Interview with Dr William White, former Head of the Monetary and Economic Department at the BIS Part 1

William White is currently Chairman of the Economic and Development Review Committee of the OECD which provides policy recommendations to governments of member and aspiring member countries.  Mr White was one of four members of the Issing Committee which, from 2009 to 2013, advised Chancellor Merkel of Germany on matters pertaining to international financial stability.

He continues to do research on issues pertaining to monetary and financial stability. He has published both academic papers and shorter articles of interest to the serious press in many countries. As well, Mr White regularly makes associated presentations, tailored to a wide variety of audiences, worldwide. More information can be found at

Mr White held the position of Economic Adviser at the Bank for International Settlements (BIS) in Basel for 14 years before retiring in 2008. Prior to joining the BIS,he spent three years at the Bank of England followed by 22 years with the Bank of Canada. He left the latter as Deputy Governor for International Affairs.

The Cobden Centre contributor Sean Corrigan and Editor Max Rangeley interviewed Dr White on recent developments in Europe and around the world.



Max Rangeley: Well, thank you very much for being on the call today, Bill. That’s really great. So I’ve got a few questions here, which I thought we could go through. First, now that QE has started in Europe is this likely to cause further distortions rather than stimulate the economies of Europe, especially will it favour large corporations at the expense of small businesses, do you think?

William White: To be honest, I’m not sure it’s going to do anything – certainly, anything that’s good. The fundamental problem here, as I see it anyway, is that the European banking system is still broken. As you know, the European economy is heavily reliant on small and medium-sized enterprises, and they are reliant in turn on bank financing. Unfortunately, it is these firms that are not getting the bank financing that they need. Until that gets fixed, we will continue to have a huge problem in Europe.

It also needs to be remembered that, while the first round of QE everywhere was intended to deal with liquidity problems in financial markets, QE2 and QE3 in the United States were designed to spur increases in aggregate demand through lower term spreads and credit spreads. The idea that QE will work in Europe, which has a much greater dependency on bank financing, seems a little farfetched to me.

In any event, here in the euro zone bond yields are incredibly low already although one cannot rule out that this was in anticipation of QE. So my general sense is that I don’t think QE was needed and I am dubious that it will work in stimulating aggregate demand as intended. Moreover I remain worried that its implementation might bring with it other unintended and undesirable consequences that we haven’t even thought about. All that said, I think the ECB was under such pressure to act further that it had little choice but to do what it did. And that, in itself, I think, is really unfortunate, because it just drags another important central bank still deeper and deeper into this malaise of central bank over extension.

Sean Corrigan: As you say, I couldn’t agree more. It’s a question of dysfunctional banking and also of the debt hangover, which we haven’t addressed. And to me, QE is self-deceiving in that the liquidity issue, as you say, was the first rationale in the aftermath of the Lehman collapse was one thing, but to then try and use it as a macro tool when what you’re trying to do is make borrowing more attractive for people who have just been burnt by overborrowing seems–

William White: Mad. It’s mad here and it’s mad everywhere. It’s more of what got us into trouble in the first place.

Sean Corrigan: We’re trying to fix banks but now we’re destroying their net interest rate margins, by trying to work this way as well. We’re also destroying all the other financial institutions like insurance and pension companies that must be bleeding everywhere.

William White: I’m working on a piece for the G30 which basically deals with the future of central banking and the future of monetary policy. I sense from talking to many of the members, many of whom are previous central bankers, that they are very concerned about the direction this has taken, in particular the continued over reliance on stimulative monetary policy to get us out of the predicament we are in. It has turned into a kind of Pandora’s box. Swiss Re has recently published a paper called “Financial Repression: Quantifying the Cost” which looks at the cost of these unusually low interest rates for the insurance industry. Clearly, they are really, really worried about it and I don’t blame them.

As for your other point Sean, I also agree. I guess in the early days when they started lowering the interests rates, the thought was that the deposit rates would go down before the loan rates and the banks would get a short-term benefit from the change. But in the fullness of time, however, margins are getting squeezed more and more so that even the banks are being hurt. If broken banks are a big chunk of current problems, particularly in Europe, it is a bit odd that policy is actually making the future of banks and other financial institutions still more dodgy.

As both of you may know, I’ve written a lot about this stuff, not least of which a paper that was published by the Dallas Fed in 2012 . It was called “Ultra Easy Monetary Policy And The Law Of Unintended Consequences.” It contained page after page of all the things that might go wrong. Moreover, knowing that even my imagination might be inadequate, I treated that paper as a kind of work in progress. So every time I opened up The Financial Times or something else and I saw something unpleasant that wasn’t in my paper, I clipped it out and added it to the pile. Unfortunately, the pile is getting bigger and bigger. There is a possibility at least that this whole exercise could end very badly.

Sean Corrigan: This kind of brings us on to one of the other points I think we had on the sketch of the ideas we’d like to discuss with Bill. The bigger issue to me is that the central bank has become the go-to place in lieu of the sheer incapability of politicians to address the problems in front of them. So everything is now, “Let’s ask the central bank do something. Let’s ask the central bank.” Of course, like all public choice issues, the central banks themselves, while perhaps a little reluctant at first, have come to enjoy their role as the world’s superheroes and saviours of the universe. How are we ever going to get them back to doing the job that they should have been doing, which is just providing a back stop to a functioning financial system?

William White: The answer is I don’t know. I think, increasingly, they are discomforted more than anything else. I think it’s not just the ex central bankers but increasingly the people that are still holding the levers. They are starting to ask whether they have somehow been backed into a place where they don’t really want to be. Now, I agree with you, Sean, that there’s an element in everybody, although some more than others, where they’re glad to be looked upon as the saviours of the day. But I rather sense that an increasingly large number of central banks are actually looking at what is going on and saying “We are being asked to do something that is effectively impossible.” In a nutshell, most central bankers know that our economies do not face a liquidity problem but a solvency problem linked to excessive debt accumulation. If it’s a solvency problem, central banks can’t fix it. The only way they can fix it is by inflation which, with the debt levels being the way they are, could very quickly get out of hand.

