peter J. Boettke and Mario J. Rizzo, eds., Advances in Austrian Economics, Vol. 2A (Greenwich, Conn.: JAI Press, 1995), pp. 39–53; and Richard M. Ebeling, “Expectations and Expectations Formation in Mises’ Theory of the Market Process,” in Peter J. Boettke and David L. Prychitko, eds., The Market Process: Essays in Contemporary Austrian Economics (Brookfield, Vt.: Edward Elgar, 1994), pp. 83–95.
Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, 1978), pp. 71–92.
Mises, Notes and Recollections, pp. 93–100.
For recollections of Mises’s Privatseminar by former members, see the appendix in Margit von Mises, My Years with Ludwig von Mises (Cedar Falls, Iowa: Center for Futures Education, 2nd ed., 1984), pp. 199–211; see also Earlene Craver, “The Emigration of the Austrian Economists,” History of Political Economy, Vol. 18, No. 1 (1986), pp. 1–32.
See Richard M. Ebeling, “Friedrich A. Hayek: A Centenary Appreciation,” The Freeman (May 1999), pp. 28–33.
See Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,”The Freeman (January 2000), pp. 39–46.
Ludwig von Mises, Nationalökonomie: Theorie des Handelns und Wirtschaftens (Munich: Philosophia Verlag,  1980).
Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (Spring Mills, Pa.: Libertarian Press,  1985).
Ludwig von Mises, Bureaucracy (Spring Mills, Pa.: Libertarian Press,  1983).
Ludwig von Mises, Interventionism: An Economic Analysis (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1998).
On the history and ideas of the Austrian School of economics, see Ludwig M. Lachmann, “The Significance of the Austrian School of Economics in the History of Ideas,”  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 Twentieth-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.
Ludwig von Mises, Planning for Freedom (South Holland, Ill.: Libertarian Press, 4th ed., 1980).
Ludwig von Mises, The Anti-Capitalistic Mentality (Spring Mills, Pa.: Libertarian Press,  1990).
Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution(Auburn, Ala.: Ludwig von Mises Institute,  1985).
Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (Kansas City, Kans.: Sheed Andrews and McMeel,  1978).
Ludwig von Mises, “The Historical Setting of the Austrian School of Economics,”  in Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 53–76.
See Mises, Omnipotent Government, pp. 95–96; also John Maynard Keynes, The Economic Consequences of the Peace, in D. E. Moggridge, ed., The Collected Works of John Maynard Keynes(New York: Macmillan Co.,  1971), pp. 5–7
See Hermann Levy, Economic Liberalism (London: Macmillan Ltd., 1913), p. 1; Wilhelm Röpke,German Commercial Policy (London: Longman, Green and Co., 1934); and Gustav Stolper, German Economy, 1870–1940 (New York: Reynal and Hitchcock, 1940), pp. 60–92.
Gustav Stolper, This Age of Fable: The Political and Economic World We Live In (New York: Reynal & Hitchcock, 1942), pp. 7–8.
See Richard M. Ebeling, “World Peace, International Order and Classical Liberalism,”International Journal of World Peace (December 1995), pp. 47–68.
See T. E. Gregory, “Economic Nationalism,” International Affairs (May 1931), pp. 289–306; Lionel Robbins, “The Economic Consequences of Economic Nationalism,” Lloyds Bank Limited Monthly Review (May 1936), pp. 226–39; William E. Rappard, “Economic Nationalism,” in Authority and the Individual, Harvard Tercentenary Conference of Arts and Sciences (Cambridge, Mass.: Harvard University Press, 1937), pp. 74–112; Michael A. Heilperin, Studies in Economic Nationalism(Geneva: Libraire E. Droz, 1962).
See Leo Pasvolsky, Economic Nationalism of the Danubian States (New York: Macmillan Co., 1928); Antonin Basch, The Danubian Basin and the German Economic Sphere (New York: Columbia University Press, 1943); Frederick Hertz, The Economic Problems of the Danubian States: A Study in Economic Nationalism (London: Victor Gollancz, 1947).
See A. G. B. Fisher, Economic Self-Sufficiency (Oxford: Clarendon Press, 1939); and Leo Grebler, “Self-Sufficiency and Imperialism,” Annals of the American Academy of Political and Social Science(July 1938), pp. 1–8.
See F. A. Hayek, “Monetary Nationalism and International Stability”  in Stephen Kresge, ed., The Collected Works of F. A. Hayek, Vol. VI: Good Money, Part II (Chicago: University of Chicago Press, 1999), pp. 27–100; and Lionel Robbins, Economic Planning and International Order (London: Macmillan Ltd., 1937), pp. 280–301.
See Wilhelm Röpke, International Order and Economic Integration (Dordrecht, Holland: D. Reidel Publishing Co., 1959), pp. 75–77; also T. E. Gregory, The Gold Standard and Its Future (New York: E. P. Dutton, 1935), pp. 1–21; and Moritz J. Bonn, “The Gold Standard in International Relations,” in William E. Rappard, ed., Problems of Peace, 8th Series (Freeport, N.Y.: Books for Libraries,  1968), pp. 163–79.
See Leland B. Yeager, Experiences with Stopping Inflation (Washington, D.C.: American Enterprise Institute, 1981), pp. 45–98.
See Frederic Benham, “The Muddle of the Thirties,” Economica (February 1945), pp. 1–9.
See William E. Rappard, Post-War Efforts for Freer Trade (Geneva: Geneva Research Centre, 1938) and “The Common Menace of Economic and Military Armaments,”  in Varia Politica,Republication of Essays by William Rappard on the Occasion of His Seventieth Birthday (Zurich: Editions Polygraphics, 1953), pp. 76–100; Jacob Viner, “International Economic Relations and the World Order,” in Walter H. C. Laves, ed., The Foundations of a More Stable World Order (Chicago: University of Chicago Press, 1940), pp. 42–45; Commercial Policy in the Interwar Period: International Proposals and National Policies (Geneva: League of Nations, 1942); and Ragnar Nurkse,International Currency Experience: Lessons of the Inter-war Period (Princeton, N.J.: Princeton University Press, 1944).
See Ludwig von Mises, “The Disintegration of the International Division of Labor,”  in Richard M. Ebeling, ed., Money, Method, and the Market Process, pp. 113–36; and Wilhelm Röpke,International Economic Disintegration (Philadelphia, Pa.: Porcupine Press,  1978).
See Moritz J. Bonn, “Introductory Address,” in The State and Economic Life, A Record of a First International Study Conference (Paris: International Institute of Intellectual Cooperation, 1932), pp. 7–15; J. B. Condliffe, “Vanishing World Trade,” Foreign Affairs (July 1933), pp. 645–56; Lionel Robbins, The Great Depression (London: Macmillan Ltd., 1934); Gustav Stolper, “Politics versus Economics,” Foreign Affairs (April 1934), pp. 357–76; P. W. Martin, “The Present Status of Economic Planning: I. An International Survey of Governmental Economic Intervention,” International Labour Review (May 1936), pp. 619– 45; Henry J. Tosca, World Trade Systems (Paris: International Institute of Intellectual Cooperation, 1939); Margaret S. Gordon, Barriers to World Trade: A Study of Recent Commercial Policy (New York: Macmillan Co., 1941); and Richard M. Ebeling, “Liberalism and Collectivism in the 20th Century,” in Alexsandras Shtromas, ed., The End of “Isms”? Reflections on the Fate of Ideological Politics After Communism’s Collapse (Cambridge, Mass.: Blackwell Publishers, 1994), pp. 69–84.
See J. B. Condliffe, “The Value of International Trade,” Economica (May 1938), pp. 123–37.
William E. Rappard, “Nationalism and the League of Nations Today,” in Problems of Peace, 8th Series (New York: Books for Libraries Press,  1968), pp. 17–19; also by Rappard, The Crisis of Democracy (Chicago: University of Chicago Press, 1938); and William Henry Chamberlin,Collectivism: A False Utopia (New York: Macmillan Co., 1938).
See J. B. Condliffe, The Reconstruction of World Trade: A Survey of International Economic Relations (New York: W. W. Norton & Co., 1940); Michael A. Heilperin, “Totalitarian Trade,” World Affairs Interpreter (January 1941), pp. 1–8; Lewis L. Lorwin, Economic Consequences of the Second World War (New York: Random House, 1941); Douglas Miller, You Can’t Do Business with Hitler(Boston: Little, Brown and Co., 1941); Thomas Reveille, The Spoil of Europe: The Nazi Technique in Political and Economic Conquest (New York: W. W. Norton, 1941); Howard Ellis, “The Problems of Exchange Systems in the Postwar World,” American Economic Review (May 1942), pp. 195–205; Frank Munk, The Legacy of Nazism: The Economic and Social Consequences of Totalitarianism (New York: Macmillan Co., 1943); and Jacob Viner, Trade Relations Between Free Market and Controlled Economies (Geneva: League of Nations, 1943).
See Henry Simons, “Trade and the Peace,” in Seymour E. Harris, ed., Postwar Economic Problems (New York: McGraw-Hill Book Co., 1943), pp. 141–55; also Benjamin M. Anderson, “The Road Back to Full Employment,” in Paul T. Homan and Fritz Machlup, eds., Financing American Prosperity: A Symposium of Economists (New York: Twentieth Century Fund, 1945), pp. 9–70.
Howard Ellis, “Removal of Restrictions on Trade and Capital,” in Seymour Harris, ed., Postwar Economic Problems, p. 345; see also Richard M. Ebeling, “The Global Economy and Classical Liberalism: Past, Present, and Future,” in Richard M. Ebeling, ed., The Future of American Business, Champions of Freedom Series, Vol. 24 (Hillsdale, Mich.: Hills-dale College Press, 1996), pp. 9–60, especially pp. 18–23, on the relationship between domestic intervention and “demand management,” and regulation of international trade.
Charles E. Merriam, “The Place of Planning,” in Seymour E. Harris, ed., Saving American Capitalism: A Liberal Economic Program (New York: Alfred A. Knopf, 1948), p. 161
See Eugene Staley, World Economy in Transition: Technology vs. Politics, Laissez Faire vs. Planning, Power vs. Welfare (Port Washington, N.Y.: Kennikat Press,  1971), pp. 127–200 and 225–326, and “The Economic Side of Stable Peace,” Annals of the American Academy of Political and Social Science (July 1945), pp. 27–36; and J. B. Condliffe, Agenda for a Postwar World (New York: W. W. Norton, 1942).
See Jacob Viner, “The International Economic Organization of the Future,” in Ernest H. Wilkins, ed., Toward International Organization (New York: Harper & Brothers, 1942) and “International Economic Cooperation,” in William B. Willcox and Robert B. Hall, eds., The United States in the Postwar World (Ann Arbor, Mich.: University of Michigan Press, 1947), pp. 15–36; also J. B. Condliffe and A. Stevenson, The Common Interest in International Economic Organization (Montreal: International Labor Organization, 1944).
See H. W. Arndt, The Economic Lessons of the Nineteen-Thirties (London: Oxford University Press, 1944), pp. 295–302; Murray Shields, ed., International Financial Stabilization: A Symposium(New York: Irving Trust Co., 1944); Michael A. Heilperin, International Monetary Organization: The Bretton Woods Agreements (Washington, D.C.: American Enterprise Association, 1945); Nathaniel Weyl and Max J. Wasserman, “The International Bank, An Instrument of World Economic Reconstruction,” American Economic Review (March 1947), pp. 93–107; Raymond F. Mikesell, “Quantitative and Exchange Restrictions under the ITO Charter,” American Economic Review (June 1947), pp. 351–68; Philip Cortney, The Economic Munich: The I.T.O. Charter, Inflation or Liberty, The 1929 Lesson (New York: Philosophical Library, 1949); Henry Hazlitt, From Bretton Woods to World Inflation: A Study of Causes and Consequences (Chicago: Regnery Gateway, 1984)
However, on the extent to which governments did attempt to influence for political or economic reasons the private patterns of foreign loans and investments in the nineteenth and early twentieth centuries, see Jacob Viner, “Political Aspects of International finance,” Journal of Business (April and July 1928), pp. 141–73 and 324–63.
Henry Hazlitt, “The Coming Economic World Pattern,” [1944–45] in From Bretton Woods to World Inflation: A Study of Causes and Consequences, pp. 127–42.
See Gottfried Haberler, “The Liberal International Economic Order in Historical Perspective,”  in Anthony Y. C. Koo, ed., The Liberal Economic Order, Vol. I (Brookfield, Vt.: Edward Elgar, 1993), pp. 354–55; and Jagdish Bhagwati, Protectionism (Cambridge, Mass.: MIT Press, 1988), pp. 1–15.
See Jan Tumlir, Protectionism: Trade Policy in Democratic Societies (Washington, D.C.: American Enterprise Institute, 1985)
Jean-François Revel, Why Democracies Perish (Garden City, N.Y.: Doubleday, 1984)
Paul Samuelson, Economics (New York: McGraw-Hill, 7th ed., 1967), pp. 790–92; and Campbell R. McConnell, Economics: Principles, Problems, and Policies (New York: McGraw-Hill, 10th ed., 1987), p. 904.
The term and concept of Lebensraum apparently was first coined and argued for by the German author Moeller van den Bruck (1876–1925), after the first World War; see Frank Munk, The Economics of Force (New York: George W. Stewart, 1940), pp. 23–24.
See Henry Simons, Economic Policy for a Free Society (Chicago: University of Chicago Press, 1948), pp. 62–65 and 160–83; Irving fisher, 100% Money (New Haven: City Printing Co., 1945); James W. Angell, “The 100 Per Cent Reserve Plan,” Quarterly Journal of Economics (November 1935), pp. 1–35; and Frank D. Graham, “Partial Reserve Money and the 100 Per Cent Proposal,” American Economic Review (September 1936), pp. 428– 40; also Milton Friedman, “A Monetary and Fiscal Framework for Economic Stability,”  in Essays in Positive Economics (Chicago: University of Chicago Press, 1953), pp. 135–36, and A Program for Monetary Stability (Bronx, N.Y.: Fordham University Press, 1960), pp. 65–76; and Lloyd W. Mints, Monetary Policy for a Competitive Society(New York: McGraw-Hill, 1950).
For a defense of a 100 percent gold reserve system by a student of Mises’s, see Murray N. Rothbard, “The Case for a 100 Percent Gold Dollar,” in Leland B. Yeager, ed., In Search of a Monetary Constitution (Cambridge, Mass.: Harvard University Press, 1962), pp. 94–136.
Mises, The Theory of Money and Credit, pp. 434–38; “Monetary Stabilization and Cyclical Policy,” pp. 138–40, 145–46, 156; and Human Action, pp. 443–48; also Lawrence
H. White, “Mises on Free Banking and Fractional Reserves,” in John W. Robbins and Mark Spangler, eds., A Man of Principle, 517–33.
Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (New York: New York University Press,  1983), pp. 9–56.
Mises, Liberalism, pp. 105–24.
See Richard M. Ebeling, “World Peace, International Order, and Classical Liberalism,” pp. 59–62, and “Nationalism and Classical Liberalism,” “Nationalism: Its Nature and Consequences,” “National Conflicts, Market Liberalism, and Social Peace,” and “Social Conflict, Self-Determination, and the Boundaries of the State,” in Richard M. Ebeling and Jacob G. Hornberger, eds., The Failure of America’s Foreign Wars (Fairfax, Va.: Future of Freedom Foundation, 1996), pp. 327–48.
This report has been translated into Spanish and published in Mexico for the first time as a monograph fifty-five years after it was originally written under the title Problemas Economicos de Mexico: Ayer y Hoy (Mexico City: Instituto Cultural Ludwig von Mises, 1998).
For example, see Adam Smith, The Wealth of Nations (New York: Modern Library,  1937), Book IV, Ch. II, p. 438; Jean-Baptiste Say, A Treatise on Political Economy (New York: Augustus M. Kelley,  1971), p. 170.
See Ludwig von Mises, “Observations on the Cooperative Movement,”  in Richard M. Ebeling, ed., Money, Method, and the Market Process, pp. 238–79.
See Richard M. Ebeling, “The Free Market and the Interventionist State,” in Richard M. Ebeling, ed., Between Power and Liberty: Economics and the Law, Champions of Freedom Series, Vol. 25(Hillsdale, Mich.: Hillsdale College Press, 1998), pp. 9–46.
[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. 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.
It was an article he published in 1920, 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.
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. 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.
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.”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.
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.
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. The new Nazi regime soon began a methodical program of appropriating the 33,000 Jewish-owned businesses and enterprises in Vienna. 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.
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. 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. 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.
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. 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.
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. 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.
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.
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.”
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
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 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. 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.
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. 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. 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.
To cover these expenditures, the Austrian government resorted to the printing press. 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.
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..
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. 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.
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.
In June 1931, Austria had appealed for financial assistance to provide funds needed to stem the massive loss of gold and foreign exchange. 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. 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.
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.”
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.
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.”
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. 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.”
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?
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. 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.
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.
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.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.
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.
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.
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. 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.
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.
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↩
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).
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.
Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,”  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.
Ludwig von Mises, Socialism (Indianapolis: Liberty Fund,  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.
Ludwig von Mises, Liberalism: The Classical Tradition (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,  1996).
Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,  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.
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.
Ludwig von Mises, “Anti-Marxism,”  Critique of Interventionism, pp. 71–95.
See Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,”Ideas on Liberty (January 2000), pp. 33–41.
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.)
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).
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).
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.
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.
Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press,  1978), p. 115.
Ludwig von Mises, Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996).
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.
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.
Mises, Notes and Recollections, pp. 76 & 91.
Ibid., pp. 74–75.
Ibid., pp. 91–92.
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,  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,  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).
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.
See Joseph Redlich, Austrian War Government (New Haven, Conn.: Yale University Press, 1929).
On the nationalist currents in Austria-Hungary, see Oscar Jaszi, The Dissolution of the Habsburg Monarchy (Chicago: University of Chicago Press, 1929).
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.
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,”  in Rent Control, A Popular Paradox (Vancouver: Fraser Institute, 1975), pp. 67–83.
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.
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.
J. van Walre de Bordes, The Austrian Crown: Its Depreciation and Stabilization, pp. 48–50, 83, 115–39.
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
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,”  in Money, Capital, and fluctuations: Early Essays (Chicago: University of Chicago Press, 1984), pp. 136–58.
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,  1983), pp. 161–63; and also in his The Theory of Money and Credit, pp. 234–37.
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.
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.
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.
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.”
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.”
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,”  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,”  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.
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,”  in Percy L. Greaves, ed., On the Manipulation of Money and Credit, pp. 173–203.
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
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,  1980).
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,  1985), pp. 112–16.
See also Mises’s “The Disintegration of the International Division of Labor,”  in Richard M. Ebeling, ed., Money, Method and the Market Process, pp. 113–36.
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,”  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.
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,”  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,”  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.
Ludwig von Mises, Epistemological Problems of Economics (New York: New York University Press,  1981).
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).
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,  1983).
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.
Ludwig von Mises, “Trends Can Change”  and “The Political Chances for Genuine Liberalism,”  in Planning for Freedom (South Holland, Ill.: Libertarian Press, 1980), pp. 173–84.
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.
Mises, Socialism, p. 13.
[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.]
This three-volume set of the Selected Writings of Ludwig von Mises has been published in reverse chronological order. The current volume, the last prepared in the series, in fact, is devoted to some of the earliest of Mises’s writings on a variety of economic issues. They mostly cover monetary, fiscal, and general economic policy matters in the Austro-Hungarian Empire before and during the First World War, with additional articles that Mises wrote in the postwar period that had not been included in volume 2. An appendix to the present volume includes a talk that Mises delivered at his private seminar, which would meet in his office at the Vienna Chamber of Commerce, in the spring of 1934 on the methodology of the social sciences, before he moved to Geneva, Switzerland; and the curriculum vitae that his great-grandfather prepared for the Habsburg Emperor in 1881 as part of his ennoblement that gave him and his heirs the hereditary title of “Edler von.”
It is in the second volume of the Selected Writings (2002), Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, that the reader will find a large collection of Mises’s many articles and policy pieces from the 1920s and 1930s dealing with the Great Austrian Inflation, fiscal and regulatory mismanagement by the government, and the negative effects of numerous forms of government intervention and controls before and during the Great Depression. The volume also includes critiques of socialist central planning and his defense of praxeology, the science of human action.
The third volume of the Selected Writings (2000), The Political Economy of International Reform and Reconstruction, focuses on Mises’s writings mostly from the first half of the 1940s. In the midst of the Second World War, Mises lectured and wrote on the pressing issues of how Europe, small nations, and underdeveloped countries could recover [xii] from war and poverty and start on the path to economic renewal and prosperity.
Each volume begins with an introduction in which I try to explain the historical context in which Mises wrote the pieces in that particular volume. I have also tried to assist the reader with footnotes explaining some of the ideas, persons, events, or geographical locations to which Mises refers in the text.
This project developed out of the discovery of the “lost papers” of Ludwig von Mises in a formerly secret KGB archive in Moscow, Russia, in 1996. Looted by the Gestapo from Mises’s Vienna apartment in March 1938 shortly after the Nazi annexation of Austria into the German Third Reich, they ended up among a huge cache of stolen documents, papers, and archival collections that the Nazis had plundered from all over occupied Europe. At the end of the Second World War the entire cache, including Mises’s papers, was captured by the Soviet Red Army in a small town in western Czechoslovakia. After being informed about what had been captured, Stalin instructed that it all be brought to Moscow and that a secret archive be built to house it. For half a century, only the Soviet secret police and the Soviet Ministry of Foreign Affairs had access to the collections in this archive.
In the introduction to volume 2 in these Selected Writings of Ludwig von Mises, I describe in detail how my wife and I came to find out about this archive and the existence of Mises’s papers among them, amounting to about 10,000 pages of material. In October 1996, we journeyed to Moscow and spent about two weeks carefully going through the entire collection of Mises’s papers. We returned to the United States with photocopies of virtually the entire collection, which includes Mises’s correspondence, unpublished manuscripts, published articles, policy memoranda prepared during the years when he worked for the Vienna Chamber of Commerce, material relating to his teaching at the University of Vienna and his famous private seminar, and his military service during the First World War. Many of the articles, policy memoranda, essays, and speeches that were found among Mises’s “lost papers” have been included in this series, especially in volumes 1 and 2 of his Selected Writings.
Shortly after the discovery of the “lost papers” was announced, Liberty Fund contacted Hillsdale College and me about the possibility of publishing a selection of these and some of Mises’s related essays, lectures, and articles covering the period from before the First World War [xiii] to the 1940s during the Second World War. I most happily accepted Liberty Fund’s kind offer to serve as editor of the translations (mostly from German) and to prepare the volumes for publication.
It has been a labor of love that has ended up taking far longer to complete than I had expected. A good part of the delay in finishing the last of these volumes was due to a five-year “distraction” during which I served as the president of the Foundation for Economic Education (FEE) from 2003 to 2008. But my return to the “calmer” life of academia has permitted me to finally finish the task.
Ludwig von Mises is most famous for his great works on monetary theory, socialist central planning, the general theory of the market process, and the methodology of the social sciences, the leading ones, of course, being The Theory of Money and Credit; Socialism: An Economic and Sociological Analysis;Liberalism; Critique of Interventionism; Epistemological Problems of Economics; Bureaucracy;Omnipotent Government; Human Action: A Treatise on Economics; Theory and History; and The Ultimate Foundations of Economic Science.
But what the Selected Writings of Ludwig von Mises, in general, bring out is the “unknown Mises,” if you will. Not the Mises of grand economic theory and sweeping political economy, or the fundamental problems of human action. Here, instead, is Mises as applied economist, detailed policy analyst, and economic policy problem-solver in the detailed reality of the many pressing public policy issues that confronted the old Austro-Hungarian Empire and the new Austrian Republic in the aftermath of the Great War, and then the need for reconstruction and economic reform after the Second World War.
For those who have sometimes asked, “Well, but how do you apply Austrian economics to the ‘real world’ of public policy?” here is the answer by the economist who was considered the most original, thoroughgoing, and uncompromising member of the Austrian School in the twentieth century!
Indeed, it can be argued that it was having to grapple with the intricacies of these types of everyday economic policy issues during a time of great, and sometimes cataclysmic, change in the Europe and the Austria of the first half of the twentieth century that helped to guide and form Mises’s thinking on those wider and more general problems for which he is most famous.
The Selected Writings of Ludwig von Mises provide an insight into and a better understanding of the first two-thirds of Mises’s long and [xiv] productive life as a professional economist in a way that has not been available before. It also brings into English translation for the first time the vast majority of his practical economic policy writings from this, in many ways his most prolific, period before he left war-ravaged Europe in 1940 to make a new home and career for himself in the United States.
INTRODUCTION TO VOLUME 1↩
The articles and lectures included in this volume by the Austrian economist Ludwig von Mises were written in the years before, during, and after the Great War of 1914-18, as the First World War used to be called. They focus on the monetary, fiscal, and general economic policy problems of, first, the Austro-Hungarian Empire and, then, the new postwar Austrian Republic after the dismantling of the Habsburg Monarchy.
For those who may be familiar with Mises’s more theoretical works on various themes of monetary theory and policy, comparative economic systems—capitalism, socialism, and interventionism—the general nature and workings of the market economy, or the methodology and philosophy of the social sciences, most of these articles and lectures (like the ones in volume 2 and 3 in this series) offer a different [xvi] perspective on Mises as an applied economist. Here is not the broad theorist concerned, often, with stepping back from the particular details of specific historical circumstances to investigate and evaluate the essential and universal properties of human action; or the institutional prerequisites for economic calculation and the rational allocation of resources among competing ends; or the relationships between time preference, investment time horizons, monetary expansion, and the sequential stages of the business cycle.
Instead, these essays investigate and analyze the historical and institutional workings of the pre-World War I monetary system of the Austro-Hungarian Empire, and the issues surrounding legal specie redemption for the banknotes of the Austro-Hungarian Bank; the politics behind the establishment of the gold standard in Austria-Hungary; the growing fiscal imbalances developing in the Habsburg Empire due to the patterns of government spending and taxing policies in the first decade of the twentieth century; and the reasons behind the economic crisis that hit Austria-Hungary in the years immediately before the start of the Great War. Here, too, we see Mises analyzing during the war the motives behind German and Austro-Hungarian trade policy, the impact and significance of emigration from Austria, the effects from the monetary inflation used to fund the government’s war expenditures, and the pros and cons of financing those war expenditures through taxation versus borrowing by the issuance of war bonds.
After the war, Mises explains the distorting effects from the new Austrian government’s control and rationing of foreign exchange for imports and exports; the impact on the Austrian foreign exchange rate of monetary expansion to finance the government’s huge deficit spending; a specific policy agenda to bring the country’s financial house back into order, and the need for cooperation from both businesses and labor unions if this was to be achieved without Austria’s currency collapsing into hyperinflation; the claims that holders of banknotes of the old Austro-Hungarian Bank could make on the new Austrian National [xvii] Bank in the postwar period; Austria’s fiscal problems in the period after the end of the inflation; and the lessons for banking reform after the collapse of several banks in 1931.
Ludwig von Mises became immersed in these issues because he had to earn a living outside the Austrian academic arena. University teaching appointments were few and far between in Austria both before and after the First World War, even though Mises was clearly qualified for such a position. His only formal relationship with the University of Vienna, after graduating in 1906 with a doctoral degree in jurisprudence, was as a privatdozent (an unsalaried lecturer), which permitted him the privilege of offering seminars during the academic year. Mises offered such a seminar almost every term from 1913 to 1934 (except for most of the time during the Great War). He was promoted to professor extraordinary in May 1918, but this was a purely honorific title that was still unsalaried and with a nominal “tenure” as a professor in this status.
However, from 1920 until the spring of 1934, Mises organized and chaired a privatseminar (private seminar) of interested scholars in the fields of economics, history, sociology, political science, and philosophy. It met twice a month between October and June on Friday evenings at 7 p.m. at his office at the Vienna Chamber of Commerce. The private seminar came to an end when Mises accepted a full-time teaching position at the Graduate Institute of International Studies in Geneva, Switzerland, as professor of international economic relations beginning in autumn 1934.
Because an academic career was closed off to him, from 1909 to 1934 Mises made his living as an economic advisor and policy analyst for the Vienna Chamber of Commerce, Crafts, and Industry. First hired as an assistant for the drafting of documents, in 1910 he was promoted to deputy secretary. When he returned from active duty in the First World War, he was made “first secretary” at the Chamber, responsible for matters relating to a wide variety of areas including monetary and fiscal affairs, trade and financial issues, and administrative and constitutional law.
He developed and refined his skills as an economist having to deal with the everyday practical affairs and policy issues of the Austria of his time. He had to master and maintain a thorough and extremely detailed knowledge of the Austrian economy and the impact of Austrian government policy on the industrial, commercial, and monetary and fiscal affairs of the country. As Mises expressed it years later in his Memoirs:
My job with the Handelskammer [the Chamber of Commerce] greatly expanded my horizons. That I now have the material for a social and economic history of the downfall of the Austrian civilization readily at hand is to a great degree the result of the studying that was required of me to be able to carry on with my work in theHandelskammer. Travels that led me to all parts of old Austria-Hungary from 1912-1914 taught me much in particular. In visiting the centers of industry, my intent was to become acquainted with the industrial situation in view of the renewal of customs and trade relations with Hungary, and the adoption of new, autonomous tariffs and trade treaties.
The main thrust of my job with the Handelskammer was not dealing with commercial questions, but those pertaining to finance, currency, credit, and tax policy. In addition, I was given special assignments on [xix] an ongoing basis. From the time of the armistice until the signing of the Peace Agreement of Saint Germain [in September 1919] I was the consultant on financial questions to the Foreign Office. Later, when the terms of the peace treaty were put into effect, I was in charge of the office concerned with the prewar debt. In this capacity I had numerous dealings with the representatives of our former enemies. I was the Austrian delegate to the international Handelskammer [the International Chamber of Commerce] and a member of many international commissions and committees, whose insoluble task it was to facilitate the peaceful exchange of goods and services in a world pervaded by national hatred and the precursors of genocide.
At a relatively early age Mises seems to have formulated in his mind a rather comprehensive classical liberal worldview of the social order. His experience in the role of applied economist clearly left its mark and influenced his understanding of the effects that government intervention could have on the effective functioning of a modern market economy. To appreciate this, and the writings included in his volume, it is necessary to take a glance at the political and economic environment of the old Austro-Hungarian Empire and the Austrian monetary system as it developed in the nineteenth century.
The Habsburg Monarchy and the Austro-Hungarian Empire
The House of Habsburg, which came to rule a vast empire for nearly eight hundred years, had its origin in the thirteenth century. Through [xx] a series of royal marriages, treaties, and some conquests, the Habsburg Monarchy gained control over a large territory in Central and Eastern Europe, and for a period of time large areas in Western Europe as well, including Spain, parts of modern-day France, Italy, Germany, and Switzerland, and what later became Holland, Belgium, and Luxemburg. From the thirteenth century to the middle of the nineteenth century, the Habsburgs also nominally headed the Holy Roman Empire, or its later, loose German Confederation.
It was during this time, when the Habsburgs were beginning to dominate so much of Europe, that Emperor Frederick III (1415-93) had inscribed on official buildings the five vowels, A E I O U, which he interpreted as “Alles Erdreich Ist Österreich Untertan” (“All the earth is subject to Austria”), or in Latin, “Austriae Est Imperare Orbi Universo” (“Austria must rule the universe”).
The Habsburgs ruled as absolute monarchs. But under the influence of the Age of Enlightenment and the early phase of the French Revolution, Empress Maria Theresa (1717-70) and then her sons, Joseph II (1740-90) and Leopold II (1747-92), attempted to introduce various forward-looking reforms while retaining the principle of absolutism. The dark turn taken in the French Revolution and the rise of Napoleon to power shifted the monarchy back in a far more conservative direction under Francis II (1768-1835). With Napoleon’s victories over the German states, the Holy Roman Empire was dissolved and Francis II declared himself emperor of Austria in 1804.
As one of the final victors over the French after Napoleon’s defeat in Russia in 1812, the Habsburg Empire in Central and Eastern Europe was consolidated following the Congress of Vienna in 1815 as one contiguous territory that by the 1880s incorporated what are today Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia, Bosnia, and large parts of Italy, Poland, Ukraine, and Romania.
In the years just preceding the First World War, the Austro-Hungarian Empire covered a territory of about 415,000 square miles and included within its borders a dozen or so national and linguistic groups, including Germans, Hungarians, Czechs, Slovaks, Croatians, Romanians, Italians, Poles, Bulgarians, Serbians, Slovenians, and Ruthenians. Out of a population of 50 million the Germans and Hungarians [xxi] each numbered about 10 million, with the remaining 30 million made up of these other groups.
Europe of the nineteenth century experienced a relentless battle between four powerful ideas: monarchical absolutism, political and economic liberalism, integral nationalism, and revolutionary socialism. Absolutism insisted upon the divine rights of kings to rule without restraint; liberalism demanded the recognition of individual liberty, representative and limited constitutional government, and freedom of private enterprise from state control; integral nationalism (by the middle decades of the nineteenth century) increasingly insisted upon the unification and political independence of peoples sharing a common language, culture, and history, and finally a common ethnicity or race; and socialism called for the overthrow of private property, nationalization of the means of production, and greater economic and social equality by either violent or democratic methods. All four of these ideological forces were at work in the Habsburg Monarchy until the end of the Austro-Hungarian Empire in the ruins of the First World War.
The French Revolution of February 1848 reverberated across much of Europe, including in the Austrian Empire. Within days and weeks of the uprising in Paris, students on the streets of Vienna demanded constitutional change, and the Italians and Hungarians were in open revolt against their Habsburg rulers. By the end of 1849, however, the Italians and Hungarians had been crushed (the latter through the intervention of the Russian Imperial Army), and Habsburg rule was once more imposed with especial ruthlessness against the Hungarians.
At first reforms were promised to the Austrian liberals, with a constitution promised in July 1848. And when eighteen-year-old Francis Joseph (1830-1916) assumed the throne upon the abdication of his uncle, Ferdinand I (1793-1875), in December 1848, the new emperor gave his support to the constitutional changes. Almost immediately, however, [xxii] he reversed himself and insisted upon the reassertion of absolutist authority. What Francis Joseph had inherited from his ruling ancestors was a belief in “his divine right of unlimited monarchical power,” tempered with the idea “that his rule must, before all, produce the best possible results for the peoples of his realm. . . . Yet, up to the end he did not doubt that his empire, composed of so many different races and lands, could be governed successfully only by a hereditary monarch and according to his absolute will.” Thus, he could not make concessions that would have undermined his absolute rule in the name of caring for the well-being of his subjects.
Neither could he completely concede to the increasing nationalist sentiments of the diverse peoples in his large realm without also abdicating his responsibility as that benevolent ruler. Many Austrian liberals who lived a good portion of their lives under the reign of Francis Joseph believed that he twice missed the opportunity to successfully transform his multinational empire into a federal domain that might have reconciled the conflicting interests and demands of the national groups under his rule. The ideal of these liberals from the middle of the nineteenth century to the First World War had been what some of them called “the Austrian idea.” If a federal structure of government could have been set up in which each of these peoples had wide political and social autonomy within their own lands while sharing a common bond of economic freedom and civil liberties, the Habsburg Monarchy could have created on a larger and far grander scale what had been formed in the Swiss confederation with its reconciliation and harmony among its French-, German-, and Italian-speaking citizens.
Francis Joseph’s rejection of constitutional reforms and the reimposition of central authority over the Italians, Hungarians, and his Slav [xxiii] subjects in 1848-49 was the first chance lost for any such reconciliation. The second lost opportunity occurred following his defeat at the hands of the Prussians in 1866, when Bismarck pushed Austria out of the German Confederation. Fearful of the Hungarians taking advantage of the empire’s postwar weakness to claim full independence through another violent uprising, Francis Joseph agreed to the Ausgleich, the “Compromise,” of 1867 that transformed the Austrian Empire into the Austro-Hungarian Empire. While Francis Joseph remained emperor of both halves of his domain, Hungary became widely independent in many of its domestic affairs. Only a common customs and monetary system and a shared military and foreign policy completely linked Hungary to the Austrian “Crownlands” directly ruled by Francis Joseph’s government in Vienna.
As Hans Kohn, one of the twentieth century’s leading experts on the history and philosophy of nationalism, who had grown up under the rule of Francis Joseph in Prague, explained, “In the Compromise with the Hungarian nobility in 1867, the aspirations of the Czechs, Slovaks, Serbs, Croats, and Romanians, who in large majority were then still loyal to the dynasty, were sacrificed for the purpose of winning the assent of the Magyars to a common foreign and military policy on the part of what now became the Dual Monarchy.” Indeed, at first, several leading Czech and Hungarian nationalist leaders believed that the flowering of their people’s cultural and linguistic identities could best flourish in the wider setting of a multinational Habsburg Empire. But as the nineteenth century progressed this sentiment shifted into a belief that only national independence could secure these goals.
A far more liberal-minded voice in the Habsburg family was Francis Joseph’s son, Crown Prince Rudolf (1858-89), the heir to the throne. Among his personal tutors had been Carl Menger (1840-1921), the founder of the Austrian School of economics. Under Menger’s guidance, Crown Prince Rudolf had become well versed in the free trade and relatively laissez-faire ideas of the Classical economists.Menger [xxiv] also had coauthored with Rudolf a scathing criticism of the Austrian nobility, who were accused of having lost their sense of social duty and, instead, had escaped into frivolous court intrigues, pointless social entertainments, and financial irresponsibility. It was a clear call for recognition of and respect for the middle-class values of enterprise, frugality, and personal responsibility. The bourgeois virtues needed to replace the anachronistic role of the aristocracy in society, who had lost their way in the pretensions of power and lure of wasteful pleasures. But whatever influence the crown prince might have had on the course of events in Austria-Hungary was cut short by his suicide in 1889 at his hunting lodge at Mayerling.
The particularly nationalist imperialism of the Hungarians against the other peoples under their control was not the only problem as the nineteenth century progressed in terms of growing antagonism among the subject peoples in the Dual Monarchy. The German-Austrians, also, increasingly became defensive and antagonistic toward the rising nationalist aspirations of the Czechs, Poles, Slovenians, and others in the Crownlands, as well as the growing demands of the Hungarians for independence.
As Hans Kohn pointed out, “The spread of democracy, literacy, and economic well-being in the western half of the monarchy after 1867 strengthened the non-German nationalities there at the expense of the Germans. The result was that many Germans in the monarchy lost their faith in an Austrian idea as much as many Slavs and other non-Germanic peoples did. . . . By the end of the nineteenth century many Austrian Germans looked to the Prussian German Reich as their real home and venerated [Otto von] Bismarck.”
Looking back at the events that brought about the demise of the Habsburg Empire in the immediate aftermath of the First World War, Ludwig von Mises explained why many German-Austrians turned against liberalism as a foundation for the preservation of the monarchy and [xxv] the Austro-Hungarian state. Over the centuries German-Austrian settlers had made their homes in the eastern reaches of the empire. They brought with them the German language, culture, literature, commercial knowledge, and knowhow. They viewed themselves as a “civilizing force” among the lesser-advanced nationalities, especially among the Slavic peoples. Indeed, many of these subject peoples became acculturated into German-Austrian life, since the latter was the dominant group; the German language in particular became the venue for social and economic advancement. But as literacy and national consciousness awakened among these other peoples in the nineteenth century, loyalties to and identification with German-Austria and the Habsburg dynasty were replaced with a growing allegiance and sense of belonging to their own ethnic and linguistic groups.
Furthermore, these peoples had higher birth rates than the Germans living among them. Cities and towns that had been settled and predominantly populated by Germans for centuries became increasingly Czech or Hungarian or Polish or Romanian or Slovenian communities. German-Austrians found themselves shrinking minorities in lands that they had long considered to be their own politically, culturally, and commercially. This was especially true in the Czech lands with Prague at the center.
As the nineteenth century progressed, German-Austrians discovered that adherence to liberal principles of representative government and full individual and cultural equality before the law meant the demise of the German communities sprinkled across the Habsburg domains. For many German-Austrian liberals the choice was between a liberalism that would logically mean the decentralization and possible eventual breakup of the empire along nationalist lines, or advocacy of centralized political control, monarchical dictate when required, and subversion of democratic aspirations among the non-German peoples.
The first course meant the eventual loss of German political and cultural domination in the non-German lands; the second meant holding onto both political and cultural power as long as possible in the non-German areas of the empire, but only by increasingly alienating the other subject peoples. As Mises explained, part of the German-Austrian tragedy was that national and linguistic imperialism won over liberal idealism.
What enabled the Habsburg Empire to endure for fifty years after the establishment of the Dual Monarchy in 1867 was the constitutional order that had been implemented at the same time as theAusgleich (or “Compromise”). The Constitution of 1867, which accompanied the creation of “Austria-Hungary,” was imbued with the spirit of the classical liberal ideas that were then at their zenith in Europe. Every subject of the Habsburg emperor was guaranteed freedom of religion, language, association, profession, and occupation, and could appeal to a special higher court of law if a violation of these rights had occurred. Any subject might live wherever he chose throughout the emperor’s domain. Private property was secure, and relatively free trade prevailed within the boundaries of the empire, though protectionist barriers to international trade not only continued but grew in various ways in the last decades of the nineteenth and first decade of the twentieth centuries.
The economic free trade zone that made up the Austro-Hungarian Empire fostered significant economic development beginning in and especially after the 1880s, though very far from matching the economic progress in Western Europe or in Imperial Germany after 1871. However, various forms of government controls and regulations began to be domestically superimposed on the society, including the nationalization of the railways, starting in the 1880s. As a result, the remaining [xxvii] history of the monarchy was one of liberal freedoms introduced in 1867 being undermined by nationalist discord, periods of rule by central government decree, and the continuation or introduction of interventionist policies that merely intensified the antagonisms among the subject peoples. As A. J. P. Taylor explained:
In another way, the Austrian state suffered from its strength: it never had its range of activity cut down during a successful period of laissez-faire, and therefore the openings for national conflict were far greater. There were no private schools or hospitals, no independent universities; and the state, in its infinite paternalism, performed a variety of services from veterinary surgery to the inspecting of buildings. The appointment of every schoolteacher, of every railway porter, of every hospital doctor, of every tax collector, was a signal of national struggle. Besides, private industry looked to the state for aid from tariffs and subsidies; these, in every country, produce “log-rolling,” and nationalism offered an added lever with which to shift the logs. German industries demanded state aid to preserve their privileged position; Czech industries demanded state aid to redress the inequalities of the past. The first generation of national rivals had been the products of universities and fought for appointments at the highest professional level; their disputes concerned only a few hundred state jobs. The generation that followed them was the result of universal elementary education and fought for the trivial state employment that existed in every village; hence, the more popular national conflicts at the end of the century.