The point is that, if the debt problem is to be sorted out in any meaningful way, the governments have got to get involved. The hardest thing will be to admit that in many cases the debts cannot be serviced and must be written off, at least in part. This will be painful but the effects of living with crippled financial institutions for many years would be worse. There’s a great line from John Kenneth Galbraith that I used in a paper a while back. You remember Rab Butler whose autobiography was called “Politics: the art of the possible” . Galbraith denies this saying “Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous” . That is where we are at.

Sean Corrigan: I am sure there are sensible voices talking this way, Bill, but then we have Madame Lagarde and her coterie who have rushed to welcome all these things and to offer praise unto the heavens the minute that somebody somewhere is printing some money or borrowing some more money. It doesn’t really help, does it?

William White: No, it certainly doesn’t and I have to say the IMF has not always got it right in the past, as recorded by their own Independent Evaluation Office. This was set up in 1999, I think, around the time we set up the Financial Stability Forum at the BIS. The Independent Evaluation Office looked back at the Funds advice prior to the Asian crisis and basically said the IMF just got it wrong. They ignored the rapid expansion of credit and the rising stock of debt and all the other imbalances that the BIS had been concerned about.

And then around 2011, the IEO did another report on whether the Fund had adequately foreseen the current crisis and warned about it. Again the answer was no. And still more recently, Olivier Blanchard has come out, on at least two occasions, recommending higher inflation as a preventive measure for future crises. His logic is that if you had higher inflation, you’d have higher nominal rates. And if you had higher nominal rates, when you get into one of these crises, you’d have more room for manoeuvre by lowering nominal rates. My initial reaction and that of many central bankers was very negative. Where do you think the higher inflation is going to come from without the kind of monetary and credit easing that is going to create even more of the problems we’ve got already?

Sean Corrigan: Yes. Well, we now come back to ‘secular stagnation’ business as well, don’t we, that’s now become something of a norm even though we have already had this discussion. If you go back, it’s not hard to find. At the back end of the Great Depression, Alvin Hansen – the man more Keynesian than Keynes – started this nonsense off that we were never ever going to grow again, that we were never ever going to find any business that wasn’t blighted with overcapacity. We were never going to employ any more people. And look at what the world economy has done in the last 80 years! I know we’ve messed it up in the last ten or so but, still, great progress is being made on a global scale. We’ve just managed to retard it in our economies. And yet, here we go. We’re recycling the same nonsense that we need to have bubbles and negative interest rates in order to allow anybody to have the hope of finding a job in the morning. I mean, how can you believe that? The madness of it.

William White: Larry Summers argues that the Wicksellian natural rate is now below zero, and the financial rate can’t go below zero, so therefore we have a real problem. Well, my reaction is to suggest we try through policy to get the natural rate back up again The way that you do that is to raise expected profit rates for viable companies that are being held down by all the zombie companies bring supported by banks or governments in one form or another. It will be painful, absolutely no question. There will be a lot of vested interests, which will be hurt. But the way out of this thing is to get rid of the excess capacity and give people an opportunity to make an honest dollar. Now a real complication is that the Chinese, as you know, have got immense amount of excess capacity in all sorts of different areas. Much of the excess capacity is in the hands of the SOEs – the state-owned enterprises. And the problem is it then becomes a fundamental political problem whether that excess capacity can be wound down or not. If it cannot be done, than the Chinese will likely try to export the excess production as an alternative.

Sean Corrigan: Dealing with China, I think that’s absolutely right. They were the go-to people to drive growth so we had this sort of wilful blindness. You know that there’s never been any genuine accounting – even if the books themselves aren’t deliberately cooked – because there’s never been any realistic concept of return on capital there. The SOEs have been social and political instruments. And it does seem like the regime is trying to back out of this, but of course, it can only take baby steps out. If and when unemployment starts to rise out there, this becomes problematical since, as we’ve clearly been told by everybody at the top, this is the main issue from the political-social stability side. The SOEs are the only bodies left to be the reservoirs and the shock absorbers. And as you say, that has implications for the rest of the world. The question here is, does this mean they’re going to try to export their way out and does that mean they have to let the yuan go. But remember we have this pyramid of whatever it was the BIS estimated – $1 trillion in bank loans alone? – certainly, an enormous amount of money – on top of which rests the partly illicit foreign finance smuggled into China via commodities and notional trade. If we let the yuan go, all of that now presents us with a classic, Third World, Thailand, Argentinian-type issue and we end up with not just a competitive devaluation, but possibly a collapse. Is this the next instability that we’re going to face?

William White: I wouldn’t be surprised. If everyone else is trying to devalue against the US dollar, can the Chinese be far behind? I mean you said they certainly must have been watching what the Japanese did and the fact that G20 never said a word about competitive devaluation. The new wrinkle– I’m not sure whether this was the reference you were making to the BIS, Sean – but the BIS estimates that over the last four or five years corporates from emerging market countries have issued 6 trillion dollars worth of bonds, mostly denominated in dollars. If the dollar goes up against all these other currencies, including the Yuan, there’s going to be a lot of people that are going to be on the short end of that currency mismatching.

Sean Corrigan: Well this is ’97, ’98 all over again potentially.

William White: It is not impossible. I haven’t looked closely at the numbers but 6 trillion sounds like a sizable amount of money to me..

Sean Corrigan: It is noticeable that the Chinese press has started in the last month or so to carry articles about this whereas they’ve never really said anything until now. They never said too much about Japan before even though the contention between the two sides there is more deep seated than the simply economic one. But they have started to talk about a world in which the Europeans devalue. This is our second biggest or sometimes our biggest export destination and they devalue, they say. What does this mean for the yuan? For the moment they may feel no need to adjust, but they are talking about the yuan-euro rate. I have not seen that at all up until the last few weeks and since QE was announced in Europe.

William White: The argument being used is that this is not a competitive devaluation because all we’re trying to do is stimulate our own domestic economy. It is only a side effect that the currency goes down. But as we all know, if you’re in a world where you are debt constrained or in a liquidity trap, then the only thing that really is available to you is a lower currency. So these people must know in the back of their minds that that’s basically what they’re doing. Anyway, it seems to me that if everybody is doing what they’re doing on the basis of what everybody else is doing, you might not call it competitive devaluation but it sure looks that way. Who knows? I mean maybe the next step will be the kind of open trade protectionism that we’ saw in the 1930’s. Fortunately, I don’t see many signs of it so far but it’s not impossible.

Sean Corrigan: Indeed, and that would be certainly one way to push the natural rate through the negative, if such a concept means anything! I mean that would be a disaster for world wealth creation, wouldn’t it?

William White: For sure. It should also be noted that many fringe political parties in Europe are already talking about leaving the Eurozone. There’s a very strong protectionist kind of element that seems to be part of what they’re talking about.

Sean Corrigan: Everyone is a Listian or a Mercantilist at heart, Bill. I think local populist politicians find it particularly hard to resist. If they’re appealing to the disenfranchised urban working man, it’s very hard to make an argument for free trade at the same time unfortunately.

William White: It’s a quick fix. One of the things that I’ve been increasingly worried about, as I look at the mistakes that the politicians are making, is that they are doing so to satisfy the guy in the street who wants a quick fix. Ultimately, it is a political thing. I’m currently back to reflecting on a very old issue; namely, whether we need a new international monetary system with rules to impose some discipline. Otherwise, we are going to wind up doing some really dumb stuff.

Max Rangeley: Relating to that with the new monetary system, Bill. At the Cobden Centre, we’re very partial to Friedrich von Hayek. And I was just wondering– we’ve discussed a lot of the distortions that can be caused by very low interest rates. But do you have sympathies with the idea that actually central banks should not set interest rates at all? They should be set by markets, just like all other prices.

William White: Well, I’m not sure that I’m prepared to go that far at this point. However, I can remember having a conversation more than 20 years ago with the then governor of the Bank of Canada, John Crow. We had, at the time, come to exert such a strong influence on the Treasury Bill rate that it basically belonged to us. And I thought that was wrong because I figured that there should be at least a band out there where the interest rate, the longer term rates in particular, could move of their own accord. That could tell us something about what the market thought about where the economy was going, and in turn what policy needed to do. And I’ll be honest. I haven’t really thought this thing through. But the idea of a complimentarity between the central bank that basically sets a very short-term rate and the market, which sets all the others, strikes me as being not an inappropriate way to run the system.

At the moment, the problem is that central banks, either through forward guidance about where the short-term rate is going to go, or through QE that actually exploits the substitution effect to drive the spreads down, are basically responsible for setting all the rates. That I think is wrong. However, my concerns are a little bit like the old joke about the guy who goes in the museum, and says, “I may not know much about art but I know what I don’t like. My comments fall far short of an explicit statement of what I would like to see done as an alternative.

Sean Corrigan: And again, the problem with the central banks has been building. Ever since we moved to floating exchange rates in the first place, of course, but it’s accelerated clearly since the Tequila crisis 20 years ago. Every successive blow-up is bigger and the infamous Greenspan Put — it’s a bit unfair to blame just him for this since everybody followed him in offering one! — but the infamous Greenspan Put has become a bigger and bigger option every time. And now, we’re in a situation where we it’s not just too big to fail banks, but we tried to make the whole system too big to fail, so we also have too big to fail governments. As you say, it’s now all pervasive. Even from the perspective of the screen jockey of financial markets, you can see there’s nobody cares really about analyzing an economy or even a company anymore. It’s all about what’s going to be the central bank’s response to the newsflow.

William White: It’s crazy, crazy. A number of years ago, Mervyn King reminded us of that old line of John Maynard Keynes, which was – I’m not going to get it exactly right – “If central bankers could get themselves thought of as just ordinary working men, like dentists, wouldn’t that be splendid? “And my reaction, even at the time was not dentists but doctors. Above all, do no harm, and that’s where we are at.

I wrote a paper around 2004 which was called “Are Changes in Financial Structure, Increasing Safety Nets?” The whole paper, although it was written in a very polite way, was essentially about the Greenspan Put and moral hazard. It pointed out that the Greenspan Put worked in the sense that, when the economy went down, the Greenspan Put brought it back up again. But the problem is that, as debt levels increased in response to successive bouts of monetary easing, each new bout of easing had to be more vigorous than the one before. The logic of this progression is that at a certain point, monetary easing would no longer deliver the goods. However, the Americans in particular have never seen that. They’ve always said, “Basically, it worked in the past. It will work in the future. As we know from the book “The Black Swan” this logic is just wrong.

Max Rangeley: So it’s like a ratchet effect where every time you need stimulus, you need even lower, lower interest rates and more and more cheap credit, and eventually, you get to the lower bound.

William White: We wrote papers about these issues over a decade ago basically, saying, “If you ratchet down, time after time, you’re going to hit the zero lower bound and what are you going to do then?” I remember a meeting in 2002 or maybe 2003 at the BIS. It was mostly the deputy governors in charge of monetary policy and I was in the chair. The Representative from the Fed had already written a couple of papers with Ben Bernanke on this topic. He concluded that there was no problem with the zero lower bound because there were many other things a central bank could do and he outlined them However, the next person to speak was Masaaki Shirakawa, before he became Governor, who responded by saying We’ve already done all of this stuff in Japan and it didn’t work.”