In spite of all this, and the international tensions and foreign policy fiascos that would eventually plunge Austria-Hungary and the rest of Europe into the calamitous cauldron of conflict in 1914, the Habsburg Monarchy succeeded in generating a cosmopolitan culture, especially in Vienna, that brought all the subject peoples together and fostered an inspiring and flourishing world of the arts, music, literature, philosophy, the humanities, and the sciences.
It gave many who lived in the postwar period of rising totalitarianism in the 1920s and 1930s a deep nostalgia for what seemed a far more [xxviii] civilized and humane epoch in turn-of-the-century Vienna. One voice that attempted to capture this “lost world” was that of Stefan Zweig (1881-1942), a renowned Austrian novelist and essayist who fled Vienna in 1934 and committed suicide in Brazil during the Second World War out of despair for all that was happening in the European world that he had known. In his posthumous work The World of Yesterday, he said:
One lived well and easily and without cares in that old Vienna. . . . “Live and let live” was the famous Viennese motto, which today still seems to me more humane than all the categorical imperatives, and it maintained itself throughout all classes. Rich and poor, Czechs and Germans, Jews and Christians, lived peaceably together in spite of occasional chafing, and even the political and social movements were free of the terrible hatred which has penetrated the arteries of our time as a poisonous residue of the First World War. In the old Austria they still strove chivalrously, they abused each other in the news and in the parliament, but at the conclusion of their ciceronian tirades the selfsame representatives sat down together in friendship with a glass of beer or a cup of coffee, and called each other Du [the “familiar” in the German language]. . . . The hatred of country for country, of nation for nation, of one table for another, did not yet jump at one daily from the newspaper, it did not divide people from people and nations from nations; not yet had every herd and mass feeling become so disgustingly powerful in public life as today. Freedom in one’s personal affairs, which is no longer considered comprehensible, was taken for granted. One did not look down upon tolerance as one does today as weakness and softness, but rather praised it as an ethical force. . . . For the genius of Vienna—a specifically musical one—was always that it harmonized all the national and lingual contrasts. Its culture was a synthesis of all Western cultures. Whoever lived there and worked there felt himself free of all confinement and prejudice.
For Zweig, thinking back on that bygone paradise, “It was sweet to live here, in this atmosphere of spiritual conciliation, and subconsciously every citizen became supernational, cosmopolitan, a citizen of the world.”
It was, of course, only an illusion. That twilight of the liberal era in the old Austro-Hungarian Empire about which Zweig was so nostalgic [xxix] had never been as pure and perfect as his mind recalled it. It was certainly true that liberal ideals had been established in the Constitution of 1867, and that they were implemented and enforced for the most part, especially in the Crownlands more directly under Emperor Francis Joseph’s imperial authority. But beneath the surface of tolerance, civility, and cosmopolitanism were all the undercurrents of racial and nationalist bigotry, economic collectivism, and political authoritarianism that poured forth like destructive lava from an exploding volcano during and in the aftermath of the First World War.
The Austrian Monetary System, 1867-1914
A leading theme of Mises’s articles in the first part of this volume concerns the reasons for and the resistance to the full implementation of a gold standard in Austria-Hungary. His arguments in these essays can be better understood against the backdrop of Austria’s monetary policies and experiences during the nineteenth century leading up to the currency reform act of 1892.
The story of the Austrian currency in the late eighteenth century and the first two-thirds of the nineteenth century is one of almost continual financial mismanagement. The government would debase the currency to cover its expenses, then make promises to put its budget on a sound footing, only to see another crisis arise requiring once again turning the handle on the monetary printing press.
The Austrian government made several experiments with state-chartered [xxx] banks in the 1700s. But each of these banks soon collapsed or was closed due to lack of public confidence following large quantities of paper monies being issued to cover government expenditures. These expenditures reached huge proportions during the long years of war between the Austrian Empire and first Revolutionary and then Napoleonic France.
Between 1797 and 1811, the supply of government paper money increased from 74,200,000 florins to 1,064,000,000 florins, yielding a fourteen-fold increase over this period. Not surprisingly, whereas the price of silver coin expressed in paper money was 118 in 1800, it rose to 203 by 1807, then to 500 by 1810, and reached 1,200 by 1811.
The government announced its intention in 1811 to stop the printing presses and issue a new currency that would be converted at the ratio of five old florins for one new florin, with the total amount of paper money in circulation to be reduced to 212,800,000 florins. But the renewal of the war with Napoleon in 1812 resulted in the new currency being increased to 678,716,000 florins by 1816, a near tripling of the “reformed” currency in five years.
With the final defeat of Napoleon, the Austrian government announced that it would use a portion of the war reparations being paid by France to retire about 131,829,900 florins from circulation, leaving the paper money supply outstanding at around 546,886,000 florins. This process was assisted with the establishment of a new National Bank of Austria, with the Bank withdrawing government paper money in circulation in exchange for its own banknotes, until by early 1848, the total currency supply in circulation had been reduced to 241,240,000 florins; that is, there was an almost two-thirds reduction in the paper money supply over a thirty-year period. The National Bank, in February 1848, had silver reserves of about 65,000,000 florins, or, an approximate 25 percent specie cover for its outstanding currency in circulation.
But all of these monetary reforms began to unravel with the outbreak of the revolution of 1848, especially the Hungarian revolt against Austrian rule. Within days, panic runs on the National Bank reduced its silver reserves to 35,023,000 florins, a 53 percent loss in specie. The Austrian government suspended silver redemption and banned the exporting of silver and gold. Putting down the revolution forced the government to again borrow heavily from the National Bank. As a result, confidence in the Bank fell so low that in 1849 the government publicly promised to stop borrowing and cease increasing the currency.
But the process started again in a few years with Austria’s military mobilization during the Crimean War, and then its wars against Italian nationalists and their French ally in a vain attempt to maintain control of portions of northern Italy. In 1850 government indebtedness to the National Bank had stood at 205,300,000 florins. With the Crimean War of 1854, the government’s debt increased to 294,200,000 florins. It was reduced to 145,700,000 florins by 1859. But the start of the Italian campaigns that year pushed it up again to 285,800,000 florins, along with a renewed suspension of specie payments as the public wished to redeem the paper currency representing the value of this enlarged debt.
In 1863, an attempt was made, once again, to introduce a currency reform—the Plener Act—this time along the lines of Britain’s Peel’s Bank Act of 1844. But Austria’s disastrous war with Prussia in 1866 pushed the supply of paper money in circulation from 80,000,000 florins before the conflict to 300,000,000 florins at its end.
The Compromise of 1867 that formally created the Austro-Hungarian Empire granted Hungary its own parliament, government, and domestic budget. It established a customs union and a common military and foreign policy between the two parts of the Habsburg domain, and a monetary union with the Austrian National Bank retaining its monopoly of note issue throughout Francis Joseph’s domain. Some of the Hungarian liberals had advocated a system of competitive note-issuing private banks in place of the National Bank, but secret agreements between the emperor’s government and the Hungarian nobility eliminated this as an option.
On July 1, 1878, the Austrian National Bank was transformed into the Austro-Hungarian Bank. The emperor, under joint nomination of the Austrian and Hungarian parliaments, appointed its governor. He was assisted by two vice-governors—one Austrian and the other Hungarian—appointed by the respective governments. The Bank’s operating privileges were renewed in 1887, 1899, and 1910, with few substantial changes in their detail.
Formally, from 1816, Austria had been on a silver standard. But as we saw, the Austrian National Bank maintained unofficial specie redemption only for limited periods of time, soon interrupted usually by another war crisis requiring currency expansion to fund the government’s expenditures.
The paper currency florin, not surprisingly, traded at a significant [xxxii] discount against the silver coin florin. Between 1848 and 1870, this discount was never less than about 14 percent and was often between 20 and 23 percent. But restrictions on note issuance under the operating rules of the Bank limited the expansion of the supply of banknotes. The provisions of the 1863 Bank Act limited the circulation of “uncovered” florins to 200,000,000. Any amount above that had to be covered by gold or silver coin or bullion. Any additional “uncovered” banknote issuance was subject to a penalty tax against the Bank of 5 percent.
With many of the major governments of Europe and North America establishing or reestablishing their economies on a gold basis in place of silver in the 1870s, the world price of silver began to fall. After the Austro-Prussian War of 1866, the government’s pressures on the Bank to fund deficits were greatly reduced, and the Bank could more or less follow the rules against uncovered note issuance. As a result, the paper florin’s discount relative to silver disappeared by 1878. Silver began to flow into Austria-Hungary in such quantities that the Bank was instructed by the government to end the free minting of silver.
As a result, the paper florin actually rose to a premium against silver. As Friedrich von Wieser expressed it, “Silver had become of less value than paper!” In addition, the florin was significantly appreciating in value against gold. The price in paper florins for 100 gold florins between 1887 and 1892 was:
|Average for the year
||Austrian florin notes
The major monetary issue, therefore, during these years was to bring a halt to any further increase in the value of the Austrian paper currency. In February 1892, the Austrian and Hungarian governments invited a group of professional and academic experts to meet and address a set of questions relating to whether a gold standard should be [xxxiii] adopted; if so, should it be monometallic or partly bimetallic with silver; what should be the status of government notes in circulation; how should the conversion from the existing florin to a gold standard be undertaken; and what monetary unit should be chosen?
Some of the most illustrious people in the field were brought together to offer their views and opinions on these questions. Thirty years later Ludwig von Mises described them in the following manner:
From March 8 to March 17, 1892, the government-convened Currency Inquiry Commission met in Vienna. The chairman was Finance Minister [Emil] Steinbach; beside him stood the memorable Eugen von Böhm-Bawerk, as section head. Thirty-six experts appeared before the commission to answer five questions that were posed by the government. No Austrian was left off the list of participants at the inquiry who had anything of importance to say on currency matters. Along with Carl Menger, the founder of the Austrian School of economics, there was Wilhelm von Lucam, the highly honored longtime secretary general of the Austro-Hungarian Bank; Moriz Benedikt, the publisher of Neue Freie Presse [New Free Press]; Theodor Thaussig, the spiritual leader of the Viennese banking world; and Theodor Hertzka, the well-known writer on monetary matters and social policy. The thick quarto volume that makes up the stenographic minutes of the inquiry remains today a source for the best ideas on all matters relating to monetary policy.
Virtually all of the participants spoke in favor of Austria’s adoption of a gold standard. Menger, for example, at one point said: “Gold is the money of advanced nations in the modern age. No other money can provide the convenience of a gold currency in our age of rapid and massive commodity exchanges. Silver has become a troublesome tool of trade. Even paper money must yield to gold when it comes to monetary convenience in everyday life. . . . Moreover, under present conditions only a gold currency constitutes hard money. Neither a bank note and treasury note nor a silver certificate can take the place of gold, especially in moments of crisis.”
Later summarizing the work of the commission, Wieser supported the adoption of the gold standard in colorful language:
Money is like speech; it is a means of intercourse. He who would have dealings with others must speak their language, however irrational he may find it. Language is rational by the very fact that it is intelligible to others, and more rational in proportion as it is intelligible to more people or to all. There can no more be an independent money system than independent speech; indeed, the more universal character of money, as compared with language, appears in this, that while a national language has its justification and significance in the intercourse of the world, there is no place for a national monetary system in the world’s intercourse. If Europe errs in adopting gold, we must still, for good or evil, join Europe in her error, and we shall thus receive less injury than if we insist on being “rational” all by ourselves.
The Currency Commission, in its official report to the Upper House of the Austrian Parliament, was no less adamant that gold, and only gold, was the recognized and essential international money. For that reason Austria-Hungary needed to adopt gold as the nation’s standard if it was to successfully participate in the commerce and trade of the world.
The commission proposed and the government accepted that the monetary unit would be renamed thekrone (the crown), with the new crown being equal to one-half the replaced florin. Standard coins would be gold pieces of ten and twenty crowns, each one being of 900 parts gold to 100 parts copper. The twenty-crown coin would have a full weight of 6.775067 grams, and a fine weight of 6.09756 grams. In 1892 an exchange rate for the crown was fixed at 1.05 Swiss francs and 0.8505 German marks.
Silver was kept as a secondary medium of exchange of limited legal tender status for smaller transactions. Government paper money was temporarily kept in circulation up to a certain maximum, but with the expectation of its eventual retirement. For the transition to a full gold standard with legally mandated redemption of banknotes for specie, it was expected that the Austro-Hungarian Bank would continue to accumulate sufficient supplies of gold until at an unspecified date formal redemption would be instituted.
An obligation to redeem crowns for gold was, in fact, never made into law. Yet from 1896 and most certainly after 1900 up until the outbreak of the war in 1914, the Austro-Hungarian Bank acted as if it now had that obligation and did pay in gold for its banknotes presented for redemption. Indeed, the oversight of this “shadow” gold standard (as it was called) by the Austro-Hungarian Bank, with maintenance of the exchange rate within a margin not much off the “gold points,” was praised by authorities at the time as an exemplary case of a highly successful “managed currency.”
Ludwig von Mises’s Writings on Monetary and Fiscal Policy Before the Great War
Ludwig von Mises’s earliest writings on monetary and fiscal policy were published between 1907 and 1914, and focused on these currency reform and related issues. He devoted a chapter in his Memoirsto explaining the background behind some of these articles. He details his frustrations when the articles resulted in his coming face-to-face for the first time with opposition by government officials to reasonable and publicly endorsed policies due to political corruption and misappropriation of “secret” slush funds that would be threatened by implementing a fully convertible gold standard.
But he does not go into very great detail about the content of these early essays. They may be grouped under two headings. The first consists of articles concerning the political pressures that finally led to putting Austria formally on the path of a gold standard in 1892, and the reasons for the resistance and delay in legally establishing gold convertibility up to the beginning of World War I. The second group deals with fiscal extravagance and the regulatory and redistributive intrusiveness of the Austro-Hungarian government, which was leading the [xxxvi] country to a potential financial and economic crisis. Even if the events of the war had not intervened to accelerate the process that culminated in an end to the nearly eight-hundred-year reign of the Habsburgs, the growth of the interventionist state was weakening the foundations of the country.
The earliest of these essays is “The Political-Economic Motives of the Austrian Currency Reform.” It is primarily an analysis of the changing factors influencing various interest groups that finally led to a sufficient coalition of these interests endorsing the move toward a gold standard. It highlights the fact that a major shift in economic policy is often dependent upon the vagaries of unique historical events, without which such a change might never have the chance to be implemented.
From 1872 to 1887, the Austrian currency had been depreciating on the foreign exchange market. Many of the agricultural and manufacturing interests in both Austria and Hungary did not object to this trend, since it reduced foreign competition by raising the costs of imports and worked to make Austrian goods more competitive in other countries. But beginning in 1887, the currency began to appreciate, and continued to do so until 1891. The same interests that were quite happy living with a currency losing value were extremely anxious with an appreciating currency that lowered the costs of imports and raised the costs of Austrian exports.
By the time the Austrian Currency Commission was convened in 1892, all the leading manufacturing, agricultural, and financial interests had agreed behind the scenes on the necessity for currency reform to bring the appreciation of the Austrian florin to a halt. And they all concurred on the desirability for Austria-Hungary to establish a gold standard, while they initially argued over the particular rate of exchange at which the new currency—the crown—would be stabilized.
Mises’s essay reads partly as what, today, would be considered a “public choice” analysis of the special-interest politicking that often guides [xxxvii] public policy. It brings out how a concentrated benefit to a wide array of interest groups served to generate a consensus on a significant institutional change in the existing monetary system. It also demonstrates how the costs or burdens imposed on a variety of smaller interest groups—particularly creditors and a number of medium-sized businesses who gained from currency appreciation, and conservatives who opposed a gold standard on ideological grounds—could be outweighed and outmaneuvered into being unable to prevent the monetary reform.
But at first, the Austro-Hungarian Bank was not legally compelled to redeem its notes for specie (gold). Its initial task was to prevent any further appreciation of the new crown from its formal foreign exchange rate. It was not given any direct instruction to prevent any renewed depreciation, if it were to occur. This, too, was consistent with the dynamics of the coalition of interest groups that had opposed any further increase in the value of the currency, but had not objected to the earlier years of currency depreciation.
But after 1896, the Austro-Hungarian Bank had accumulated enough gold and foreign exchange that it could assure the stability of the Austrian crown’s foreign exchange rate within both the upper and lower ends of the gold points, and in fact kept it within less than one percent of the parity rate most of the time. And after 1900, the Bank was redeeming and issuing its notes for gold as well as for foreign exchange on an unofficial de facto basis, while still not legally required to follow a policy of specie redemption.
This was the context in which Mises wrote four of the essays in this volume: “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” “The Foreign Exchange Policy of the Austro-Hungarian Bank,” “On the Problem of Legal Resumption of Specie Payments in Austria-Hungary,” and “The Fourth Issuing Right of the Austro-Hungarian Bank.”
Mises’s argument was that nothing was keeping the Austro-Hungarian Bank from now being given the legal obligation to redeem gold on demand for its banknotes, and thus formally joining the international community of gold standard nations. He insisted that this would immediately raise the creditworthiness of debt issued by the Austrian and Hungarian governments on foreign markets, and therefore lower the costs of borrowing from international creditors. It would also improve global confidence in Austria-Hungary as a developing nation desirous [xxxviii] of attracting foreign investment and lower the cost of international capital for Austrian entrepreneurs.
Opponents of formal specie redemption argued that requiring the Austro-Hungarian Bank to redeem gold would risk a large hemorrhage of specie reserves at any time an international crisis induced holders of crown notes to transfer their liquid capital out of the country. If during such an international crisis other central banks were to raise interest rates to protect their gold reserves from the danger of capital flight, the Austro-Hungarian Bank would be compelled to also raise its interest rate to prevent loss of its own gold reserves. Domestic manufacturing and commerce would then find that the cost of capital was held captive to the uncontrollable market forces of international finance. Domestic interest rates could experience swings that would carry negative effects for business within the country, merely to counteract speculators who wished to move gold in and out of the country to take advantage of interest rate spreads that had nothing to do with the legitimate needs of the import and export trade to facilitate international transactions. These critics argued that it was far better to maintain the present system of de facto specie payments, which gave the Austro-Hungarian Bank the latitude and liberty to, at any time, refuse gold or foreign exchange redemption for its notes to shelter the domestic economy from unnecessary and destabilizing interest rate changes.
Mises counterargued in these articles that since the 1860s, first the old Austrian National Bank and then its successor, the Austro-Hungarian Bank, had had legal authority to hold a sizable portion of its reserves against notes outstanding (even when official redemption was not imposed) in foreign bills of exchange, foreign currency, and other foreign-denominated assets that were, themselves, redeemable abroad in specie money. In other words, the Austrian central bank operated on the basis of a gold-exchange standard rather than a full gold standard. Through this method the Austro-Hungarian Bank was able to earn a significant interest income from its reserve holdings instead of letting its gold sit idle in the Bank’s vaults. At the same time, these foreign earnings not only went to the Bank’s stockholders, but were shared by law with the Austrian and Hungarian governments, thus reducing what otherwise might have been higher taxes to cover government expenditures.
For a long time the Bank already had been utilizing its holdings of foreign exchange and other foreign-denominated assets precisely to [xxxix] substitute for having to meet every demand with an actual gold outflow. This not only was an effective tool for meeting “legitimate” needs for specie in international transactions, but served to counteract speculative demands for gold or foreign exchange to keep the crown’s foreign exchange rate within the gold points, beyond which it would become profitable to export or import gold.
Furthermore, the Austro-Hungarian Bank did, in fact, export gold at times of international crisis, as well as on a regular basis. In normal times it exported gold precisely to replenish its stock of foreign exchange, foreign bills of exchange, and other foreign-denominated assets redeemable in specie abroad to maintain a supply sufficient to cover its international dealings and obligations. And during international financial crises it consciously exported gold to markets in Germany, Great Britain, and France to help alleviate the pressure for gold abroad, and at the same time earned a handsome return when gold prices were high. By supplying gold to foreign markets at such times, it also reduced the need to raise interest rates at home since the gold exports reduced the need for other central banks to raise their interest rates to protect their own gold reserves.
Finally, even while not legally obligated to redeem its notes for specie, the Austro-Hungarian Bank used its discount rate when it deemed it necessary to dampen the demand for both gold and other foreign-denominated assets among its reserves on the part of “speculators” and any others. Thus the Bank was already doing all the things that it would be required to do or could do under formal specie redemption to both maintain the official parity rate and preserve its gold reserves from undesired withdrawals. From any of the critics’ perspectives, no case could be reasonably made against the Austro-Hungarian government’s legislatively enacting the final completion of the currency reform process that had begun in 1892.
So why did the Austrian and Hungarian governments never pass legislation establishing formal specie redemption on the part of the Austro-Hungarian Bank? Mises gave no fully satisfactory answer in these articles, which were all published in respected scholarly journals of the time. However, in his MemoirsMises explained that behind the scenes the opposition to formal convertibility was partly because a portion of the rather large funds earned from foreign exchange dealings by the Austro-Hungarian Bank were hidden away in a secret account from which senior political and ministerial officials could draw for [xl] various “off the books” purposes, including influencing public opinion through the media. He learned about this special fund from Eugen von Böhm-Bawerk (1851-1914), the internationally renowned Austrian economist and Mises’s mentor, who told him about it off the record. Böhm-Bawerk was disgusted by the whole business and frustrated that even when he was finance minister (1900-1904), he had not been able to abolish the fund. A good part of the opposition and anger expressed against Mises’s defense of legal convertibility was the fear by those accessing these special funds that this source of money would dry up under the more transparent accounting procedures that would come with legal redemption.