Sean Corrigan: That’s the tragedy. It is. It seems to me, again the smartest minds in the world don’t seem to notice that they keep allowing over-borrowing to occur and/or they actively promote it. Whichever way, whether it’s a sin of omission or commission, we know this is where the cycle always stops. So then, when the structure fails, there is no will, as you say, to allow the bankruptcies and to cut the deadwood out and so restore the natural rate – even though this is what we did throughout recorded history, all the way up to the New Deal. Then we typically had a two or three year, short, sharp recession before everybody was either back on their feet and merrily building way above the old peak shortly or else they at least had before them the prospect that this was going to be the case.

William White: And even more recently what happened in the Scandinavian banking crisis in the early 1990s.

Sean Corrigan: And in the Asian countries in 1998, of course. We always forget that. They had a huge collapse but they came back stronger than ever, didn’t they?

William White: Yeah. Absolutely.

Sean Corrigan: We try to smooth the cycle out and all we do is perpetuate the debt. But most people don’t look at the balance sheet. The ordinary man has been conditioned not to look too closely at how much he has to pay back. He looks at what the debt costs him to service out of his income – it’s a lessee’s or a tenant’s mentality. So we got into this trap that because there’s ever more debt, we have to continually force the burden down. And so therefore, we push interest rates lower and lower in every cycle. And we preserve too many of the old dead fossilized layers of lending, which have now no economic benefit whatsoever, and this is where we’re ratcheting down. So, the debt level goes up every cycle. The officials at the central banks, however, whether they explicitly think about it this way or not, seem to be focused on trying to keep the overall debt burden at the same level, regardless. And the issue is here is that while they’re doing that on one side with lowered interest rates, on the other side, financial innovation has increased the maturity range for everybody.
The idea that the ordinary man of my father’s generation might be offered an eight-year car loan would have been laughed out of court. It’s a bit of an exaggeration , but you could barely get an eight-year housing loan – not without having saved long and hard to let someone else go before you in the queue at your mutual society! Now, you can get an eight-year car loan. You can get a 50-year mortgage and a non-amortizing mortgage and so on and so forth. But, the people to whom this facility is being extended are lower and lower in the scale of creditworthiness if we’re honest about it. And so, we have enhanced the effects of lower interest rates in more extended payment terms, which means that the monthly take is lower, so we can build a bigger debt mountain. And with that comes all the instability and all the problems of micromanaging the cycle.

William White: Absolutely. It is notable that in the course of the last couple of years, the BIS in its Annual Reports has repeatedly used the phrase the ‘debt trap’. Very low interest rates encourage so much debt increase that central banks fear raising them again because you will bankrupt everybody. That is the debt trap. Similarly, Robert Pringle wrote a book in 2012 called “The Money Trap”, which is about the international side of this over extension. Hans-Werner Sinn has just published “The Euro Trap”, and Eswar Prasad recently published “The Dollar Trap”. There is something going on here with these dynamic processes that is being increasingly recognized as dangerous.

Sean Corrigan: Well, we hear this line from Mr. Carney. Without getting to personalities, of course since I don’t know him – he may well be a very worthy individual – but I can’t read any of his pronouncements without shuddering. He explicitly says this, doesn’t he? “We need more borrowing. We need more borrowing,” and then, “Oh, we will only put up interest rates gently, because with all this borrowing, we will just shock the system again the minute we do anything.”

William White: Who is that you’re talking about?……



Richard Ebeling, “Introductions to the Selected Works of Ludwig von Mises (2000-12)” Part 3

[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.[1]

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,”[2] which he expanded into a comprehensive treatise on Socialism in 1922.[3]In 1927, he published Liberalism,[4] which was followed two years later by Critique of Interventionism.[5] 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.[6]

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).[7] 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.[8]

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.[9]

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.[10]

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.[11] Almost [xv] to a man, the participants recalled that the seminar was one of the most rigorous and rewarding experiences of their lives.[12]

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.[13] 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.[14] 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.[15] 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[16] and Bureaucracy.[17] 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.[18]

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.[19] He also published a number of significant books, including [xvii] Planning for Freedom,[20] The Anti-Capitalistic Mentality,[21] Theory and History: An Interpretation of Social and Economic Evolution,[22] The Ultimate Foundation of Economic Science,[23] and The Historical Setting of the Austrian School of Economics.[24]

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.[25] 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.[26] 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.[27] 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.[28]

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.[29] 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.[30]

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.[31]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.[32] 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.[33]

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.[34] 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.[35]

There were half-hearted attempts to restore international trade and [xxi] monetary order in the 1920s and 1930s, but they all failed.[36] 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.[37] 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.[38] The benefits of a free international economic order were forgotten.[39]

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.[40] 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.[41] 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.[42] 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.”[43] 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.”[44]

The ideal was the so-called “middle way” between laissez-faire and a totally planned economy.[45] 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.[46]

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.[47] 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.[48]After the Second World War, the new [xxv] international order was to be based on planned, regulated, and intergovernmentally managed trade.[49]

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.[50] 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.[51] 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.[52] 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.[53]

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.[54]

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.[55] 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.[56] 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.[57]

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[58] and Liberalism,[59] 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.[60]


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.[61]

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.)[62]

While generally critical of government-sponsored and supported cooperative movements,[63] 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.[64] 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

[1.] 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.

[2.] Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” [1920] in F. A. Hayek, ed., Collectivist Economic Planning (London: Routledge & Sons, 1935), pp. 87–130.

[3.] Ludwig von Mises, Socialism (Indianapolis: Liberty Fund, [1951] 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.

[4.] 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, [1927] 1985).

[5.] Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1929] 1996).

[6.] 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.