In his 1909 article “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Mises did point out that one reason behind the opposition to legal convertibility was the resistance of the Hungarians. They wanted to weaken the power of the joint Austro-Hungarian Bank as a way to continue their drive for independence from the Habsburg Monarchy. Since the Compromise of 1867,
Hungarian politics have ceaselessly endeavored to loosen the common bonds that connect that country to Austria. The achievement of economic autonomy from Austria has appeared as an especially important goal for Hungarian policy as a preliminary step leading to political independence. The national rebirth of the non-Magyar peoples of Hungary—Germans, Serbo-Croatians, Romanians, Ruthenians, and Slovaks—will, however, pull the rug out from under these endeavors and contribute to the strengthening of the national ideal of Greater Austria. At the moment, however, Hungarian policy is still determined by the views of the Magyar nobility, and the power of the government rests in the hands of the intransigent Independence Party.
The nationalistic “rebirth” of these peoples under the often oppressive control of the Hungarians did not strengthen the “national ideal of Greater Austria”—that “Austrian idea” of a harmonious multinational empire under the reign of the Habsburgs—that Mises assumed and clearly hoped would triumph. Instead, the appeal of nationalism over individual liberty and liberalism that had been developing throughout [xli] the empire for decades finally contributed to the death of the Habsburg dynasty in 1918.
But if the centrifugal forces of nationalism were pulling the empire apart from within, it was also being undermined by the fiscal cost and growth of the state. This was the second theme in Mises’s policy writings before the First World War, in two essays: “Financial Reform in Austria” and “Disturbances in the Economic Life of the Austro-Hungarian Monarchy During the Years 1912-13.”
After having its financial house in order for almost twenty years, Mises pointed out, the Austrian government was now threatening the fiscal stability of the society with increasing expenditures, rising taxes, and budget deficits. Government spending was likely to significantly grow in future years partly due to the expenses of maintaining costly military forces in an environment of an international arms race. The other major factor at work on the spending side of the government’s ledger were social welfare expenditures that the Austrian authorities were taking on, and which would only grow in the years ahead. Already in the preceding ten years, government spending had increased by over 53 percent, and over the same decade the cost of funding the government’s debt had increased by nearly 20 percent. The cost of financing many of the ministries was exploding; the nationalized railway system was running large deficits that had to be covered from other government funding sources; and the Austrian Crownlands were managed with a three-layered bureaucratic system of administrators at the national, provincial, and municipal levels, each with its own rules, regulations, [xlii] and taxing authorities—and often in contradiction with each other.
To cover these expenditures, a wide variety of taxes were being increased, including inheritance taxes, sales and excise taxes, and income and corporate taxes. They frequently were manipulated to shift the incidence of the tax burden away from the agricultural and rural areas of Austria onto the shoulders of the urban populations and especially onto industry and manufacturing. In addition, the finance ministry wanted to implement legislation giving the government the authority to examine the books of businesses and industries. Mises observed that “Austrian entrepreneurs rightly see in this arrangement an intensification of the harassment that the authorities display toward them.” Although the tax rates and burdens that Mises analyzes and criticizes seem by today’s higher and more intrusive fiscal standards to be part of that bygone, idyllic world of limited government liberalism before the First World War, they all represented significant increases at the time, and all pointed in a dangerous direction for the future.
What Mises also found most disturbing in the coalition of political forces raising taxes and shifting them onto industry and the urban areas was a clear ideological bias against modern capitalist society. There were conservative and rural interests who wished for a return to the preindustrial era, Mises claimed, and were using their preponderant representation in the Austrian parliament to place roadblocks in the way of modernization, and delay if not stop the economic development of the country.
The economic crisis in Austria-Hungary in 1912 and 1913, Mises argued, showed that fiscal irresponsibility was pervasive in both the government and the private sector. Everywhere consumption spending was growing at the expense of savings, while everyone did all in their power to avoid work. Government expenditures were expanding and eating away at the hard-won wealth and capital accumulation of previous years as a result of government deficit spending. But the private sector was no more frugal than government. In every walk of Austrian life, people attempted to live beyond their means. Everyone lived on credit that depended upon the illusion that debts accumulating on the books of retailers and wholesalers eventually could be repaid. Retailers extended credit to their customers; wholesalers extended credit to retailers; and the financial institutions extended credit to the wholesalers, manufacturers, and merchants.
It was a financial game of musical chairs in which everyone throughout the entire chain of production and sales appeared to be prosperous and profitable only because of the claims on the books against others up and down the payment structure of the economy. A serious default anywhere along the line could set off repercussions that would threaten the entire financial system. And precisely because of this, whenever anyone failed to pay even a fraction of the balances owed, the lines of credit were extended further to put off the inevitable day of reckoning and keep the illusions going.
The financial crisis of 1912-13, Mises explained, had been partially that day of reckoning in which the financial system was found to be built on sand. Mises could only hope that some lessons would be learned: that consumption needed to be based on production, and debts undertaken needed to be repaid through savings, work, and investment. He feared that the lessons had not been learned. Within a matter of months after writing in early 1914 his analysis of the causes and consequences of this crisis, Austria-Hungary was plunged into a far more disastrous crisis from which it would not survive as a political entity.
In two pieces written in 1913, “The General Rise in Prices in the Light of Economic Theory” and “On Rising Prices and Purchasing Power Policies,” Mises had attempted to explain the monetary mechanism by which increases in the supply of money and credit bring about a general rise in prices. Mises develops part of the argument that he had formulated in 1912, in The Theory of Money and Credit, that the period of inflation through which Austria-Hungary and much of the world was passing was due to the expansion of credit by the banking system in the form of fiduciary media. The latter, in Mises’s terminology, are money substitutes in the form of banknotes and checking deposits that are claims against specie currency held as reserves by the central bank and other lending institutions. However, such fiduciary media may be of two sorts: those that Mises calls “commodity credit,” which is fully backed by bank reserves, and “circulation credit,” which is only partially backed by reserves in the banking system. It is the fractional reserve basis behind a growing amount of the fiduciary media in circulation, Mises insists, that is the real cause of price inflation and the business cycle. Creating and lending unbacked fiduciary media at [xliv] artificially lowered rates of interest produces an imbalance between savings and investment that leads to an unsustainable boom, which finally has to end in an economic downturn and a period of readjustment in the market.
But Mises suggested that another influence was generating a general rise in prices, which he argued was caused by the nature of monetary transactions in an increasingly complex market order. In a developed market with multistaged processes of production, in which producers no longer meet face-to-face with their ultimate consumers, each seller must fix his prices on the basis of his expectations about what he thinks buyers further down the production chain may be willing to pay. This expectation about what his buyer will be willing to pay, in turn, influences the price he will be willing to pay to the producer or wholesaler from whom he purchases goods.
To the extent that such a seller expects that his buyer may be willing to pay more, he then will be willing to pay prices to those who sell to him that he otherwise might consider too high. Thus, Mises argued, a dynamic is set in motion that results in a continuing rise in prices throughout the various sectors of the economy in a certain temporal sequence. For example, trade unions may demand wages higher than employers consider the workers’ labor to be worth. But if those employers are confident that they can pass on the cost of paying higher money wages to those to whom they sell their products, they acquiesce in money wage demands that would otherwise be unjustifiable. At the same time, the higher real wages that those workers hope to obtain through an increase in their money wages will be eroded as prices of finished goods continue to rise in the economy due to this general inflationary process throughout the market. What trade unions might consider their demonstrated capacity to improve the real wages of workers was illusionary, since over time any temporary gains would be washed out by the general rise in prices. In the long run workers [xlv] could not obtain real wages in excess of the value of their marginal product.
Mises went as far as to say that nothing really could be done about this inherent price-increasing process; he even suggested that it was indicative of a dynamic and growing economy in which constant shifts in supply and demand and the conditions and methods of production required pricing decisions to be made on the basis of expectations under inescapable uncertain future market conditions. Mises concluded that the fact that the economy was not static, and therefore not more fully predictable, was a reason for optimism that these changing economic circumstances were bringing about improvements all the time.
What is missing in this part of Mises’s analysis is any clear link with either a prior or simultaneous increase in the supply of money and fiduciary media that permits this price-inflationary process to continue, or an indication that the process implies an increase in the velocity of money that would allow the same number of market transactions to be facilitated at rising prices. As he formulated it in these two articles, his argument seems to represent a version of what in the post-World War II period became known as cost-push inflation.
War Financing, Inflation, and the Goals of International Trade Policy
When war broke out in summer 1914, Mises’s artillery reserve unit was called up for active duty. For part of the next four years he sometimes saw intense action on the eastern front against the Russian Army. However, in 1918, during the last year of the war, Mises was assigned to work in various consulting capacities for the Austrian High Command in Vienna. And for a short time he served in Austrian-occupied Ukraine involved with currency matters.
In 1916, he published “On the Goals of Trade Policy,” in which he presents a clear analysis of the gains from division of labor and international trade. But Mises goes on to explain that what motivated nations such as Germany and Austria-Hungary was a particular dilemma. For [xlvi] these relatively overpopulated countries in Europe, the greater economic opportunities in foreign countries resulted in emigration that meant a loss of manpower both for future wars and as part of the work-force during peace as well as at times of international conflict. Also, in the cultural struggles between countries, emigration meant a loss of part of a nation’s human heritage, since over time many such emigrants were absorbed into the culture and language of the host nation.
Thus, in countries like Germany and Austria-Hungary the task was to develop policies that would raise the living standards and opportunities in the homeland to reduce the incentive to leave and be “lost” to the fatherland. The nationalist trade method rejected free trade and erected protectionist barriers to artificially raise prices and secure domestic employments for the population. Alternatively, such a country could attempt territorial expansion into surrounding areas to gain the land and resources that would overcome the too densely populated condition within the pattern of existing political boundaries in which, for example, Germany was currently confined. One other method was to acquire colonies abroad to which emigrants could move while retaining their cultural identity and political allegiance to the fatherland.
Writing at a time of war, Mises carefully emphasized that these political trade policy goals were in the long run incompatible with the economic forces of an increasingly global market society. These forces were constantly working to guide both labor and capital to where their productive capacity was most highly valued, which inevitably would result in redistributions of people around the world to reflect their most optimal employments in the international division of labor. In the long run, the logic and incentives of the market would transcend the political goals of nationalist ideology.
In “Remarks Concerning the Problem of Emigration,” a memorandum that Mises prepared in 1918 for the Austrian government commission to which he was assigned in Vienna, he suggested a variety of domestic policies that would reduce the incentive for workers to leave Austria. These included making more farmland available out of existing larger estates for the benefit of small landholders who currently could not support their families on the properties they owned. It would be useful for the government and private associations to assist seasonal migrant labor in finding more attractive wage and work condition opportunities abroad, thus increasing the likelihood they would return home to a country that cared about their well-being. It was also necessary [xlvii] to reduce the burden and inconveniences of compulsory military service that too often induced some workers employed abroad to not come home.
Also in the summer of 1918, Mises delivered a public lecture, “On Paying for the Costs of War and War Loans.” He praised the military successes of Austria’s armed forces in its fight against the Allied Powers and the industrial efficiencies of Austrian business that had provided the manufacturing wherewithal for, Austria to do so well, even in the face of Allied blockades that cut Austria off from foreign sources of supply. But production had to be paid for, and the issue arose of whether the government’s war costs should be covered by taxation or debt.
Mises reminded his listeners that borrowing did not enable the current generation to shift any part of the costs of war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by forgoing all that could have been produced and used, if not for the war. Mises also explained to his audience what today is often referred to as the Ricardian equivalence theorem, named after British economist David Ricardo (1772-1823). In his 1820 essay, “Funding System,” Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.
But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. First, many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. [xlviii] This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and need for ready cash to pay the tax obligation. Second, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than the government’s. As a consequence, these private individuals would have to pay a noticeably higher interest rate than that at which the government could finance its borrowing. Thus, the interest burden from government borrowing to be paid for out of future taxes would be less for the citizenry than the financial cost of their having to borrow money in the present to cover all the costs of war through current taxation. Hence it was both patriotic and cost-efficient for those listening to Mises’s presentation to buy war bonds in support of the war effort.
Finally, in “Inflation,” another lecture delivered in the late summer of 1918, Mises explained the impact of the government’s financing a large amount of its war expenditures through monetary expansion. First, all creditors who had failed to anticipate the resulting depreciation in the value of the Austrian crown are paid back in money possessing less purchasing power than when the loan was issued. This might seem to be a desirable side effect, since clearly the debtor gains by paying back his loan in depreciated crowns, especially if it is “the poor” who are the predominant debtor group. But it was worth recalling, Mises said, that in modern society the debtors were most often businesses that had borrowed to cover investment costs, while the creditors were middle-class citizens, widows and orphans, civil servants, and members of the lower-income working class who had put their savings into the financial institutions that did the lending. Hence, Mises pointed out, in this debtor-creditor relationship, under inflation the “rich” benefited at the expense of the middle class and the “poor.”
Some saw the benefit from inflation in that it also reduced the real value of the government’s accumulating debt, thus reducing the “real” cost of the war. At the same time, rising money incomes and profits in the private sector due to inflation meant that the government gained higher tax revenues in money terms. On the other hand, to the extent [xlix] to which the government had covered part of its debt with foreign borrowing denominated in another currency, the falling value of the crown on the foreign exchange market due to inflation increased the amount of crowns the government had to pay to meet its foreign financial obligations. Also, some taxes were fixed at a specified level, so in this instance the taxpayer gained in real terms during inflation while the government lost. Furthermore, the worse and more continuing the inflation, the more reluctant citizens would be to buy war bonds and other government debt instruments, thus increasing the difficulties of financing the war other than through inflation. Thus, from a variety of perspectives, inflation was a dangerous and undesirable method of covering the costs of war, since it undermined the real wealth of the middle class and those in the working class who saved in an attempt to improve their position in society.
After War: Hyperinflation and Fiscal Mismanagement in the New Austria
In October and November 1918, the Austro-Hungarian Empire began to disintegrate as various national groups began to break away and declare their independence, most notably the Czechs and Slovaks, who joined in creating their own country, then the Hungarians, who were then followed by the Serbs, Croats, Slovenians, and Bosnians, who formed a new Yugoslavia. The Romanians soon began to incorporate Transylvania within their borders, and Italy seized south Tyrol and the port of Trieste. Galicia became a battleground between the Poles, the Ukrainians, and the Russian Bolsheviks in the next few years.
In what was declared the new state of German-Austria a coalition government was formed between the Social Democrats, the Christian Socialists, and the Nationalist Party. Almost immediately, they began a campaign of expensive food subsidies for the urban population at controlled prices, compulsory requisitioning of agricultural goods from the rural parts of the country, foreign exchange controls on all imports and exports at an artificial rate of exchange, a vast array of social welfare [l] programs, and the use of the monetary printing press to finance it all. By the middle of 1919 and then into 1920 and 1921, serious inflation had degenerated into hyperinflation.
Mises’s articles “Monetary Devaluation and the National Budget” and “For the Reintroduction of Normal Stock Market Practices in Foreign Exchange Dealings” explained that the foreign exchange rate was a market-created price that could not be simply fixed and manipulated by the state. The value of any one currency in terms of another was ultimately a reflection of each currency’s purchasing power. Guided by the “law of one price,” the market tendency was to establish the exchange rate at that point at which the attractiveness of buying some quantity of a good in either country was the same. Setting the exchange rate at some level other than the market-determined rate merely meant that it was artificially fixed at too dear or too cheap a price. In the face of the currency shortages that the exchange control resulted in, the government then commanded that all foreign exchange earnings be sold to the Austrian Exchange Control Authority at the fixed rate, with the government bureaucracy now determining the rationing of it to both importers and exporters.
Prohibiting normal foreign exchange dealings merely drove transactions underground into the black market, and prevented the functioning of those institutional arrangements through which individuals can hedge against uncertain fluctuations in the foreign exchange rate by utilizing a legal futures market. Instead, the inflationary environment, with limited legal avenues to “take cover” against the effects of a depreciating currency, meant that more and more people were shifting into the use of foreign monies in domestic Austrian business transactions. The foreign exchange controls needed to be abolished, and the printing presses needed to be brought to a halt if a monetary disaster was to be averted.
The fundamental cause for Austria’s problems was that it was in the stranglehold of the socialist idea, with all of its negative consequences. This was the theme in two pieces by Mises: “The Austrian Problem” and “The Social Democratic Agrarian Program.” The socialists were [li] determined to control and spend their way into the destruction of the country. Under this administration, taxes and inflation ate away at the accumulated wealth of the past and hindered any capital formation in the present. They demagogically promised wealth while causing waste by nationalizing and regulating industries that ended up suffering losses that needed to be paid for through even more inflation. Their agricultural agenda was to do with the rural economy the same harm they were doing with industry and manufacturing in the cities.
What was to be done? In February 1921, Mises presented the outline of a plan in answer to the question, “How Can Austria Be Saved?” The first order of business was to stop the monetary printing presses. But this could be done only if the costly food subsidies were eliminated and the nationalized industries were reprivatized to end the huge expenses to cover their deficits, so the national budget once again could be brought into balance. Foreign exchange controls had to be abolished with a free market in all currency dealings. At the same time, the value of the Austrian crown had to be stabilized once the central bank had stopped issuing paper money and the depreciation of the currency was brought to a halt. All domestic regulations and controls inhibiting free commerce among the various provinces of Austria had to be lifted, and free trade had to be reintroduced in all forms of foreign trade. This was the path to a revitalized and prosperous Austria.
A sound monetary system was unlikely if the governments of those new states that had formerly been part of the Austro-Hungarian Empire looted the assets of a reconstructed Austrian central bank. Thus, in “The Claims of Note Holders upon Liquidation of the Bank,” published in February 1921, Mises argued against those who asserted that those other governments had a right to a portion of the old Austro-Hungarian Bank’s gold reserves. Under the Treaty of Saint-Germain, which had ended the war between Austria and the Allied Powers, the successor states were obligated to redeem the old crown notes on their territories for their own respective currencies. The old Austro-Hungarian Bank notes were then to be turned over to the new Austrian central bank, which would take them out of circulation. Mises argued that everyone knew that the huge expansion of banknotes to fund the government’s war expenses were backed by nothing, and certainly not by whatever gold may have remained in the central bank’s vaults. To demand anything else would be to plunder the gold and other assets upon which a reconstituted Austrian monetary system would be built.
Mises observed in an article early in 1922, “The Austrian Currency Problem Thirty Years Ago and Today,” that the key to ending Austria’s problems was stopping inflation. Thirty years earlier, in 1892, the task had been to stabilize a currency that was appreciating in value. The task in 1922 was to bring a halt to its depreciation. But the method was the same: link the currency to gold and do not manipulate its quantity in circulation.
As the situation worsened, Mises put together a proposal on behalf of the Vienna Chamber of Commerce for “The Restoration of Austria’s Economic Situation,” which was submitted to other trade and labor union associations in the country to devise a way to bring an end to the government budget deficits as a prelude to stopping the inflation. In a nutshell, Mises recommended the establishment of price indexation throughout the economy. Already government expenditure levels were automatically adjusted in line with a cost-of-living index. Now the same arrangement had to be set up for government revenues. Otherwise nominal expenditures would keep growing while nominal tax revenues would always lag behind, never leading to an end to the deficits. Incomes, profits, and wages and prices all had to be indexed to the market value of gold. This would continually adjust government tax revenues to government expenditures. It would mean that government nationalized sectors, such as the railway system, would have their prices rise in tandem with the average rate of depreciation of the currency reflected in its link to the price of gold, which would help to reduce their losses and maybe even earn a profit from transit fees for cargos passing through Austria. At the same time, gold indexation would assist in keeping the wages and salaries of many workers rising to maintain a certain real value of their income.
Mises emphasized that such an indexation policy was desirable not only due to questions of equity in a period of rapid depreciation and the need to bring the government’s budget better into balance. It was also needed because inflation distorted the very essence of a money-using economy: the ability for economic calculation to reasonably estimate profit and loss, and relative profitability of alternative lines of production. Price and wage indexation linked to the price of gold would help to reduce the miscalculations that inflation caused, and which often resulted in capital consumption. This measure, Mises stated, was meant to be a transition method to bring stability to the Austrian economy, or, as he concluded, “We must make up our minds to return from [liii] the extravagant intoxication of spending ‘billions’ to the sober, more modest financial figures of a smaller state. The object of the proposed plan is to avoid a sudden and disastrous collapse.”
The inflation was brought to a halt in late 1922 and early 1923 with the financial assistance and supervisorial oversight of the League of Nations. In 1925, in “The Gold-Exchange Standard,” Mises pointed out that while Austria and a number of other countries were moving back to a gold-backed currency, it was not a full gold standard system. Most countries did not have large amounts of actual gold reserves, and gold coins were nowhere in circulation. Instead, their monetary systems (like that under the old Austro-Hungarian Bank) were gold-exchange standards, under which most reserves were held in other countries in the forms of financial assets that were, in principle, redeemable in gold in those other countries. The entire system depended upon at least a few countries, like the United States at that time, being willing to serve as ultimate gold reserve redeemers. Mises thought that this was only a shadow of the type of real gold-backed system that could assure noninflationary stability to the various countries of the world.