[7.] Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd revised ed., [1924; 1953] 1980).

[8.] Ludwig von Mises, “Monetary Stabilization and Cyclical Policy,” [1928] 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.

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

[10.] Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, 1978), pp. 71–92.

[11.] Mises, Notes and Recollections, pp. 93–100.

[12.] 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.

[13.] See Richard M. Ebeling, “Friedrich A. Hayek: A Centenary Appreciation,” The Freeman (May 1999), pp. 28–33.

[14.] See Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,”The Freeman (January 2000), pp. 39–46.

[15.] Ludwig von Mises, Nationalökonomie: Theorie des Handelns und Wirtschaftens (Munich: Philosophia Verlag, [1940] 1980).

[16.] Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (Spring Mills, Pa.: Libertarian Press, [1944] 1985).

[17.] Ludwig von Mises, Bureaucracy (Spring Mills, Pa.: Libertarian Press, [1944] 1983).

[18.] Ludwig von Mises, Interventionism: An Economic Analysis (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1998).

[19.] 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,” [1966] in Richard M. Ebeling, ed., Austrian Economics: A Reader, Champions of Freedom Series, Vol. 18 (Hillsdale, Mich.: Hillsdale College Press, 1991), pp. 17–39; and Richard M. Ebeling, “The Significance of Austrian Economics in 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.

[20.] Ludwig von Mises, Planning for Freedom (South Holland, Ill.: Libertarian Press, 4th ed., 1980).

[21.] Ludwig von Mises, The Anti-Capitalistic Mentality (Spring Mills, Pa.: Libertarian Press, [1956] 1990).

[22.] Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution(Auburn, Ala.: Ludwig von Mises Institute, [1957] 1985).

[23.] Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (Kansas City, Kans.: Sheed Andrews and McMeel, [1962] 1978).

[24.] Ludwig von Mises, “The Historical Setting of the Austrian School of Economics,” [1969] in Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 53–76.

[25.] 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., [1919] 1971), pp. 5–7

[26.] 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.

[27.] Gustav Stolper, This Age of Fable: The Political and Economic World We Live In (New York: Reynal & Hitchcock, 1942), pp. 7–8.

[28.] See Richard M. Ebeling, “World Peace, International Order and Classical Liberalism,”International Journal of World Peace (December 1995), pp. 47–68.

[29.] 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).

[30.] 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).

[31.] 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.

[32.] See F. A. Hayek, “Monetary Nationalism and International Stability” [1937] 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.

[33.] 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, [1934] 1968), pp. 163–79.

[34.] See Leland B. Yeager, Experiences with Stopping Inflation (Washington, D.C.: American Enterprise Institute, 1981), pp. 45–98.

[35.] See Frederic Benham, “The Muddle of the Thirties,” Economica (February 1945), pp. 1–9.

[36.] See William E. Rappard, Post-War Efforts for Freer Trade (Geneva: Geneva Research Centre, 1938) and “The Common Menace of Economic and Military Armaments,” [1936] 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).

[37.] See Ludwig von Mises, “The Disintegration of the International Division of Labor,” [1938] in Richard M. Ebeling, ed., Money, Method, and the Market Process, pp. 113–36; and Wilhelm Röpke,International Economic Disintegration (Philadelphia, Pa.: Porcupine Press, [1942] 1978).

[38.] 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.

[39.] See J. B. Condliffe, “The Value of International Trade,” Economica (May 1938), pp. 123–37.

[40.] William E. Rappard, “Nationalism and the League of Nations Today,” in Problems of Peace, 8th Series (New York: Books for Libraries Press, [1934] 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).

[41.] 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).

[42.] 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.

[43.] 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.

[44.] 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

[45.] See Eugene Staley, World Economy in Transition: Technology vs. Politics, Laissez Faire vs. Planning, Power vs. Welfare (Port Washington, N.Y.: Kennikat Press, [1939] 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).

[46.] 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).

[47.] 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)

[48.] 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.

[49.] 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.

[50.] See Gottfried Haberler, “The Liberal International Economic Order in Historical Perspective,” [1979] 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.

[51.] See Jan Tumlir, Protectionism: Trade Policy in Democratic Societies (Washington, D.C.: American Enterprise Institute, 1985)

[52.] Jean-François Revel, Why Democracies Perish (Garden City, N.Y.: Doubleday, 1984)

[53.] 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.

[54.] 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.

[55.] 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,” [1948] 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).

[56.] 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.

[57.] 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.

[58.] Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (New York: New York University Press, [1919] 1983), pp. 9–56.

[59.] Mises, Liberalism, pp. 105–24.

[60.] 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.

[61.] 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).

[62.] For example, see Adam Smith, The Wealth of Nations (New York: Modern Library, [1776] 1937), Book IV, Ch. II, p. 438; Jean-Baptiste Say, A Treatise on Political Economy (New York: Augustus M. Kelley, [1821] 1971), p. 170.

[63.] See Ludwig von Mises, “Observations on the Cooperative Movement,” [1947] in Richard M. Ebeling, ed., Money, Method, and the Market Process, pp. 238–79.

[64.] 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.



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

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

Introduction to Volume 2

The “Lost Papers” of Ludwig von Mises

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

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

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


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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


The Economist as the Historian of Decline

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


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

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

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

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

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

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

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

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

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

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

Austria Between the Two World Wars[22]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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


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


Austrian Economics

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


Methodology of the Social Sciences

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

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

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

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

Economic Calculation under Socialism

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

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

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


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

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



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

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

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

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

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

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

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

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

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

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

Endnotes to Volume 2

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[20.] Ibid., pp. 74–75.

[21.] Ibid., pp. 91–92.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


A matter of trust

“Popping down to #guardiancoffee later on to order a ‘Toynbee’: short, rich and intensely bitter.”