In 1926, Mises had spent three months traveling in the United States. When he returned he delivered the talk “America and the Reconstruction of the European Economy.” Any further European recovery from the effects of the Great War could not count upon American political or economic leadership. Both manufacturing and agricultural interests in the United States were heavily protectionist and therefore resistant to imports. This, in turn, made it difficult for Europeans to find markets for their goods or to earn the dollars to pay back their wartime loans to America. While the United States was a creditor nation with the means to invest in Europe, money would not be given away but would depend on the profitability of such investments. Thus Europe would have to rely upon itself if it was to continue to overcome the legacy of the war.
Mises pointed out the difficulty for such stable recovery and growth in a summary he presented in 1928, “The Currency and Finances of the Federal State of Austria.” Five years after the end to Austria’s inflation, the currency was on a relatively sound basis. A new schilling had replaced the old crown and was fixed at a specific value in terms of gold. The rules under which the new Austrian National Bank operated made it difficult for it to serve as a means to finance the expenses of the government.
However, the fiscal affairs of the nation were far from sound. The government was still running budget deficits, but all of it was due to cost overruns in the nationalized sectors of the economy, especially the railway system and the lumber industry in the nationalized forest system. Financial pressures were placed on the federal authority because of the tax and related transfers to the provincial governments, which were all overlaid with bureaucratic regulatory structures and mismanagement. And in Vienna, where the Social Democrats controlled the municipal government, the financial extravagance on public projects was exceptionally large. For domestic growth and international competitiveness, Austria had to make its economy more productive. Cutting wasteful government and radically reducing taxes was the only avenue to a prosperous future for Austria.
When the Great Depression began in the early 1930s, the banking system was badly shaken. The collapse in May 1931 of the Austrian bank, Credit-Anstalt, in particular, sent shock waves throughout the financial markets. Shortly afterward, Mises wrote “The Economic Crisis and Lessons for Banking Policy.” In his eyes, the banking systems in Germany and Austria had two weaknesses. First, too many banks had become financially entangled with the industrial corporations to whom they lent. In fact, they often had become major shareholders in the very companies whose financial status they were supposed to oversee with a critical eye in terms of continuing creditworthiness. Instead, they unsoundly extended more credit to companies they should have pulled back from because their own balance sheets were too closely linked to the illusion of their continuing profitability. Finally the situation imploded, taking the banks down with those companies.
Second, those same banks had poorly managed the term structure of their investment portfolios. They lent long, while being liable for depositor withdrawals on demand. In other words, they had become caught in the system of fractional reserve banking, in which the amount of claims payable on demand far exceeded their available cash reserves to meet depositor liabilities.
The banking crisis, as far as Mises was concerned, was not the end of capitalism, but showed the need to reorganize the way banks managed their liabilities and investments after the crisis had passed. Sounder banking principles in a market economy were the avenue to avoid similar crises in the future.
Interventionism, Collectivism, and Their Ideological Roots
In the 1920s, one of the contributions for which Mises was most famous was his theory of government intervention. In 1930, he published “The Economic System of Interventionism,” a brief summary of his critique of this practice, with particular emphasis on the deleterious effects from all forms of control over prices. While various forms of production regulations had the tendency to reduce productivity, price controls were a far more directly harmful type of intervention. They inevitably distorted the relationship between supply and demand, artificially generated either shortages or surpluses, and deflected production from those avenues most likely to satisfy consumer demand. They also had a tendency to spread out to more and more sectors of the economy, as the government imposed similar controls on other markets and industries in a vain attempt to compensate for the imbalances the earlier price controls had created. If followed to their logical conclusion, such price controls led to a fully planned economy through piecemeal interventions imposed one after another.
Where did all this lead? In “Economic Order and the Political System” (1936), Mises pointed out that in the eighteenth and early nineteenth centuries, political democracy, civil liberty, and economic freedom had grown hand in hand. But in the second half of the nineteenth century the idea had taken hold that political democracy and personal freedom could be preserved even if the government increasingly intervened in and controlled the economic affairs of the citizenry in the name of social justice and socialist planning.
What the twentieth century was showing, however, was that political democracy and individual freedom could not last long when government planning increasingly replaces the market economy. Economic planning means planning people’s lives, and people must then conform in all their affairs to what the plan dictates. In countries like Soviet Russia, fascist Italy, or National Socialist (Nazi) Germany even the appearance of preserving democratic and personal liberties had been discarded and the reality of where planning leads could be most clearly seen. This was the crossroads that now confronted the remaining relatively free and democratic societies in the West: freedom or planning.
More than twenty years later, in 1959, Mises offered “Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923,” when hyperinflation had brought Germany to the edge of total economic [lvi] collapse. He reflected back to when he was a young man before the First World War, during the years when he wrote those early pieces on the gold standard and had only just published The Theory of Money and Credit. He had attended the meetings of the Verein für Sozialpolitik (Society for Social Policy), the leading and most influential social science association in the German-speaking world, which was dominated by members of the German Historical School. Here he came face-to-face with the enemies of economic liberalism, who rejected most of economic theory in the name of a historically based approach to social analysis, on the basis of which they rationalized aggressive nationalistic conclusions, all leading to an eventual war. They had contempt for the Austrian economists and ridiculed the idea that there were “laws of economics” that should stand in the way of markets and money being controlled by the state. These were the thinkers who were the harbingers of many of the disasters of the twentieth century. Their aggressive nationalism had led to two world wars; their belief in the interventionist state had cultivated the coming of the planned and regulated society; and their confidence that money and its value were creatures of the state had fostered the inflations of the twentieth century.
And though Mises did not point it out, many of these German thinkers laid the ideological groundwork for the mass murder of millions at the hands of the National Socialists, including the destruction of six million Jews. Indeed, it was because of such ideas and their consequences that Mises himself was forced to flee a Nazi-dominated Europe and find sanctuary in America in the midst of the Second World War.
Leaving Europe for America had not been an easy decision for Mises. Indeed, he said in a letter to Friedrich A. Hayek in May 1940, as he was approaching his departure from Switzerland for the United States, “The decision to leave is truly difficult. For me, it represents saying good-bye to a life which I have always lived, it is for me an ‘adieu’ to a Europe which is about to disappear forever.”
It is only appropriate, therefore, that before concluding this introduction we should take a look at Mises’s Jewish family roots in the old Habsburg Empire and how the fate of the Austrian Jews led to a man [lvii] like Mises having to say good-bye to the life and world in which he made his career and won his reputation as one of the leading economists of his time, and his having to make a new start at the age of fifty-eight in the New World.
Liberating Liberalism and the Austrian Jews
Ludwig von Mises was born on September 29, 1881, into a prominent Jewish family in Lemberg (Lvov in present-day Ukraine), the capital of the Austrian Crownland of Galicia, far to the east of Vienna and near the border with the Russian Empire. In the last decades of the nineteenth century, more than 50 percent of the population of some parts of Galicia was Jewish, with the center of Jewish life and culture being in Lemberg.
The documents that Ludwig von Mises’s great-grandfather, Mayer Rachmiel Mises (1801-91), prepared as background for his ennoblement by the Austrian emperor, Francis Joseph, in mid-1881 (just a few months before Ludwig was born), record the history of the Mises family in Lemberg going back to the 1700s. Mayer’s father, Fischel Mises, had been a wholesaler and real estate owner who had received permission to live and conduct business in the “restricted district” reserved for non-Jews. At the age of eighteen, Mayer married a daughter of Hirsch Halberstamm, the leading Russian-German export trader in the Galician city of Brody.
Mayer took over the family business following his father’s death and also served for twenty-five years as a commissioner in the commercial court of Lemberg. For a time he also was on the city council and was a full member of the Lemberg Chamber of Commerce. He also was a cofounder of the Lemberg Savings Bank, and later was a member of the board of the Lemberg branch of the Austrian National Bank. He also was one of the founders of the Cracow-Lemberg railway line. In addition, he was a founder of a Jewish orphanage, a reform school, a secondary education school, a charitable institution for infant orphans, and a library in the Jewish community. Some of these charities were [lviii] begun with funds provided by Mayer for their endowment. Indeed, it was for his service to the emperor as a leader of the Jewish community in Lemberg that Mayer Mises, great-grandfather of Ludwig von Mises, was ennobled.
Mayer’s oldest son, Abraham Oscar Mises, ran the Vienna office of the family business until he was appointed in 1860 the director of the Lemberg branch of the Credit-Anstalt bank. Abraham also was the director of the Galician Carl-Ludwig Railroad. His other son, Hirsch Mises, was a partner in and a director of the Halberstamm and Nirenstein banking company.
It is perhaps because of the family’s connection with the railroad business that Hirsch Mises’s son, Arthur Edler von Mises, took up civil engineering with a degree from the Zurich Polytechnic in Switzerland, and then worked for the Lemberg-Czernowitz Railroad Company. Arthur married Adele Landau, the granddaughter of Moses Kallir and the grandniece of Mayer Kallir, a prominent Jewish merchant family in the city of Brody. Arthur and Adele had three sons, of whom Ludwig was the oldest. His brother, Richard, became an internationally renowned mathematician who later taught at Harvard University. The third child died at an early age.
Members of the Mises family also were devout practitioners of their Jewish faith. The vast majority of the Galician Jews were Hasidic, with all the religious customs and rituals that entailed. But the Mises family was part of that movement in the Jewish community devoted to theological and cultural reform, and participated in the liberal-oriented political activities that were attempted in nineteenth-century Galicia. As a small boy, Ludwig would have heard and spoken Yiddish, Polish, and German, and studied Hebrew in preparation for his bar mitzvah.
Ludwig’s father, Arthur, like many of his generation, chose to leave Galicia and make his life and career in the secular and German cultural world of Vienna, where he accepted a civil servant’s position with the Austrian Ministry of Railways. But from the documents among [lix] Ludwig von Mises’s “lost papers” found in the Moscow archives, it is clear that his mother maintained ties to her birthplace, contributing money to several charities in Brody, including a Jewish orphanage. In Vienna in the 1890s, Arthur was an active member of the Israelite Community’s Board, a focal point for Jewish cultural and political life in the Austrian capital.
Until the early and middle decades of the nineteenth century, Jews throughout many parts of Europe were denied civil liberties, often being severely restricted in their economic freedom, and, especially in Eastern Europe, confined to certain geographical areas. In the 1820s it was still not permitted for Jews to unrestrictedly live and work in Vienna; this required the special permission of the emperor.Commercial and civil liberation of the Austrian Jews occurred only in the aftermath of the Revolution of 1848, and most especially with the new constitution of 1867, which created the Austro-Hungarian Dual Monarchy following Austria’s defeat in its 1866 war with Prussia. The spirit and content of the 1867 constitution, which remained the fundamental law of the empire until the collapse of Austria-Hungary in 1918, reflected the classical liberal ideas of the time. Every subject of the emperor was secure in his life and private property; freedom of speech and the press was guaranteed; freedom of occupation and enterprise was permitted; all religious faiths were respected and allowed to be practiced; freedom of movement and residence within the empire was a guaranteed right; and all national groups were declared to have equal status before the law.
No group within the Austro-Hungarian Empire took as much advantage of the new liberal environment as the Jews. In the early decades of the nineteenth century a transformation had begun among the Jewish community in Galicia. Reformers arose arguing for a revision in [lx] the practices and customs of Orthodox Jewry. Jews needed to enter the modern world and to secularize in terms of dress, manner, attitudes, and culture. The faith had to be stripped of its medieval characteristics and ritualism. Jews should immerse themselves in the German language and German culture. All things “German” were distinguished as representing freedom and progress.
With the freedoms of the 1867 constitution, Austrian and especially Galician Jews began a cultural as well as a geographical migration. In 1869, Jews made up about 6 percent of the population of Vienna. By the 1890s, when the young Ludwig von Mises moved to Vienna from Lemberg with his family, Jews made up 12 percent of the Vienna population. In District I, the center of the city where the Mises family lived, Jews made up over 20 percent of the population. In the neighboring District II, the Jews made up over 30 percent.
But in the late nineteenth and early twentieth centuries, there was a stark contrast between these two districts of the city. In the central District I, the vast majority of the Jewish population had attempted to assimilate with their non-Jewish neighbors in dress, manners, and cultural outlook. In District II, bordering on the Danube, on the other hand, the Jewish residents were more likely to have retained their Hasidic practices and orthodox manners, including their traditional dress. It was the visible difference of these Jews, who often had more recently arrived from Galicia, which so revolted the young Adolf Hitler—who was shocked, and wondered how people acting and appearing as they did could ever be considered “real Germans.” They seemed such an obviously alien element in Hitler’s eyes.
The characteristic mark of most of the Jews who migrated to Vienna (and other large cities of the empire such as Budapest or Prague) was their desire and drive for assimilation; in many ways they tried to be more German than the German-Austrians. The Czechs, the Hungarians, and the Slavs, on the other hand, often were still focused on their traditional ways; the Hungarians in particular were suspicious of the Enlightenment, civil liberties, and equality—these threatened their dominance over the subject peoples in their portions of the empire (the Slovaks, Romanians, and Croats). To constrain the Hungarians, the emperor increasingly put the Czechs, Poles, and Slavs under direct imperial administration on an equal legal footing with the German-Austrians. For the Jews, Austrian imperial policy meant the end of official prejudice and legal restrictions, and a securing of civil rights and educational opportunities. Their continuing and generally steadfast loyalty to the Habsburgs, however, led many of the other nationalities to be suspicious and anti-Semitic as the years went by. The Jews were viewed as apologists and blind supporters of the Habsburg emperor, without whose indulgence and protection the Jews might have been kept within the ghetto walls.
Civil liberties and practically unrestrained commercial and professional [lxii] opportunity soon saw the Jews rise to prominence in a wide array of areas of Viennese life. By the beginning of the twentieth century more than 50 percent of the lawyers and medical doctors in Vienna were Jewish. The leading liberal and socialist newspapers in the capital were either owned or edited by those of Jewish descent, including the New Free Press, the Viennese newspaper for which Mises often wrote in the 1920s and 1930s. The membership of the journalists’ association in Vienna was more than 50 percent Jewish. At the University of Vienna, in 1910, professors of Jewish descent constituted 37 percent of the law faculty, 51 percent of the medical faculty, and 21 percent of the philosophy faculty. At the time Mises attended the university in the first decade of the twentieth century almost 21 percent of the student body was Jewish. The proportion of Jews in literature, theater, music, and the arts was equally pronounced.
The main avenue for social and professional advancement was education in the gymnasium system—the high school system in the German-speaking world. But the gymnasium education not only offered a path to higher education and a university degree for many Jews, it also was an avenue for acculturation and assimilation into European and especially German culture. For example, Mises and his fellow student Hans Kelsen (who later became an internationally renowned philosopher of law and the author of the 1920 constitution of the Republic of Austria) attended the Akademisches Gymnasium in the center of Vienna. It was meant for students preparing for the university and professional careers. Here a wide liberal arts education was acquired, with mandatory courses in Latin, Greek, German language and literature, history, geography, mathematics, physics, and religion, with electives in either French or English—Mises selected French. At the core of the curriculum was the study of the ancient Greek and Roman classics. Mises and other Jewish students at the Akademisches Gymnasium, as a part of their religion training, had courses in Hebrew. According to memoirs written by people who attended theAkademisches Gymnasium in the 1880s and 1890s, most of the students ridiculed [lxiii] the religion classes as “superstition.” The Greek and Roman classics were considered literary avenues for entering the mainstream of modern European and Western culture. And while it was not assigned, the students absorbed on their own contemporary writings in history, social criticism, literature, and the sciences as their way to integrate themselves into modern and “progressive” society.
In the 1890s, during Mises’s time at the Akademisches Gymnasium, 44 percent of the student body was Jewish. But there were some gymnasiums at which Jewish admission was informally restricted. For example, the Maria Theresa Academy of Knights in Vienna was reserved for the children of the nobility and senior officials. Joseph Schumpeter attended it in the 1890s, but only because his stepfather was a lieutenant field marshal. No matter what his academic qualification, Mises would have had virtually no chance to be accepted there. Thus clusters of these gymnasiums were clearly closed to Jews, even if they were converts to Christianity, while other clusters represented the high schools where middle-class Jewish businessmen, professionals, and civil servants sent their children.
But for all their assimilationist strivings—their conscious attempts to be German-Austrians in thought, philosophy, outlook, and manner—the Jews remained distinct and separate. Not only was this because they belonged to schools, professions, and occupations in which they as Jews were concentrated, but because non-Jewish German-Austrians viewed them as separate and distinct. However eloquent and perfect their German in literature and the spoken word, no matter how contributing they were to the improvement of Viennese society and culture, most non-Jewish Viennese considered these to be Jewish contributions to and influences on German-Austrian corners of cultural life.
Name, family history, gossip, and mannerisms made it clear to most [lxiv] people who were Jewish and who were not. The wide and pronounced success of so many Viennese Jews made non-Jews conscious of their preponderance and presence in many visible walks of life. This success also served as the breeding ground for anti-Semitism.
In the Habsburg domain, part of this anti-Semitism was fed by conservative and reactionary forces in society who often resented the emperor’s diminishment or abolition of the privileges, favors, and status of the Catholic Church and the traditional landed aristocracy. The high proportion of Austrian Jews involved in liberal or socialist politics made them targets of the conservatives who said they were carriers of modernity, with its presumption of civil equality, unrestrained market competition, and a secularization that was said to be anti-Christian and therefore immoral and decadent. Preservation and restoration of traditional and Christian society, it was claimed, required opposition to and elimination of the Jewish influence on society. Jews were the rootless “peddlers” who undermined traditional occupations and ways of earning a living, as well as the established social order of things. They pursued profit. Honor, custom, and faith were willingly traded away by them for a few pieces of gold, it was said. Craft associations became leading voices of anti-Semitism, especially when economic hard times required small craftsmen and businessmen to go hat in hand to Jewish bankers for borrowed sums to tide them over.
German nationalism also was a vehicle for growing anti-Jewish sentiment. The paradox here is that in the 1860s and 1870s a sizable number of Jewish intellectuals were founders and leaders in the Austrian and German nationalist movements. German culture and society were viewed as representing the universal values of reason, science, justice, and openness in both thought and deed. German culture and political predominance within the Austro-Hungarian Empire restrained the backward-looking forces of darkness—the Hungarian, Czech, and Slavic threats. At the same time, German culture in Central Europe offered rays of enlightenment in the regions of Eastern Europe.
Mises estimated that before the Second World War, Jews made up 50 percent of the business community in Central Europe and 90 percent of the business community in Eastern Europe. Indeed, in Omnipotent Government he asserted that in Eastern Europe “modern civilization was predominantly an achievement of Jews.” What the Jews in these parts of Europe introduced and represented, at least in their own minds, was the enlightened German mind, with its culture and institutions. But to those other nationalities being introduced to and “threatened” by this German cultural influence, it was perceived as being Jewish as much as German—a dominating, imperial, and “foreign” culture.
At the same time, in both Germany and German-Austria, the Jews in the forefront of the Pan-German nationalist movements were viewed as interlopers by many of the Christian German nationalists. As a consequence, there emerged in the second half of the nineteenth century [lxvi] rationalizations to justify the rejection of Jewish participation in the cause of German nationalism and culture. First, it was said that only Christians and the Christian faith were consistent with true German life and culture. But when a significant number of German and Austrian Jews converted to Christianity, it still was found not to be enough. Now it was claimed that to be a true German it was not sufficient to be a convert to Christianity. “Germanness” was a culture, an attitude toward life, and a certain sense of belonging to the Volk community.
As a growing number of Jews immersed themselves in all things German—language, philosophy, literature, dress, and manner—it was found, again, not to be enough. Really to be a German was to share a common ancestry, a heritage of a common blood lineage. This was one barrier the German and Austrian Jews could not overcome. In the emergence of racial anti-Semitism in the 1880s and 1890s, there were laid the seeds of the “final solution.”
In Vienna, Karl Lueger, who was mayor of the capital city in the first decade of the twentieth century and a leader of the Christian Social Party, represented the spirit of anti-Semitism. He insisted that only “fat Jews” could weather the storm of capitalist competition. Anti-Semitism, Lueger said, “is not an explosion of brutality, but the cry of oppressed Christian people for help from church and state.” He blended anti-Semitism with social-left reforms, which included civil service and municipal government restrictions on Jewish access to city jobs or contracts. On the other hand, when Lueger was challenged as to why he had Jewish friends and political associates, he replied, “I decide who is a Jew.”
But in spite of the presence and growth of anti-Semitic attitudes in [lxvii] the late nineteenth and early twentieth centuries in Austria in general and Vienna in particular, Mises’s seeming lack of attention to his own Jewish family background or any hint of the impact of anti-Semitism around him—there were anti-Jewish student riots at the University of Vienna during the years when he was a student there around the turn of the century—was in fact not uncommon. One can read Stefan Zweig’s fascinating account of everyday life in the Vienna of this time and have the distinct impression that anti-Semitic attitudes or municipal government policy were virtually nonexistent.
Yet many invisible walls characterized the circles in which people moved in Viennese society both before and after the First World War. Traditional or Orthodox Jews lived and worked within a world of their own in the city. Secular and assimilated Jews, like Ludwig von Mises and Hans Kelsen, moved in circles of both Jews and non-Jews, but even the nonreligious and German-acculturated Jews clustered together. A review of the list of participants in Mises’s famous private seminar in Vienna, for example, shows a high proportion of Jews. And even after Mises had moved to Geneva, Switzerland, in 1934, his agenda books for this time show that many of his social engagements were with other Jews residing in or visiting that country.