–       Tweet from Robbie Collin (chief film critic, The Telegraph).


We have come a long way since the release of ‘All the President’s Men’. Alan J. Pakula’s 1976 thriller, about the Watergate scandal, may be the first and last film in which the real hero is an institution (The Washington Post, under its principled then executive editor, Ben Bradlee). Or for that matter, not even an institution, so much as an idea: the free press. Robert Redford and Dustin Hoffman may spend their two hours of screentime rushing about having doors slammed in their faces and meeting covert sources in sinister garages, but it’s the idea of the resolute pursuit of truth in the face of administrative obfuscation, peer group indolence, executive greed and a flurry of non-denial denials that lingers long after the titles have rolled. These days, newspapers cut out the middleman and do the bugging themselves.

The concept of a free press has not exactly thrived over subsequent years. Media groups have bulked up into ever more massive, and conflicted, conglomerates. Media channels have proliferated, creating a ‘winner takes most’ competitive environment that has dumbed down everything and crushed audience numbers for anything but the lowest common denominator pap. That catch-all culprit, ‘the Internet’, has facilitated an explosion in the number of amateur content providers that cannot but relentlessly erode the margins of paid-for publishing models. Some of this Schumpeterian creative destruction is to be welcomed. Competition always is. But from an aesthetic and cultural perspective, one is left to wonder whether some industries are better left untouched by those biting digital winds. From the perspective of quality, and in a culture in which time increasingly seems scarcer than money, one sometimes has to ask whether what is free is often far too expensive.

Felix Salmon last week issued an obituary for journalism as usual:

“Labour has almost no leverage over capital any more, which helps explain the rash of “Uber for X” start-ups: they’re nearly all based on the idea that there is a bottomless pool out there of people with smartphones willing to do just about anything (drive a car, go shopping, do laundry, clean an apartment) for $15 an hour. If a company loses one of those workers, it’s no big deal, it just replaces that person with someone else who’s just as good and just as cheap. Now just apply that model to journalists.”

Megan McArdle responded with a less than entirely convincing defence of her own chosen career. Or perhaps she was just expressing Felix Salmon’s concerns from a subtly dissimilar angle:

“..the problem is not competition for eyeballs from new outlets that are writing news in a different, fresher way. The problem is competition for ad dollars from companies that don’t produce news at all. Making news is expensive. It’s hard to compete against companies that don’t bother. Journalism’s biggest threat comes from companies like Google and Facebook that cheaply aggregate our expensive content and sell low-cost, demographically targeted ads in huge numbers. They can kill the whole business.”

Ezra Klein waded in to the debate, and was almost ridiculously upbeat by comparison.

As with so many things, it turns out that Michael Lewis got there before almost everybody:

As you walk through the front door of the Columbia School of Journalism, the first thing you see is this paragraph, cast on a bronze plaque:


“..The first sentence on the bronze plaque that you see when you walk through the front door of the Columbia Journalism School may or may not be true, but it sets a fittingly autocratic, unreflective tone. The second sentence is ungrammatical. The last two sentences offer the sort of grandiose vision of journalism entertained mainly by retired journalists or those assigned to deliver speeches before handing out journalism awards. Highly flattering to all of us, of course, but it would be more true to flip the statement to read: “a cynical, mercenary, demagogic people will produce in time a press as base as itself …”

The problem with journalism isn’t just the competitive environment; the problem with journalism is journalists. But our focus here is more specifically on journalism relating to matters of finance and investment. Such journalism tends to fall into one of four categories:


  • The omniscient economics correspondent. Invariably a tortured authoritarian still clinging to the discredited remnants of Keynesian economic theory. “QE does work, we just haven’t done enough of it yet.”


  • The anti-business zealot. “Everyone should pay their fair share of taxes – especially everybody else.” These social campaigners often come from inherited wealth, and are employed by a tax-advantaged trust.


  • The clueless tipster. Spanish practices among the gutter press have poisoned the communal well and led to a generalised suspicion by the public that wealth management is little more than organised insider dealing.



It is not enough, and it is certainly not accurate, to say that journalists are merely commentators on financial market action. The commentator at a sports match has no ability whatsoever to affect the outcome of the game. But the financial journalist does, depending on the consumer reach of their ‘platform’.

The irony is that most investors might be better served by cutting out the commentary altogether (an irony of which we are, of course, well aware). The psychologist Paul Andreassen showed that people who receive frequent news updates on their investments earn lower returns than those who get no news. The following is from a 2002 Fast Times article:

“The barrage of information and pseudo-information has been magnified by the explosion in financial news over the past decade. In the late 1980s, psychologist Paul B. Andreassen did a series of experiments with business students at MIT that showed that more news does not necessarily translate into better information. Andreassen divided students into two groups. Each group selected a portfolio of stocks and knew enough about each stock to come up with what seemed like a fair price for it. Then Andreassen allowed one group to see only the changes in the prices of its stocks. Students in that group could buy and sell if they wanted, but all they knew was whether the price of a stock had gone up or down. The second group was allowed to see the changes in price and was also given a constant stream of financial news that supposedly explained what was happening with each stock. Surprisingly, the less-informed group did far better than the group that was given all the news.
“The reason, Andreassen suggested, was that news reports tend to overplay the importance of any particular piece of information. When a stock fell, its fall was typically portrayed as a sign that further trouble lay in wait, while a stock that was on the rise seemed to promise nothing but blue skies ahead. As a result, the students who had access to the news overreacted. Because they took each piece of information as excessively meaningful, they bought and sold far more frequently than the people who were just looking at the price.”

The consistently excellent Wall Street Journal columnist Jason Zweig says he was once asked at a journalism conference how he defined his job. His response:

“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.”