The end of the nineteenth and the beginning of the twentieth century saw the eclipse of liberalism in Austria and the rise of socialism in its place, centered in the political ascendancy of the Social Democratic Party. A sizable number of Jews were prominent in the Austrian socialist movement; they were anticapitalist and viewed the entrepreneurial segment of the society as exploiters and economic oppressors. The capitalist class would be swept away in the transformation to socialism, including the Jewish capitalists in the “ruling class.” Most of the Jews in the socialist movement not only were secular and considered themselves harbingers of the worker’s world to come; they were contemptuously opposed to cultural and religious Judaism as well.
These three political movements in Austria and Vienna when Mises was a young man—conservatism, German nationalism, and radical socialism—were, each for its own reasons, enemies of liberal society, opponents of free-market capitalism, and therefore threats to the ideas and occupations of those middle class, or “bourgeois,” walks of life heavily populated by the Jews of Austria and Vienna.
The history of Austrian Jewry during this time is a story of triumph and tragedy. The winds of nineteenth-century liberalism freed the Austrian Jewish community, both internally and externally. Internally, the liberal idea pried open Orthodox Jewish society in places such as Austrian Galicia. It heralded reason over ritual; greater individualism over religious collectivism; open-minded modernity over the strictures of traditionalism. Externally, it freed the Jewish community from legal and political restraints and restrictions. The right of freedom of trade, occupation, and profession opened wide many opportunities for social improvement, economic betterment, and political acceptance.
Within two generations this transformed Austrian Jewish society. And that same span of time saw the rise of many Jews to social and economic prominence, with greater political tolerance than ever known before. If these two liberating forces had not been at work, there would not have been Ludwig von Mises—the economist, the political and social philosopher, and the notable public figure and policy analyst in Austria both before and between the two world wars.
At the same time, these two liberating forces set the stage for the tragedy of the German and Austrian Jews. Their very successes in the arts and the sciences, in academia, and in commerce fostered the animosity and resentment of those less successful in the arenas of intellectual, cultural, and commercial competition. It set loose the emotion of envy, the terror of failure, and the psychological search for scapegoats and excuses. It ended at the gates to the Nazi death camps.
In Mises’s case and for many others it meant leaving the country of their birth and seeking refuge in other lands. Among those who left before or immediately after Germany’s annexation of Austria were many members of the Austrian School of economics or Mises’s private seminar circle (both Jews and non-Jews): Martha Steffy Browne, Gottfried Haberler, Friedrich A. Hayek, Felix Kaufmann, Fritz Machlup, Ilse Mintz, Oscar Morgenstern, Paul N. Rosenstein-Rodan, Alfred Schutz, and Erich Voegelin, to name just a few.
Mises had departed in autumn 1934 for a teaching position at the Graduate Institute of International Studies in Geneva, when it was clear that the collectivist darkness was starting to fall over the center of Europe. He made a new life for himself after 1940 in the United States, like many of his Austrian colleagues and friends, where the spirit of freedom was not yet in the same shadow of tyranny as in their native Austria. America, for them, was still a land where Austrian Jews such as Mises could breathe the air of liberty.
He continued to explain and defend the principles and ideals of classical liberalism and the free market in his new home in America until his death on October 10, 1973, at the age of 92.
Endnotes to Volume 1↩
The European Central Bank has announced its intention to create out of thin air over one trillion new Euros from March 2015 to September 2016. The rationale, the monetary central planners say, is to prevent price deflation and “stimulate” the European economy into prosperity.
The only problem with their plan is that their concern about “deflation” is a misguided fear, and printing money can never serve as a long-term solution to bring about sustainable economic growth and prosperity.
Europe’s High Unemployment and Economic Stagnation
The European Union (of which the Euro currency zone is a subset) is experiencing staggering levels of unemployment. The EU as a whole has 10 percent of the work force unemployed, and 11.5 percent in the Euro Zone.
But breaking these numbers down to the national levels show just how bad the unemployment levels are in the different member countries. In Greece it is nearly 26 percent of the work force. In Spain, it is 24 percent; Italy and Portugal are both over 13 percent. France has over 10 percent unemployment, with Sweden at 8 percent. Only Germany and Austria have unemployment of 5 percent or less out of the 28-member countries of the European Union.
Youth unemployment (defined as those between 16 and 25 years of age unable to find desired work) is even more catastrophic. For the European Union as a whole it is an average of over 22 percent, and more than 23 percent in the Euro Zone.
In Greece, its almost 60 percent of those under 25; in Spain, it is nearly 55 percent, with Italy at 43 percent, and over 22 percent in both France and Sweden. Only in Norway and Germany is youth unemployment less than 8 percent. Almost all the other EU countries are in the double-digit range.
At the same time, growth in Gross Domestic Product for the European Union as a whole in 2014 was well below one percent. Only in the Czech Republic, Norway, and Poland was it above 2 percent among the EU members.
Consumer prices for the EU averaged 0.4 percent in 2014, with most of the member countries experiencing average consumer price increases between 0.2 and 2 percent for the year. Only in Greece was the average level of prices calculated as having absolutely declined by a minus 1.3 percent. Hardly a measured sign of dramatically suffered price deflation in the EU or the Euro Zone!
Fears of Price Deflation are Misplaced
The monetary central planners who manage the European Central Bank are fearful that the Euro Zone may be plagued by a prolonged period of generally falling prices if they do not act to push measured price inflation towards their desired target of around two percent a year.
(It is worth pointing out that if the Euro Zone monetary central planners were to succeed with their goal and maintain two percent average annual price inflation, this would mean that over a twenty-year period the purchasing power of a Euro would decline by around 50 percent.)
Many commentators inside and outside of the European Union and the Euro Zone have insisted that price deflation needs to be prevented or reversed at all costs. The implicit premise behind their arguments is that deflation equals economic depression or recession, and therefore any such decline in prices in general must not be allowed.
In all these discussions it is often ignored or forgotten that annual falling prices can well be an indication of economic prosperity and rising standards of living. For instance, between 1865 and 1900, prices in general in the United States declined by around 50 percent, with overall standards of living in general estimated to have increased by 100 percent over these 35 years. This period is usually recognized as America’s time of rapid industrialization in the post-Civil War era that set the United States on the path to becoming the world’s economic giant through most of the 20thcentury.
Falling Prices and Improved Standards of Living
A hallmark of an innovative and competitive free market economy is precisely the never-ending attempt by entrepreneurs and enterprisers to devise ways to make new, better and less expensive goods to sell to the consuming public. The stereotypes in modern times have been pocket calculators, mobile phones, DVD players, and flat-screen TVs.
When pocket calculators first came on the market in the 1980s, they were too big to fit in your shirt pocket, basically performed only the most elementary arithmetic functions, and cost hundreds of dollars. Within a few years they fit in your shirt pocket with space to spare, performed increasingly complex mathematical functions, and became so inexpensive that many companies would give them away as advertising gimmicks.
The companies that made them did not proclaim their distress due to the lower and lower prices at which they sold the devices. Cost efficiencies were developed and introduced in their manufacture so they could be sold for less to consumers to expand demand and capture a larger share of a growing market.
In a dynamic, innovative and growing free market economy there normally would be a tendency for one product after another being improved in its quality and offered at lower prices as productivity gains and decreased costs made them less expensive to market and still make a profit.
Looking over a period of time, a statistical averaging of prices in general in the economy would no doubt show a falling price level, or “price deflation,” as one price after another experienced such a decline. This would be an indication of rising standards of living as the real cost of buying desired goods with our money incomes was decreasing.
Europe’s Problems are Due to Anti-Market Burdens
Relatively stagnant economies with high rates of unemployment like in the European Union and the Euro Zone are not signs of deflationary forces preventing growth and job creation. Indeed, since 2008, the European Central Bank has increased its balance sheet through monetary expansion by well over one trillion Euros, and prices in the Euro Zone, in general, have been rising on average between 0.5 and 2 percent throughout this period. Hardly an indication of “deflationary” forces at work.
The European Union’s problems are not caused by a lack of “aggregate demand” in the form of money spending. Its problems are on the “supply-side.” The EU is notorious for rigid labor markets in which trade unions limit worker flexibility and workplace adaptiveness to global market change.
Above market-determined wages and benefits price many who could be gainfully employed out of a possible job, because government policies and union power price these potential employees out of the market. Plus, the difficulty of firing someone once a worker is hired undermines the incentives of European companies to want to expand their work forces.
Even a number of international organizations, usually culprits in fostering anti-free market policies, have pointed out the need for European governments to introduce workplace reforms to free up labor markets in their countries, along with general reductions in regulations on business than hamper entrepreneurial incentives and prevent greater profit-oriented competitiveness.
Creating a Trillion Euros will only Imbalance Europe More
Creating a trillion more Euros cannot overcome or get around anti-competitive regulations, cost-price mismatches and imbalances due to government interventions and union restrictions, or the burdensomeness of taxes that reduce the willingness and ability of businessmen to undertake the enterprising activities that could lift Europe out of its economic malaise.
Furthermore, to the extent to which the European Central Bank succeeds in injecting this trillion Euros into the European economy it will only set in motion the danger of another future economic downturn. Not only may it feed an unsustainable financial and stock market run-up. The very manner in which the new money is introduced into the European-wide economy will inevitably distort the structure of relative prices and wages; wrongly twist the patterns of resource and labor uses; and induce forms of mal-invested capital.
Thus, the attempt to overcome Europe’s stagnant economy through monetary expansion will be the cause of a misdirection of labor, capital and production that will inescapably require readjustments and rebalances of supplies and demands, and price relationships that will mean people living through another recession at some point in the future.
A Market-Based Agenda for Growth and Jobs
What, then might be a “positive” pro-market agenda for economic recovery and job creation in the European Union, and in the United States, as well, for that matter? Among such policies should be:
- Significantly reduce marginal personal tax rates and corporate taxes, and eliminate inheritance taxes; this would create greater incentives and the financial means for private investment, capital formation and job creation;
- Cut government spending across the board by at a minimum of 10 percent more than taxes have been cut so to move the government in the direction of a balanced budget without any tax increases; this would take pressure off financial markets to fund government deficits, and end the growth in accumulated government debt, until finally government budgets would have surpluses to start paying down that debt;
- Reduce and repeal government regulations over the business sector and financial institutions to allow competitive forces to operate and bring about necessary adjustments and corrections for restoring economic balance;
- Institute real free trade through elimination and radical reduction of remaining financial and regulatory barriers to the competitive free flow of goods among countries;
- End central bank monetary expansions and manipulation of interest rates; interest rates need to tell the truth about savings availability and investment profitability for long-run growth that is market-based and sustainable. Monetary expansion merely sends out false signals that distort the normal functioning of the market economy.
A market-based set of policies such as these would serve as the foundation for a sound and sustainable real “stimulus” for the European and American economies. It also would be consistent with the limited government and free enterprise principles at the foundation of a free society.
The recent brutal events in France have reminded us how small the world is that we all share. Violence and conflicts that have their origin in one part of the globe shows itself in another part of our planet. And mass media immediately shares those events to the rest of us, no matter where we are.
The impression that is often created by these events and those images is that the world is a dangerous place. And that the more interconnected we become, the more we face the threat of that violence and those conflicts coming our way.
However, the sensationalism of the pictures and videos capturing such tragic events as those in Paris should not distract us from the much more fundamental and everyday linkages that increasingly bind all of us together for mutual prosperity and possible world peace here on Planet Earth.
The Global Economy and Gains from Trade
I mean, of course, the global economy and the network of supplies and demands, productions and consumptions of goods and services that has been and continues to make us one interdependent market of buyers and sellers regardless of the political lines that appear to divide us into different nations and countries in this common world of ours.
For the last two hundred years the increasing integration of our world has, certainly been, been greatly influenced by new, better, and swifter means of travel and communication.
For example, about 160 years ago, in the 1850s, a journey from Boston, Massachusetts to Charleston, South Carolina took about 15 to 16 days of hard riding by stagecoach, or anywhere between 7 and 25 days by sailing ship, depending upon the winds.
Now, in the 21st century, flying nonstop gets you from Boston to Charleston in less than two and a half hours. Air travel enables us, as well, to circumvent the globe in less than twenty-four hours.
But what has been the prime factor behind the develop of trade and its increasingly global nature is a social and economic setting in which individuals are relatively free to peacefully interact in networks of exchange guided by market prices that inform producers and consumers about potential gains from trade.
More and more parts of the world are being drawn into this nexus of international trade, and reaping benefits from it.
South Carolina’s Place in the Global Economy
Let’s take South Carolina, the state in which I now live, as an example of the impact and significance of global trade on people’s livelihood and well being. South Carolina is part of this global economy no less than the rest of the United States.
In 2013, South Carolina industries exported goods to over 200 countries worth more $26 billion, making up nearly 15 percent of the state’s Gross Domestic Product. Charleston, alone, made up $3.5 billion of those export earnings
If 160 years ago, cotton was “king” in export earnings, today, the state’s leading export sectors are automobiles, machinery, rubber, aircraft, plastics, paper and wood products, optics and organic chemicals. Indeed, South Carolina, in 2013, was the number one state in the export of tires, and number two in the export of automobiles to the global market.
Nearly 30 percent of South Carolina’s manufacturing jobs are connected with its export trade. In fact, out of an employed labor force of over two million, more than 500,000, or one-fourth of the total jobs in South Carolina, are connected with exports, imports, and international shipping. Twenty percent of those half-a-million trade related jobs are supplied from foreign direct investment in the state of South Carolina.
Foreign imported goods into South Carolina in 2013 came to over $32 billion, with the largest share of those goods coming into the state arriving from Germany, China, Canada, and Mexico. Nearly 200,000 South Carolinians are employed where foreign, imported goods are sold in the state.
I wish to highlight the import side of South Carolina’s foreign trade because most discussions over the benefits that the state or America as a whole receives from international commerce focuses on the gains in sales and jobs in the export sectors of the state’s economy.
Imports as the Real Gain from Trade
The only real purpose and benefit from “exporting,” however, is its ability to enable us as individuals or a country to earn the financial means to buy “imports” either from our neighbors next door or from sellers on the other side of the globe, who can produce and supply those goods at a lower cost and/or a better quality than if we tried to manufacture them for ourselves.
As Adam Smith expressed it in his famous book, The Wealth of Nations, in 1776:
“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor . . .
“What is prudence is the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”
A concern is often expressed that the purchasing of any good or service from the producers of another country deprives domestic businesses and workers of employment.
Imports are Paid for with Exports
But we need to remember that, just like ourselves, the foreign seller does not give his goods away for free. He wishes to sell them precisely in order to earn an income that enables him to, then, turn around and purchase other goods that we or some other country’s producers can make better or less expensively than if he made those goods in his own home country.
When manufacturers in Germany, China, Canada, or Mexico sell some of their goods in South Carolina or some other part of the United States, they earn dollars. Since U.S. dollars are not the currency of use in any of these countries, they will either spend those earned dollars back in the United States demanding American goods in exchange for what they have sold to us, or will sell those dollars on the foreign exchange market for some other currency they wish to use to buy desired goods and services.
If, for example, an export producer in Canada would prefer to buy goods made in Germany than those produced in the U.S., he will sell his earned dollars for Euros. But why would some holder of Euros have sold them for U.S. dollars other than that he, instead, wishes to buy goods made in America or even in South Carolina?
Ultimately, it is goods that trade for goods through the medium of one type of money or another. And what we buy from other countries must, finally, be paid for through part of our own output as individuals and as a nation.
It is true that if American consumers find it more attractive to purchase a foreign version of some product, the domestic American producer(s) may experience declines in their sales, market share, and profitability. Some U.S. firms in this part of the economy may reduce output or even go out of business, with a matching loss of some jobs in this sector of the domestic market.
Those businesses and jobs will have to shift into other areas of enterprise. To where will these businesses and workers “migrate”? Some will find alternative profitability or employment in the export industries with which South Carolina’s and America’s imports are paid.
Imports and Cost-Efficient Trade Improve Our Standard of Living
Others will find new profits and employments satisfying different domestic demands. For instance, suppose that a foreign import costs $10, while the domestic version of this product that Americans or South Carolinians used to buy costs $15. Consumers in America now pay $10 for what used to cost them $15. They have the desired good, plus they have saved $5 on the price. The less expensive foreign product has “freed up” $5 of purchasing power in each consumer’s pocket that now enables them to increase their demand for other things that previously they could not afford when they were paying the higher American-made price for this good.
No doubt, in the short-run this requires some people to change what products they produce or where they are employed. But this is the price of economic progress from which we all gain in the long-run: new, better, and less expensive goods and services available to improve our standard of living as well as the quality of our life.
The fact that more commercial airplanes and automobiles are now manufactured in South Carolina has, no doubt, resulted in the loss of some business and jobs in other states in America where these planes and cars were previously being produced. (Or, if nothing else, a loss of greater business and jobs that might have come to those other states, if factories had not been built in South Carolina, instead.)
But in the long run everyone in America is better off with those planes and cars being produced where they could be manufactured most cost-efficiently to the gain of all of us as consumers. When goods that we, the consumers, want are produced in the most least costly manner, which includes the comparative advantage of the manufacturing location as well, all in society benefit from the resources available to people being used in the ways that enable getting the most out of them that is possible in both physical and value terms.
Finally, I would emphasize another gain from international trade and commerce that goes beyond its more narrowly “economic” benefits to all participants.
Ends in Ourselves, and Means to Each Other’s Ends
I am referring to the fact that trade is a means and a method for people who may live very differently from each other, based on widely diverse beliefs and values, to cooperate and mutually benefit from free and voluntary association.
The nature of the market economy, both domestic and international, is that it leaves each individual and voluntary group free to follow whatever ends, goals or purposes they may find desirable to pursue, given their values and belief-systems. Each serves others in society as the means to their own ends, with little concern or consideration as to why and for what purpose those who fulfill our demands want the income they earn by selling us the goods we desire.
For example, how much do any of us know about those who earn a living making commercial planes or automobiles at the Boeing or BMW factories in South Carolina, and how they use their incomes in their own role as consumers? The answer is, virtually nothing.
In some cases, no doubt, if we knew how some of them spend the income they have earned by producing and selling us automobiles, we would be shocked and disturbed because of, maybe, radically differing views about what values and ends people should pursue in their lives.
But the beauty of the market system is that we use each other as means, while each of us is free to follow the ends that give meaning, purpose and value to our individual lives. Whether a vocal minority or a substantial majority disapproves of how you furnish your home, select your wardrobe, decide on the church to go to, or contribute to some charitable cause, you are at liberty to make your own decisions in these matters as a sovereign consumer in a free market, given your success as a producer in fulfilling and satisfying the ends and goals of others with whose choices you may have no agreement or even respect.
Political Decentralization and Market Freedom Make for Diversity
It is this aspect or element of a, now, global market, that makes for, and even fosters the social and cultural “diversity” about which many often speak, but about which they frequently have little understanding concerning how it is only made possible through a competitive, open, and free market order.
A Muslim in Kuwait who makes his living in his country’s oil fields may use his income to contribute to his mosque and maintain a standard of living for his two-wife family. The American Christian family that drives to church on Sunday with gasoline that has been refined from Kuwaiti crude oil may tithe for significantly different reasons than that Muslim half-way around the world, and consider having more than one wife morally and legally unacceptable.
But each can live his own life as he chooses without a “conflict of visions” about a moral and right life leading to violence and bloodshed between them. What makes this possible at an international level is that fact that we live in a world of global anarchy.
That is, there is no single and unified political authority that controls the world and imposes the political and ideological values of one society on all the rest. It is that decentralization of political power among many governments rather than one global united nation that leaves people free in their international dealings from the values and preferences of others in other parts of the world with which they may disagree.
When governments do not intrude into international trading affairs for either economic or ideological reasons through political or military intervention, there is often the potential for greater peace and mutual harmony than within a country, where different groups and individuals vie for control over their own government to impose their particular values, beliefs and desires on their fellow citizens.
This is why on the mundane, everyday level, the people of South Carolina and those of the United States as a whole are able to trade and associate with the other people of the world through buying and selling, importing and exporting, with all the participants gaining and benefiting from the talents, skills, and specializations of others in faraway places.
All of this happens for everyone’s mutual betterment without having to accept or have imposed on them the values, beliefs and ideals of others in those faraway lands. If we understand this better and leave markets and people free in this manner, there would be a greater chance for both world peace and material and cultural prosperity for all.
(The text is based on a talk given at the Charleston Rotary Club of South Carolina on January 13, 2015.)
Friends of freedom often become despondent when it seems that every day brings another growth and intrusion of government over people’s lives. But there is no reason to be disheartened, because there are lessons for winning liberty – from the opponents of freedom.
Beginning in the last decades of the nineteenth century, through most of the twentieth century and into our own time, all ideological, political and economic trends have been in the direction of various forms of collectivism. How did this come about, and what might friends of freedom learn from it?
Let’s take the case of socialism. On March 14, 1883, a German philosopher living in exile in London passed away. When he was buried three days later in a modest grave where his wife had been laid to rest two years earlier, fewer than ten people were present, half of them family members.
His closest friend spoke at the gravesite and said, “Soon the world will feel the void left by the passing of this Titan.” But there was, in fact, little reason to think that the deceased man or his long, turgid, and often obscure writings would leave any lasting impression on the world of ideas or on the course of human events.
That man was Karl Marx.
Socialism Did Not Always Seem “Inevitable”
Advocates of liberty often suffer bouts of despair. How can the cause of freedom ever triumph in a world so dominated by interventionist and welfare-statist ideas? Governments often give lip service to the benefits of free markets and the sanctity of personal and civil liberties. In practice, however, those same governments continue to encroach on individual freedom, restrict and regulate the world of commerce and industry, and redistribute the wealth of society to those with political power and influence. The cause of freedom seems to be a lost cause, with merely temporary rear-guard successes against the continuing growth of government.