As Zweig puts it, good advice rarely changes, whereas markets change constantly. “The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”

These are desperate times for investors. Interest rates have been slashed to zero, making a surreal mockery of any sort of savings culture. In some cases they have gone below zero: Bloomberg’s Mark Gilbert points out that negative bond yields are becoming the new normal for many sovereign borrowers, with (clearly terrified) investors willing to pay for the privilege of lending their money to governments. Finland last week auctioned five year notes at minus 0.017%. At least six other countries have five year debt trading at, or below, zero.

At the same time, desperate investors have stampeded into the shares of businesses that seem ostensibly “safe”. In the process, they have bid up the prices of many of those shares to what we consider unsustainable (and probably “unsafe”) levels.

Like us, Zweig sees huge merit in the advice of the legendary value investor, Benjamin Graham:

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Another piece of Ben Graham’s advice which we feel is particularly relevant today:

“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes – in fact very frequently – they make mistakes by buying good stocks in the upper reaches of bull markets.”

That advice could have been written for the market environment of February 2015.

Back to Jason Zweig:

“My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”

Good luck getting an editor to endorse that message.

There is an intriguing post-script to the Watergate story that touches on the venality of human nature (and therefore, more or less directly, on the biddability of politicians). One of the participants in the decision to break into the offices of the Democratic National Committee was Jeb Stuart Magruder. On hearing that the Watergate burglars had been caught, he responded with a degree of bewilderment consistent with an FT or New York Times economics correspondent:

“How could we have been so stupid ?”

Robert Cialdini points out that the original idea for the break-in came from G. Gordon Liddy, who was in charge of intelligence-gathering for the Committee to Re-elect the President (the appropriately monickered CREEP). His proposal was expensive. It required a budget of $250,000 in untraceable cash, and the involvement of no fewer than ten individuals.

But that wasn’t even his first proposal.

His first plan, proposed two months earlier, involved a $1 million programme, featuring a “chase plane”, break-ins, kidnapping and mugging squads, and a yacht featuring “high-class call girls” to blackmail Democratic politicians. The sort of thing that high-ranking IMF officials wouldn’t necessarily be averse to participating in, when not busy saving the world.

Magruder reports that “no-one was particularly overwhelmed with the project” but “after starting at the grandiose sum of $1 million, we thought that probably $250,000 would be an acceptable figure.. We were reluctant to send him away with nothing.”

You do not need to be a senior Republican activist to master this particular strategy. Any seven-year old girl could proffer a similar negotiating gambit:

“If you want a kitten, ask for a pony.”

So you can choose to trust the newspapers. You can choose to trust the marketing businesses masquerading as asset management firms. You can choose to trust bloggers. But you will probably be well served by shrinking, rather than expanding, your universe of advisory inputs, and focusing on a smaller, more focused network of trusted – and trustworthy – serious and intelligent people. If in doubt, trust no-one.

Book Reviews

The Greatest Depression You’ve Never, Ever Heard Of

James Grant, in his new book The Forgotten Depression, makes a strong case for applying a prime directive of the Hippocratic Oath — “First, do no harm” — to economic policy. We today find ourselves beset by economic stagnation, racial strife, political bitterness, infectious diseases, and terrorism. Grant brings back to mind some of the direness of the days of yore, making our current condition seem a pale echo.

By the contemporary reckoning of the English economist T.E. Gregory, the world in 1921 was “nearer collapse than it has been at any time since the downfall of the Roman Empire.” Certainly, in America, there was no mistaking the postwar zeitgeist with the Era of Good Feelings. Preceding the race riots and Red scare of 1919-20 was the worldwide influenza pandemic of 1918-19; it killed 40 million people, including 675,000 Americans. With the advent of Prohibition in January 1920 a major industry was outlawed (yes, said the evangelist Billy Sunday, but “Hell will be forever for rent.”) On September 16, 1920, a terrorist explosion on Wall Street killed 38 and wounded 300. Later, in September, a grand jury started hearing evidence into the Chicago White Sox’s alleged fixing of the 1919 World Series.

A 1920 recession turned into a 1921 depression…. This was no mere American dislocation but a global depression ensnaring nearly all the former Allied Powers (the defeated Central Powers suffered a slump of their own in 1919).

So depression it was: What would the government do about it? It would implement settled doctrine, as governments usually do. In 1920-21, this meant balancing the federal budget, raising interest rates to protect the Federal Reserve’s gold position, and allowing prices and wages to find a new, lower, level. Critically, what it would not do was what the Hoover administration so energetically attempted to do a decade later: there would be no federally led drive to maintain nominal wage rates and no governmentally orchestrated work sharing. For this reason, not least, no one would wind up affixing the label “great” on the depression of 1920-21.

The Forgotten Depression fundamentally is Grant’s deep look into the sharp but short depression of 1921 and his challenge to Neo-Keynesianism, the settled economic doctrine of our era. Grant draws out implications from comparing that painful but relatively brief event with the long misery of the Great Depression and, by implication, with the recent, protracted, Great Recession.

Grant likely is the greatest belle-lettrist (and one of the greatest narrative historians) of our generation’s economic neoclassicists. He is learned, erudite, witty, with an eye for the telling detail. Posterity might consider Grant our era’s Bastiat. The Forgotten Depression is filled with vivid personalities, wisdom and folly, ecstasies and agonies.   It brings to fresh life an era that is far more forgotten than it is forgettable.

Grant provides abundant wry observations that make most of the conventional wisdom of Washington’s political elites today appear foolish. We confront a dilemma, however, one which Grant does not resolve. It might be irresolvable. A severe economic downturn causes immense human suffering. The estimable quality of empathy beckons those in authority to alleviate such suffering.