What friends of freedom need to remember is that trends can change, that they have in the past and will again in the future. If this seems far-fetched, place yourself in the position of a socialist at the time that Karl Marx died in 1883, and imagine that you are an honest and sincere – if naïve – advocate of socialism.
As a socialist, you live in a world that is still predominately classical liberal and free market, with governments in general only intervening in relatively minimal ways in commercial affairs. Most people – including those in the “working class” – believe that it is not really the responsibility of the state to redistribute wealth or nationalize industry and agriculture, and are suspicious of most forms of government paternalism.
How could socialism ever be victorious in such a world so fully dominated by the “capitalist” mindset? Even “the workers” don’t understand the evils of capitalism and the benefits of a socialist future! Such a sincere socialist could only hope that Marx was right and that socialism would have to come – someday – due to inescapable “laws of history.”
Yet within 30 years the socialist idea came to dominate the world. By the time of the First World War the notion of paternalistic government had captured the minds of intellectuals and was gaining increasing support among the general population. Welfare-statist interventionism was replacing the earlier relatively free-market environment.
The socialist ideal of government planning was put into effect as part of the wartime policies of the belligerent powers beginning in 1914, and also lead to the communist revolution in Russia in 1917, the rise to power of fascism in Italy in 1922, the triumph of National Socialism (Nazism) in Germany in 1933, and the implementation of FDR’s New Deal policies in 1933, as well.
Collectivists Triumphed Based on Individualist Methods
Socialism triumphed during that earlier period of the last decades of the nineteenth and early decades of the twentieth centuries because while socialists advocated an ideology of collectivism, they practiced a politics of individualism. They understood that “history” would not move in their direction unless they changed popular opinion. And implicitly they understood that this meant changing the minds of millions of individual people.
So they went out and spoke and debated with their friends and neighbors. They contributed to public lectures and the publishing of pamphlets and books. They founded newspapers and magazines, and distributed them to anyone who would be willing to read them. They understood that the world ultimately changes one mind at a time – in spite of their emphasis on “social classes,” group interests, and national conflicts
They overcame the prevailing public opinion, defeated powerful special interests, and never lost sight of their long-term goal of the socialist society to come, which was the motivation and the compass for all their actions.
Lesson One: Confidence in the Moral Rightness of Liberty
What do friends of freedom have to learn from the successes of our socialist opponents? First, we must fully believe in the moral and practical superiority of freedom and the free market over all forms of collectivism. We must be neither embarrassed nor intimidated by the arguments of the collectivists, interventionists, and welfare statists. Once any compromise is made in the case for freedom, the opponents of liberty will have attained the high ground and will set the terms of the debate.
Freedom advocate, Leonard E. Read, once warned of sinking in a sea of “buts.” I believe in freedom and self-responsibility, “but” we need some minimum government social “safety net.” I believe in the free market, “but” we need some limited regulation for the “public good.” I believe in free trade, “but” we should have some form of protectionism for “essential” industries and jobs. Before you know it, Read warned, the case for freedom has been submerged in an ocean of exceptions.
Each of us, given the constraints on his time, must try to become as informed as possible about the case for freedom. Here, again, Leonard Read pointed out the importance of self-education and self-improvement. The more knowledgeable and articulate we each become in explaining the benefits of the free society and the harm from all forms of collectivism, the more we will have the ability to attract people who may want to hear what we have to say.
Lesson Two: Focusing on the Long Run, Not Short Run Turns
Another lesson to be learned from the earlier generation of socialists is not to be disheartened by the apparent continuing political climate that surrounds us. We must have confidence in the truth of what we say, to know in our minds and hearts that freedom can and will win in the battle of ideas.
We must focus on that point on the horizon that represents the ideal of individual liberty and the free society, regardless of how many twists and turns everyday political currents seem to be following. National, state, and local elections merely reflect prevailing political attitudes and beliefs. Our task is to influence the future and not allow ourselves to be distracted or discouraged by who gets elected today and on what policy platform.
As Austrian economist, F.A. Hayek, emphasized, current policy directions are the product of ideological and political trends from thirty or forty years ago. In other words government policies today are the lagged effect of political-philosophical and ideological trends of earlier decades. To change tomorrow’s policies, our focus today must be on influencing the “climate of opinion” reflected in people’s minds that, then, will determine how people in the future view issues such as the role of government in society based on their notion of the nature and rights of individuals.
Lesson Three: Knowing that Only Freedom Works
Let us remember that over the last hundred years virtually every form of collectivism has been tried—socialism, communism, fascism, Nazism, interventionism, welfare statism—and each has failed. There are very few today who wax with sincere enthusiasm that government is some great secular god that can solve all of mankind’s problems – at least not many outside of those currently employed in the White House!
Statist policies and attitudes continue to prevail because of institutional and special interest inertia; they no longer possess the political, philosophical, and ideological fervor that brought them to power in earlier times.
Political collectivism resulted in terrible and brutal tyrannies around the world. Government central planning created economic stagnation and chaos wherever tried. Interventionist-welfare statist policies have generated spider’s webs of special interest politics, intergenerational redistributive dependency, and perverse incentives and barriers to opportunity and prosperity.
There is, in fact, only one “ism” left to fill this vacuum in the face of collectivism’s failures in all its forms. It is classical liberalism, with its conception of the free man in the free society and the free market, soundly grounded in the ideas of each individual’s right to his life, liberty, and honestly acquired property in a social setting of peaceful association and voluntary cooperation and trade.
If we keep the classical liberal ideal of individual rights and laissez-faire capitalism before us, we can and will win liberty in our time – for our children and ourselves.
With the beginning of 2015, what might be a “New Year’s resolution” for a friend of freedom? I would suggest that one answer is for each of us to do our best to become “lights of liberty” that will attract others to the cause of freedom and the free society.
For five years, from 2003 to 2008, I had the opportunity and privilege to serve as the president of the Foundation for Economic Education. FEE, as it is also called, was founded in 1946 by Leonard E. Read, with the precise goal of advancing an understanding of and the arguments for individual freedom, free markets, and constitutionally limited government.
One of the reasons that I accepted the position as president was that FEE had been influential in my own intellectual development in appreciating the meaning and importance of liberty from the time that I was a teenager, both through the pages of its monthly magazine, The Freeman and the books that it published and distributed at heavily discounted prices.
I wanted to assist in continuing the work that Leonard Read had begun at FEE, especially among the young whose ideas and actions would greatly influence the chances for liberty in the decades to come.
Self-Improvement as Lights of Liberty
In fact, it is now just over forty years ago, in June 1974 when I was in my mid-20s, that I first attended a weeklong FEE summer seminar at its, then, headquarters in a spacious and charming mansion building in Irvington-on-Hudson, New York.
There were many impressive speakers at the seminar that week, including the famous free-market journalist, Henry Hazlitt, and the riveting Austrian School economist, Hans Sennholz.
But I must confess that I only recall the content of one of the lectures that week, delivered by Leonard Read, himself. He pointed out that many of us wish we could change the world in ways that we consider to be for the better. But changing the world can only happen through changes in the attitudes, ideas, and actions of the individual members of any society.
He asked, out of all the people in the world, over whom do you have the most influence? The answer, he said, is, obviously, yourself. Therefore, changing the world begins with improving one’s own understanding and ability to explain and persuasively articulate the case for freedom and free markets.
At one point in his talk he asked that the lights be turned off in the classroom. In the darkness he slowly started to turn up the light of an electric candle that he held in his hand, asking us to notice how all eyes were drawn to it, however dim the illumination.
As the candle brightened he pointed out that more and more of the darkness was pushed away into the corners, enabling us to see more clearly both the objects and the people in the room.
If each of us learned more about liberty, we would become ever-brighter lights in the surrounding collectivist darkness of the society in which we lived. Our individually growing enlightenment through self-education and self-improvement would slowly but surely draw others to us who might also learn the importance of freedom.
Through this process more and more human lights of freedom would sparkle in the dark until finally there would be enough of us to guide the way for others so that liberty would once again triumph. And collectivism would be pushed far back into the corners of society.
Anything That’s Peaceful and First Principles
Central to Read’s philosophy of freedom was a commitment to first principles as the Archimedean point from which the logic of liberty flows. As Read explained in his book Anything That’s Peaceful(1964):
“I mean let anyone do anything that he pleases that’s peaceful and creative; let there be no organized restraint against anything but fraud, violence, misrepresentation, predation; let anyone deliver the mail, or educate, or preach his religion or whatever, so long as it’s peaceful. Limit society’s agency of organized force – government – to juridical and policing functions . . . Let the government do this, and leave all else to the free, unfettered market!”
What are the “first principles” of liberty, and what do they imply?
Each Individual’s Right to His Own Life
Firstly, and most importantly, liberty means the right of the individual to live his own life for himself. The starting axiom of freedom is that right of the individual to his life, liberty, and honestly acquired property.
Either the individual has “ownership” over himself, or it must be presumed that the collective, the tribe, the group has the authority to dispose of his life and the fruits of his mental and physical labors.
If he does not have a right to his own life, then he is at the mercy of the wishes, whims and coercive caprice of others who claim to speak and act in political authority in the name of “society.”
Only the individual knows what will bring happiness, satisfaction, fulfillment, meaning and purpose to his own life. If this is taken away from him, then he is a slave to the purposes and brute power of others.
Respect for the Equal Rights of All
Secondly, liberty means for each of us to respect the equal right of every other individual to his life, liberty, and honestly acquired property. We cannot expect others to respect our own right to these things, if we do not, as a matter of principle, forswear any claim to their life and property.
To not recognize and abide by the reciprocity of respect for and defense of such unmolested individual rights is to abrogate any principle of human association other than force and plunder – the enslavement and spoliation by the intellectually manipulative and physically stronger over others in society.
On what basis or by what principle can we appeal not to be murdered, physically violated or robbed by others, if we do not declare and insist upon the right of each individual to his life, liberty and property, ours and everyone else’s, as a starting moral premise in society?
Voluntary Consent and Peaceful Agreement
Thirdly, this means that all human associations and relationships should be based on peaceful and voluntary consent and agreement. No one may be coerced or intimidated through the threat of force to act in any way other than he freely chooses to do.
Each of us only enters into those associations and exchanges from which we expect to be made better off, as we define and desire an improvement in our lives.
This does not mean that we often do not wish that the terms under which another is willing to trade with us would be more favorable to ourselves. But the fact that we may choose to exchange at some agreed terms that is minimally acceptable to ourselves as well as to the other person means that, all things considered, we anticipate that our circumstances will be better than if we passed up this trading opportunity.
The only time that it is clear that a trade or an association with others is not considered by us as a source of personal betterment is when we are forced or coerced into the relationship. Why would compulsion have to be used or threatened against us, if we did not view what we are being compelled to do is an action or a commitment that we evaluate as making us worse rather than better off?
The Mutual Respect of Private Property
Fourthly, liberty means that each individual’s honestly acquired property is respected as rightfully his, and may not be plundered or taxed away by others, even when majorities may think that some minority has not paid some supposed “fair share.”
What makes something the rightful property of an individual? When he has either appropriated unclaimed and previously unowned land and resources through their transformation in some manner through his mental and physical labor, or when he has acquired it through peaceful and non-fraudulent trade with another in exchange for something he has to offer in the form of a desired good or his labor services at voluntarily agreed-upon terms of trade.
The use of force by either private individuals or those in political authority to seize such rightful property or compel its use or sale on terms other than those freely chosen and agreed to by its owner is, therefore, unjust and indefensible in a free society.
A Free Market of Goods and Ideas
Fifthly, liberty means respect for the free, competitive interactions of people in the marketplace of goods and ideas, out of which comes the creative and innovative energy of mind and effort that bring about rising standards of living for all in society.
The free market is the arena of human association in which each individual is at liberty to make his own choices and decisions as both producer and consumer.
Yet, as has been understood since the time of Adam Smith in the eighteenth century, each individual, in his own self-interest, necessarily must apply his abilities in ways that take into consideration the circumstances and desires of others in society.
Since, in the society of liberty, no individual may acquire what he desires through murder, theft or fraud, he is left with only one avenue to obtain what others have that he wants. He must offer to those others something that he can produce or provide that those others value more highly than what they are asked to trade away to get it.
Thus, in the free market each receives in voluntary trade what they value more highly in exchange for what they value less highly. And each serves the interests of others as the means to his own end of the personal improvement of his self-defined circumstances.
Thus, the free market as a moral and starting principle eschews all forms of compelled self-sacrifice in the networks of human association.
Liberty and Limited Government
And, sixthly, a society of liberty means a limited government, a government whose purpose is to protect each individual in his freedom and peaceful market and social affairs, and is not to be an agency of political oppression or economic favoritism through special privileges and benefits that are given to some at the expense of others in society.
Compulsory redistribution of wealth and income, and regulatory coercions over the means and methods of production, and the peaceful buying and selling of goods and services are all inconsistent with the ideal of a society of free men and women, each secure in their individual rights to their life, liberty and honestly acquired property.
These are not easy rules and ideals to live by, but they are what America was founded upon and made it originally great as a land of liberty – a land of both wide individual freedom and rising prosperity.
Winning Others Over to Liberty, One Person at a Time
They are, also, ideas not always easy to get others around us to understand and appreciate the way we see them, ourselves. This gets us back to Leonard Read’s conception of self-improvement in our own understanding of what he called the “freedom philosophy.”
Our New Year’s resolution should be to do all that we individually can to better understand the principles of liberty, their logic, their moral rightness, and their convincing application to the political and economic issues of our day.
As we each become more enlightened and articulate spokespersons for freedom we widen the circle of people able to persuasively draw others into that illumination of liberty. And step-by-step, one person at a time, the supporters and advocates of collectivism will be reduced and the proponents and enthusiasts for freedom will be increased.
Make it your goal, therefore, to bring at least one person over to the cause of liberty in 2015, and if we all do this we will have, at a minimum, doubled the friends of freedom in this New Year. If we repeat this same process of reasoned persuasion in 2016, that larger number can and will be doubled again. And, then, again in 2017, and 2018, and . . .
Through this means of peaceful persuasion the friends of freedom can become the majority of Americans in our own lifetime. All it requires is enough of us willing to try.
As a new year begins, it is easy to consider that the prospects for freedom in America and in many other parts of the world to seem dim. After all, government continues to grow bigger and more intrusive, along with tax burdens that siphon off vast amounts of private wealth.
Extrapolating these trends out for the foreseeable future, it would seem that the chances for winning liberty are highly unlikely. There is only one problem with this pessimistic forecast: the future is unpredictable and apparent trends do change.
Many years ago the famous philosopher of science Karl Popper pointed out, “If there is such a thing as growing human knowledge, then we cannot anticipate today what we shall only know tomorrow.” What does this mean?
When I was in high school in the 1960s, I came across an issue ofPopular Science magazine published in the early 1950s that was devoted to predicting what life would be like for the average American family in the 1970s. It had a picture of a wife and child standing on an apartment building roof waving good-bye to dad as he went off to work—in his one-seat mini-helicopter!
As best as I can recall, the authors talked about such things as color televisions, various new household appliances, robots that would do much of our household work, and the use of jet planes for commercial travel. What was not mentioned, however, was the personal computer or the revolution in communication, knowledge, and work that it has brought about. When that issue of Popular Science was published, one essential element of the computer revolution had not yet been invented: the microchip.
We Cannot Predict Tomorrow’s Knowledge Today
Those authors could not imagine a worldwide technological revolution before the component that made it all possible was created by man. Our inescapably imperfect knowledge means we can never predict our own future. If we could predict tomorrow’s knowledge and its potentials, then we would already know everything today—and we would know we knew it!
This applies to social, political, and economic trends as well. Most people in 1900 expected the twentieth century to be an epoch of growing international peace and harmony. In 1911, the British free trader and peace advocate, Norman Angell (who won the Nobel Peace Prize in 1933), argued in The Great Illusion that war had become so costly in terms of financial expense and wasteful destruction that it would be irrational for the “Great Powers” of Europe or America to be drawn down that path any longer.
But, instead, in 1914, there began the First World War, that went on for four years, took the lives of at least 20 million soldiers, and cost (in 2014 dollars) over $3 trillion. And the relatively classical liberal and free market world that prevailed before the “Great War,” was shattered.
The twentieth century, as a whole, was the bloodiest and most destructive in modern history due to the rise of political and economic collectivism, in the forms of socialism, communism, fascism, Nazism and the interventionist-welfare state. The conflicts that collectivism brought in its wake have cost possibly 250 million lives over the last one hundred years. No one anticipated this turn of events in 1900.
The Unpredictability of Future Political-Economic Trends
When I was an undergraduate in the late 1960s the book assigned in my first economics class was the seventh edition of Paul Samuelson’s Economics (1967), the leading Keynesian-oriented textbook at the time.
There was a graph that tracked U.S. and Soviet Gross National Product (GNP) from 1945 to 1965. Samuelson then projected American and Soviet GNP through the rest of the century. He anticipated that possibly by the early 1980s, but certainly by 2000, Soviet GNP would be equal to or even greater than that of the United States. Notice his implicit prediction that there would be a Soviet Union in 2000, which in fact disappeared from the map of the world in December 1991.
Which of us really expected to see the end of the U.S.S.R. in our lifetimes, without either a nuclear cataclysm or a devastating and bloody civil war? In the mid-1980s the often perceptive French social critic Jean-François Revel published How Democracies Perish, in which he expressed his fear that the loss of moral and ideological commitment to freedom by intellectuals and many other people in the West meant that the global triumph of communism under Soviet leadership was a strong possibility. Instead it was Soviet communism that disappeared from the map of the globe.
Who in January 1990 anticipated that Saddam Hussein would invade Kuwait in August of that year, setting in motion a chain of events that resulted in two American invasions and a ten-year occupation of Iraq?
Who in 2000 would have anticipated that Bill Clinton’s eight years in office would seem, in retrospect, an era of restrained government compared to the explosion in government spending and intervention during the George W. Bush and Barack Obama administrations?
Historical Chronology Does Not Mean Future Causality
And who today knows what the whole twenty-first century holds for us? Let me suggest that the answer is: nobody.
As the late Robert Nisbet, one of America’s great social thinkers, once pointed out, “How easy it is, as we look back over the past – that is, of course, the ‘past’ that has been selected for us by historians and social scientists – to see in it trends and tendencies that appear to possess the iron necessity and clear directionality of growth in a plant or organism . . . But the relation between the past, present, and future is chronological, not causal.”
The decades of relative global peace and market-based prosperity that preceded 1914 did not mean that war and destruction were impossible for the rest of the twentieth century. The ascendancy of Soviet communism, Italian fascism, and German Nazism in 1920s, 1930s and 1940s did not mean that freedom and democracy had reached their end, though the books and articles of some of the most insightful advocates of individual liberty and limited government in the years between the two World Wars carried the despair and fear that totalitarianism was the inescapable wave of the future.
The persistent and current growth in government intervention and the welfare state does not mean that a return to the classical-liberal ideas of individual liberty, free markets, and limited government is a pipe dream of the past.
Human Events are the Result of Human Action
Human events are the result of human action. Our actions are an outgrowth of our ideas and our will and willingness to try to implement them. The stranglehold of Big Government will persist only for as long as we allow it, for as long as we accept the arguments of our ideological opponents that the interventionist welfare state is “inevitable” and “irreversible.”
That is, the present trend will continue only for as long as we accept that the chronologically observed increase in government power over the last decades is somehow causally determined and inescapable in the stream of human affairs.
This could have been equally said about human slavery. Few institutions were so imbedded in the human circumstance throughout recorded history as the ownership of some men by others. Surely it was a pipe dream to suggest that all men should be free and equal before the law.
Yet in the eighteenth and nineteenth centuries a new political ideal was born – that declared that all men are created equal and endowed with certain unalienable individual rights to life, liberty and honestly acquired property, which no other mortals could take away. So slavery, which Aristotle considered to be the natural condition of some men, was brought to an end before the close of the nineteenth century through the power of ideas and human purpose.
In the 1700s, mercantilism – the eighteenth-century version of central planning – was considered both necessary and desirable for national prosperity. Even Adam Smith, in the Wealth of Nations(1776), believed that its hold over men’s minds and actions was too powerful to ever permit the triumph of free trade. Yet in one lifetime following Adam Smith’s death in 1790, freedom of trade and enterprise was established in Great Britain and the United States, and then slowly but surely through much of the rest of the world.
This was all made possible because of the rise and partial triumph of a political philosophy of individual rights that argued for the banishment of violence and oppression in the relationships among men.
Liberty’s Winning Ideas are Out There
We cannot imagine, today, how freedom will successfully prevail over our current paternalistic governments, any more than many people could imagine in 1940 a world without German Nazism and Soviet communism, or FDR’s New Deal. But that does not mean it’s impossible.
Precisely because the future is unknown, we may be confident that trends can and will change, just as they have in the past. We cannot fully know today what arguments friends of freedom will imagine and successfully articulate tomorrow to end government control of our lives. But those arguments are out there, waiting to be better formulated and presented, just as earlier friends of freedom succeeded in making the cases against slavery and mercantilism.
In 1951, Austrian economist Ludwig von Mises pointed out, “Now trends of [social] evolution can change, and hitherto they almost always have changed. But they changed only because they met firm opposition. The prevailing trend toward what Hilaire Belloc called the servile state will certainly not be reversed if nobody has the courage to attack its underlying dogmas.”
There is one thing, therefore, that we can predict: patience, persistence, and belief in the power of ideas and a well articulated defense of individual rights and free markets will provide the best chance we have to achieve the free society many of us so much desire.
[This first appeared at http://www.epictimes.com/richardebeling/2014/12/forecasting-the-future-and-winning-liberty/3/]
At a time of the year when gift giving and charitable good spirit fills the air, please allow me to be the one who rains on the parade: “Yes, Virginia, there is no Santa Claus!”
I don’t mean the Santa who comes down the chimney with toys for every girl and boy. This is the Santa who really is Mom or Dad, Grandparent or other family members or close friends who out of their own earned income choose to purchase, wrap and give gifts to those little ones on Christmas morning.
The small child may have been told the fairy story about an jolly, fat man in a red suit who lives in the far north, working with his elves all year long so the toys and other presents are ready to be miraculously delivered to every “good boy and girl” around the world in one night.
But we “adults” all know that is all just a story for the children at an early and gullible age when the fantasy of it all seems possibly real. And many of us cherish those early years of wonder and make-believe, before the reality breaks through that it just does not and cannot happen that way.
The Redistributing and Regulating Political Santa
I mean the Uncle Sam “Santa” that, not just at Christmas time, but year-round, is believed by many people to have the ability to bring them many of the good things they want from a mythical North Pole called Washington, D.C., or any governmental capital around the world.
This is the political Santa who delivers subsidies of various sorts to farmers or “alternative energy” manufacturers. The Santa who redistributes vast sums of money for educational expenditures, or public housing, welfare and food stamps, or government defense contracts, and even “bridges to nowhere.”
This is also the political Santa who can magically fill the global skies with unmanned drones for surveillance and death, or fund decade-long trillion-dollar wars in far-off lands, or bankroll “friendly” governments in other places around the world while punishing “bad” countries for what Uncle Sam defines as “misbehavior.”
This is the Santa who claims the power and ability remake human nature, control human thought, and redesign some or even all of human society into various preferred shapes and forms.
This political Santa works hard to create the illusion that prosperity and improvement in the human condition cannot happen if not for the guiding, regulating, and manipulating hand of “benevolent” government.
The Political Myth of Something for Nothing
But while almost all children grow out of their belief in a Santa Claus with his home at the North Pole who “somehow” succeeds in manufacturing all those “goodies” that he carries on his sleigh on Christmas Eve, many people go through their entire life convinced of the Santa-like abilities of a paternalistic government that can “somehow” assure many, if not all, of the desired good things of life.
However, just as “Santa” is really Mom and Dad who buy the presents, and wrap them to put under the Christmas tree, governmental “Santa” are those in political office who have no ability to bestow desired benefits on “all” without, in fact, first taking from some to give to others.
Mom and Dad work. They assist in producing goods or in performing services for others in the marketplace, which earns them a salary or nets them a profit. They have had to first produce to, then, through the income they earned, have the ability to consume, including on the goods that their children find on Christmas morning.
The governmental Santa must, first, tax away the income and wealth of some to, then, redistribute it in one form or another to others in the country over which those in political power assert fiscal and regulatory authority.
For the mythical Santa at the North Pole there are no costs for anything he does. The resources, raw materials and tools with which his Christmas goodies are made just appear. The elves work, apparently, for nothing and their food and clothes do not need to be produced, either.
For our political Santa Claus to rain redistributive “gifts” on those he considers deserving and “nice,” he must take from those found to be “naughty” and not nice.
Political Santa’s “Gifts” Carry High Costs
Our political Santa Claus imposes real and meaningful costs on many in society to do his magical “social work.” First, he must appropriate part of the material wealth produced by those productive members of society. People who, in a free market, only earn what they have by peacefully offering to others things those others desire and value enough to pay an agreed-upon price to acquire.
A portion of the intellectual and material effort of real men and women are seized from them through compulsory taxation. The government classifies these net taxpayers in society as having more than they “really” need, and usually don’t ethically “deserve.”
They get “sack of coal” for being “bad” in the form of being left with less than the full value of their creative and hardworking effort. They are denied the opportunity and the right to enjoy the complete fruits of their mental and physical labors. Their choices to spend what they have honestly earned are narrowed to what the political Santa decides they should have available to spend.
The “good” little political citizens who are given the redistributive benefits, therefore, are the net recipients of what others have produced, and which they have received due the ideological and pressure group power they can bring to bear in collaboration with the political Santa in the municipal, state, and national halls of governmental control.
But the costs of political Santa’s generosity do not come just in the form of direct redistributions. They also come in the form of regulations, restrictions, and licensing requirements that determine who may allowed to compete, work, and earn a living in a particular line of enterprise, production, and trade.
This “sack of coal” for the “bad” citizens also comes in the form in the inability to start a business or expand and successfully run an enterprise as the result of the regulatory hand of political Santa. The costs also take the form of closed opportunities for those with little or no skills to find work or be hired at a starting wage that would give them a chance at improving their own lives through honest employment in the free marketplace.
It also costs the consumers who find their choices and options are more limited or nonexistent than the free market would have provided, if only the government had not imposed these barriers, walls, and hurtles in the way of those who merely wish to be left alone to go about their private and personal affairs of life by offering new, better, and less expense goods and services to their fellow men through honest, peaceful, and mutually agreed terms of trade.
The “good little citizens” in this case are those on the supply-side of the market who are sheltered from the competition of real or potentially more efficient and productive rivals. Their larger market shares, greater profit margins, and costly inefficiencies are protected by the political Santa’s regulatory power; he, in turn, receives the campaign contributions and implicitly bought votes on election days that keep him in office.
The Myth of Needing a Political Santa for Life
For political Santa to pursue his mythical game in governmental plunderland, he must do all in his power to persuade and convince his citizen “children” that they do not have a right to their own life and to live it in their own chosen way. They must be indoctrinated to either passively accept the role of life-long dependent upon the political Santa, or to serve as the self-sacrificing elves who must do the work to produce all the goods and services in the world that will be redistributed out of the political Santa’s sack of taxed and regulated benefits.
Santa will educate you; he will see that you have a job and that you receive a “fair” wage. He will make sure that you are safe and satisfied by controlling what is produced, how it produced, and the terms under which the “bad” business children under his regulatory supervision market and sell many of those “goodies” to you.
When sick or disabled, political Santa will give you medical care; and he will guarantee you a retirement free from the need for planning for these things yourself.
All you need to do is accept your status as a lifetime adolescent needing supervision, care, and oversight in everything and in all things that you do. The spirit and psychology of being political Santa’s dependent was captured in that government website cartoon during the first Obama Administration called “The Life of Julia.”
“Julia” needed government to supply the hospital in which she was born; to provide the pre-school education with which her political indoctrination began; too see that Julia was given not only a government high school diploma, but got taxpayer subsidies and special quotas to make it into a preferred college or university; to see that gender affirmative action laws guaranteed a “fair chance” to a good paying job and career that she otherwise could never get on her own; and to see that in later years Julia has the safety-net of government Social Security, without having to bear the responsibility of carrying for this herself.
Self-Sacrificing “Elves” to Serve Political Santa
The other side of political Santa’s plunderland is the indoctrination of the productive and producer “elves” who are needed to do the work that supplies all that government can give away. This requires convincing everyone that “society” comes before the individual; that anything that the individual has is not due to his own effort and his peaceful and voluntary associations with others, or as President Obama asserted, “You did not built it.”
Instead, what you have is due to the collective efforts of all, so that you cannot claim a right to anything or any more than what the collective deems you to deserve. And it is political Santa who represents and acts for the social collective in determining what shall be expected from you and in what form, and what you shall be allowed to have from “society” (or that you are allowed to keep) as bestowed by the government’s redistributive and regulatory activities.
But just as there is no Santa at the North Pole, there is no political Santa in society. Political Santa is really those who run for political office to gain and retain governmental control and power over other people’s lives. Political Santa is really all the special interest groups who wish to use the halls of governmental power to obtain through regulation and taxation what they cannot honestly earn in the open competition of the free marketplace.
Ethical Benevolence vs. Political Immorality
Benevolence and voluntary charity, and a properly understood spirit of “giving” to those you value and love at Christmas time are right and virtuous sentiments of free people in the open society.
But belief in and actions based upon the idea of a “political Santa” only succeeds in weakening and finally destroying the spirit and ethical health of a free and prosperous society.
So, yes, Virginia, there is no Santa Claus. Neither a North Pole Santa who comes down the chimney in a red suit, nor a political Santa who can give people “something for nothing” in a world in which all that people want and desire must be creatively produced by someone before it may used to satisfy those wants and desires.
What makes the mythical belief in a political Santa far worse than the short-lived childhood belief in the North Pole Santa, is that the idea of a political Santa challenges and destroys the spirit of individualism upon which the good, free and prosperous society ultimately rests.
A specter is haunting the world, the specter of two percent inflationism. Whether pronounced by the U.S. Federal Reserve or the European Central Bank, or from the Bank of Japan, many monetary central planners have declared their determination to impose a certain minimum of rising prices on their societies and economies.
One of the oldest of economic fallacies continues to dominate and guide the thinking of monetary policy makers: that printing money is the magic elixir for the creating of sustainable prosperity.
In the eyes of those with their hands on the handle of the monetary printing press the economic system is like a balloon that, if not “fully inflated” at a desired level of output and employment, should be simply “pumped up” with the hot air of monetary “stimulus.”
The Fallacy of Keynesian Macro-Aggregates
The fallacy is the continuing legacy of the British economist, John Maynard Keynes, and his conception of “aggregate demand failures.” Keynes argued that the economy should be looked at in terms of series of macroeconomic aggregates: total demand for all output as a whole, total supply of all resources and goods as a whole, and the average general levels of all prices and wages for goods and services and resources potentially bought and sold on the overall market.
If at the prevailing general level of wages, there is not enough “aggregate demand” for output as a whole to profitably employ all those interested and willing to work, then it is the task of the government and its central bank to assure that sufficient money spending is injected into the economy. The idea being that at rising prices for final goods and services relative to the general wage level, it again becomes profitable for businesses employ the unemployed until “full employment” is restored.
Over the decades since Keynes first formulated this idea in his 1936 book, The General Theory of Employment, Interest, and Money, both his supporters and apparent critics have revised and reformulated parts of his argument and assumptions. But the general macro-aggregate framework and worldview used by economists in the context of which problems of less than full employment continue to be analyzed, nonetheless, still tends to focus on and formulate government policy in terms of the levels of and changes in output and employment for the economy as a whole.
In fact, however, there are no such things as “aggregate demand,” or “aggregate supply,” or output and employment “as a whole.” These are statistical creations constructed by economists and statisticians, out of what really exists: the demands and supplies of multitudes of individual and distinct goods and services produced, and bought and sold on the various distinct markets that comprise the economic system of society.
The Market’s Many Demands and Supplies
There are specific consumer demands for different kinds and types of hats, shoes, shirts, reading glasses, apples, and books or movies. But none of us just demands “output,” any more than there is just a creation of “employment.”
When we go into the marketplace we are interested in buying the specific goods and services for which we have particular and distinct demands. And businessmen and entrepreneurs find it profitable to hire and employ particular workers with specific skills to assist in the manufacture, production, marketing and sale of the distinct goods that we as individual consumers are interested in purchasing.
In turn, each of these individual and distinct goods and services has its own particular price in the market place, established by the interaction of the individual demanders with the individual suppliers offering them for sale.
The profitable opportunities to bring desired goods to market results in the demand for different resources and raw materials, specific types of machinery and equipment, and different categories of skilled and lesser skilled individual workers to participate in the production processes that bring those desired goods into existence.
The interactions between the individual businessmen and the individual suppliers of these factors of production generate the prices for their purchase, hire or employment on, again, multitudes of individual markets in the economic system.
The “macro” economist and his statistician collaborator then proceed to add up, sum and averages all these different individual outputs, employments and specific prices and wages into a series of economy-wide measured aggregates.
But it should be fairly clear that in doing so all the real economic relationships in the market, the actual structure of relative prices and wages, and all the multitude of distinct and interconnected patterns of actual demands and supplies are submerged and lost in the macro-economic aggregates and totals.
Balanced Markets Assure Full Employment
Balanced production and sustainable employments in the economy as a whole clearly requires coordination and balance between the demands and supplies of all the particular goods and services in each of the specific markets on which they are bought and sold. And parallel to this there must be comparable coordination and balance between the businessmen’s demands for resources, capital equipment and different types of labor in each production sector of the market and those supplying them.
Such coordination, balance, and sustainable employment requires adaptation to the every-changing circumstance of market conditions through adjustment of prices and wages, and to shifts in supplies and demands in and between the various parts and sectors of the economy.
In other words, it is these rightly balanced and coordinated patterns between supplies and demands and their accompanying structures of relative prices and wages that assure “full employment” and efficient and effective use of available resources and capital, so entrepreneurs and businessmen are constantly and continuously tending to produce the goods we, the consumers, want and desire, and at prices that are covering competitive costs of production.
All this is lost from view when reduced to that handful of macro-aggregates of “total demand” and “total supply” and a statistical average price level for all goods relative to a statistical average wage level for all workers in the economy.
The Keynesian Government “Big Spender”
In this simplified and, indeed, simplistic view Keynesian-type view of things all that needs to be done from the government’s policy perspective is to run budget deficits or create money through the banking system to push up “aggregate demand” to assure a targeted rise in the general price level so profit-margins “in general” are widened relative to the general wage level so employment “in general” will be expanded.
We can think of government as a “big spender” who comes into a town and proceeds to increase “aggregate demand” in this community by buying goods. Prices for final output rise, profit margins are widened relative to the general wage level and other general cost-prices. Private businesses, in general, employ more workers, purchase or hire other inputs, and “aggregate supply” expands to a point of desired “full employment.”
The presumption on the part of the center bankers in targeting a rate of an average annual price inflation of two percent is that while selling prices are to be pushed up at this average annual rate through monetary expansion, the average level of cost prices (including money wages in general) will not rise or not by the same percentage increase as the average increase in the “price level.”
If cost prices in general (including money wages) were to rise at the same rate as the price level, there would be no margin of additional profits to stimulate greater aggregate output and employment.
Market Anticipations Undermine Keynes’ Assumptions
The fallacy in thinking that cost-prices in general will permanently lag behind the rate of increase in the price level of final goods and services was pointed out long ago, in 1898, by the famous Swedish economist, Knut Wicksell:
“If a gradual rise in prices, in accordance with an approximately known schedule, could be reckoned on with certainty, it would be taken into account in all current business contracts; with the result that its supposed beneficial influence would necessarily be reduced to a minimum.
“Those people who prefer a continually upward moving to a stationary price level forcibly remind one of those who purposely keep their watches a little fast so as to be more certain of catching their train. But to achieve their purpose they must not be conscious or remain conscious of the fact that their watches are fast; otherwise they become accustomed to take the extra few minutes into account, and so after all, in spite of their artfulness, arrive too late . . .”
The Government “Big Spender” Unbalances Markets
But the more fundamental error and misconception in the macro-aggregate approach is its failure to appreciate and focus on the real impact of changes in the money supply that by necessity result in an unsustainable deviation of prices, profits, and resources and labor uses from a properly balanced coordination, the end result of which is more of the very unemployment that the monetary “stimulus” was meant to cure.
Let’s revert to our example of the “big spender” who comes into a town. The townspeople discover that our big spender introduces a greater demand into the community, but not for “goods in general.” Instead, he announces his intention of building a new factory on the outskirts of the town.
He leases a particular piece of land and pays for the first few months rent. He hires a particular construction company to build the factory, and the construction company in turn increases its demand not only for workers to do the work, but orders new equipment, that, in turn, results in the equipment manufacturers adding to their workforce to fulfill the new demand for construction machinery.
Our big spender, trumpeting the wonders for the community from his new spending, starts hiring clerical staff and sales personal in anticipation of fulfilling orders once the factory is completed and producing its new output.
The new and higher incomes earned by the construction and machinery workers, as well as the newly employed clerical and sales workers raise the demand for various and specific consumer and other goods upon which these people want to spend their new and increased wages.
The businesses in the town catering to these particular increased consumer demands now attempt to expand their supplies and, perhaps, hire more retail store employees.
Over time the prices of all of these goods and services will start to rise, but not at the same time or to the same degree. They will go up in a temporal sequence that more or less tends to match the pattern and sequence of the changed demands for those goods and services resulting from the new money injected by the “big spender” into this community.
Inflationary Spending Has to Continue and Increase
Now, whether some of the individual workers drawn into this specific pattern of new employments were previously unemployed or whether they had to be attracted away from existing jobs they already held in other parts of the market, the fact remains that their continued employments in these particular jobs is dependent on the “big spender” continuing to inject and spend his new money, period-after-period of time, in the same way and in sufficient amounts of dollar spending to assure that the workers he has drawn into his factory project are not attracted to other employments due to the rise in all of these alternative or other demands, as well.
If the interdependent patterns of demands and supplies, and the structure of interconnected relative prices and wages generated by the big spender’s spending are to be maintained, his injection of new money into the community must continue, and at an increasing rate of spending if they are not be fall apart.
An alternative imagery might be the dropping of a pebble or stone into a pond of water. From the epicenter where the stone has hit the surface of the water a sequence of ripples will be sent out which will be reversed when the ripples finally hit the surrounding shore, and will then finally come to rest when there is no longer any new disturbances affecting the surface of the pond.
But if the pattern of ripples created are to be sustained, new pebbles or stones must be continuously dropped into the pond and with increasing force if the resulting counter-waves coming back from the shore are not to disrupt and overwhelm the ripple pattern moving out from the original epicenter.
The “Austrian” Analysis of Inflation
It is no doubt that this way of analyzing and understanding the dynamics of how monetary expansion affects market activities is more complex and complicated than the simplistic Keynesian-style of macro-aggregate analysis. But as the famous Austrian-born economist, Joseph A. Schumpeter emphasized:
“The Austrian way of emphasizing the behavior or decisions of individuals and of defining the exchange value of money with respect to individual commodities rather than with respect to a price level of one kind or another has its merits, particularly in the analysis of an inflationary process; it tends to replace a simple but inadequate picture by one which is less clear-cut but more realistic and richer in results.”
And, indeed, it is this “Austrian” analysis of monetary expansion and its resulting impact on prices, employment and production, especially as developed in the 20th century by Ludwig von Mises and Friedrich A. Hayek, that explains why the Keynesian-originated macro-aggregate approach is fundamentally flawed.
As Hayek once explained the logic of the monetary inflationary process:
“The influx of the additional money into the [economic] system always takes place at some particular points. There will always be some people who have more money to spend before the others. Who these people are will depend on the particular manner in which the increase in the money stream is being brought about . . .
“It may be spent in the first instance by government on public works or increased salaries, or it may be first spent by investors mobilizing cash balances for borrowing for that purpose; it may be spent in the first instance on securities, or investment goods, on wages or on consumers’ goods . . .
“The process will take very different forms according to the initial source or sources of the additional money stream . . . But one thing all these different forms of the process will have in common: that the different prices will rise, not at the same time but in succession, and that so long as the process continues some prices will always be ahead of others and the whole structure of relative prices therefore will be very different from what the pure theorist describes as an equilibrium position.”
An inflationary process, in other words, brings about distortions, mismatches, and imbalanced relationships between different supplies and demands, and the relationships between the structure of relative prices and wages that only last for as long as the inflationary process continues, and often only at an accelerating rate.
Or as Hayek expressed it on a different occasion:
“Any attempt to create full employment by drawing labor into occupations where they will remain employed only so long as the [monetary and] credit expansion continues creates the dilemma that either credit expansion must continue indefinitely (which means inflation), or that, when it stops unemployment will be greater than it would be if the temporary increase in employment had never taken place.”
The Inflationary “Cure” Creates More Market Problems
Once the inflationary monetary expansion ends or is slowed down, it is discovered that the artificially created supply and demand patterns and relative price and wage structure are inconsistent with non-inflationary market conditions.
In our example of the “big spender,” one day the townsfolk discover that he was really a con artist who had only phony counterfeit money to spend, and whose deceptive promises and temporary spending drew them into in all of those specific and particular activities and employments. They now find out that the construction projects began cannot be completed, the employments created cannot be maintained, and the investments started in response to the phony money the big spender injected into this community cannot be completed or continued.
Many of the townspeople now have to stop what they had been doing, and try to discover other demanders, other employers and other possible investment opportunities in the face of the truth of the big spenders false incentives to do things they should not have been doing from the start.
The unemployment and under utilization of resources that “activist” monetary policy by governments are supposed to reduce, in fact, set the stage for an inescapable readjustment period of more unemployment and temporary idle resources, when many of the affected supplies and demands have to be rebalanced at newly established market-based prices if employments and productions are to be sustainable and consistent with actual consumer demands and the availability of scarce resources in the post-inflationary environment.
Thus, recessions are the inevitable result from prior and unsustainable inflationary booms. And even the claimed “modest” and “controlled” rate of two percent annual price inflation that has become the new panacea for economic stability and growth in the minds of central bankers, brings in its wake a “wrong twist” to many of the micro-economic supply and demand and price-wage relationships that are the substance of the real economy beneath the superficial macro-aggregates.
Governments and their monetary central planners, therefore, are the cause and not the solution to the instabilities and hardships of inflations and recessions. To end them, political control and manipulation of the money and banking systems will have to be abolished.
[This piece first appeared here: http://www.epictimes.com/richardebeling/2014/12/the-false-promises-of-two-percent-price-inflation/]