Grant gives the great technocrat Herbert Hoover full credit for such empathy:

No one could doubt Herbert Hoover’s generosity of spirit, even if the secretary of commerce had none of Harding’s personal warmth. The war plunged them (Hoover and his wife) into public service. An estimated 120,000 Americans had been stranded in Europe by the outbreak of the fighting. The Hoovers devoted themselves to the costly and complex logistical task of getting the travelers home. When it came to light that millions were hungry in German-occupied Belgium, Hoover became a pro bono battler against starvation. Later, after America joined the war, he headed the U.S. Food Administration. With the peace, he led the American Relief Administration. Millions owed their health, if not their lives, to the man who now served as Harding’s secretary of commerce.”

And yet, the road to Hell is paved with good intentions.

Without what would come to be called “macroeconomic” intervention by the government the Roaring ‘20s swiftly followed the “Forgotten Depression.” Then … Black Tuesday would ensue. As Keynes said  to aSaturday Evening Post reporter, in 1932, who asked if there had ever been anything like the Great Depression: “Yes. It was called the Dark Ages and it lasted 400 years.”

The aggressive measures implemented by President Hoover and then by FDR, Grant lucidly argues, protracted what otherwise might have been a short downturn into a decade of perhaps the longest era of economic misery America has experienced.

I (along with Hayek) stipulate to Keynes’s great-heartedness. That said, Grant indicts Keynes, along with Irving Fischer, as the authors of a fundamental conceptual shift of policy that led to the protraction of a major recession into the Great Depression. Grant:

Economists on both sides of the Atlantic were making the case for a new kind of monetary system. Under the pre-war gold standard, exchange rates were fixed and inviolable. If something had to adjust, that something was business or employment or prices, not the gold value of money. Better by far in the postwar world, contended John Maynard Keynes and Irving Fisher, if prices remained stable while currency values were allowed to adjust. To achieve the great desideratum of “price stability,” the theorists advocated a new style of central banking. … The mark of success in central banking was no longer a currency fully convertible into gold at a fixed and statutory rate. It was stable prices and lots of jobs.”

These very objectives remain with us. The statutory mission of the Federal Reserve System has been called the “dual mandate.” It is price stability and full employment. Were it capable of “targeting” these outcomes successfully a great leap forward indeed would have been made in human welfare.

Yet according to the Bank of England’s Financial Stability Paper No. 13, published in December 2011, all economic outcomes under the current monetary regime — notably price stability and employment —have underperformed — dramatically —both the gold and the Bretton Woods gold-exchange standard.

It now may be intolerable, politically, for a government to do nothing to alleviate the deep misery associated with a recession. That said, not all interventions are equal. Although not quite brought to the fore by Grant it might be possible for the government to provide fast — virtually immediate — relief by doing the right thing thereby honoring both the economic and the political imperatives.

It is hard to imagine a state of greater destitution than that of the exhausted, bombed out, Germany financially ruined by the Nazis and its infrastructure and industry demolished by allied forces. As I previously have written Ludwig Erhard’s Wirtschafswunder — the German Economic Miracle — began on a dime, as recorded by Erhard in Prosperity Through Competition quoting Jacques Rueff, whom Grant mentions but briefly, and Piettre:

Shop windows were full of goods; factory chimneys were smoking and the streets swarmed with lorries.  Everywhere the noise of new buildings going up replaced the deathly silence of the ruins.  If the state of recovery was a surprise, its swiftness was even more so.  In all sectors of economic life it began as the clocks struck on the day of currency reform.  Only an eye-witness can give an account of the sudden effect which currency reform had on the size of stocks and the wealth of goods on display.  Shops filled with goods from one day to the next; the factories began to work.  On the eve of currency reform the Germans were aimlessly wandering about their towns in search of a few additional items of food.  A day later they thought of nothing but producing them.  One day apathy was mirrored in their faces while on the next a whole nation looked hopefully into the future.

Rueff, with Pinay, later engineered the French “Economic Miracle” founded on comparable principles. Prosperity, not austerity, is the means as well as the ends.

There is a third way between doing nothing and doing the wrong thing. Grant observes, rightly, that government typically implements “settled doctrine.”  Settled doctrine has a poor track record.  Time to pivot back to what has proven to work in practice.

As the late presidential economic advisor Walter Heller once observed to Congress, in 1985, sometimes one must “Rise above principle and do what’s right.” The Forgotten Depression would be a suitable place for our policy makers to begin to tousle the settled doctrine and embrace policies that will return us to to robust job creation and economic mobility.

Originating at


One Leg to Stand on

Here’s a question for all the cheering QEuro fans out there. If you came across a country where both real and nominal money supply were growing at rates in the low teens – something its people had not experienced for almost a decade and close to the fastest seen in the last four – would you consider it to be a victim of ‘deflation’? If not, what help do you suppose an expansionary central bank would be to it?

Courtesy of Bloomberg
Really, Mr. Draghi?!?


Imagine next what would be the state of that nation if, in a five year burst of temporary insanity, it had it had contracted 2 ½ times as many bank loans as it had when it first went mad and that it had thus registered four times the net indebtedness (loans less deposits) as when it began– a deficit which nearly equalled the combined shortfall of its two largest neighbours put together, despite the fact that they were three times as heavily populated.

Now you might well suppose that, if such a thing could ever be advisable in such circumstances, the central bank could readily offer an effective incentive to carry the tendency further were it only to act to suppress interest rates across the curve.

But consider instead what would be the case if, after another five, nearly six, years of blood, sweat, toil and tears, that nation had rid itself of 30% of its loans, had added 25% to its stock of deposits, and had therefore shrunk its net indebtedness by an impressive two-thirds to return itself to where it was in relation to national income eleven years previously. If you were also told that households, having gone into hock to the tune of 28% net from an initial position of small surplus, were now, thankfully, back in credit, would you imagine that the plight of the saver might outweigh that of the borrower in the ordering of their priorities?

If so, you would be considering whether Spain should rejoice at Snr. Draghi’s latest coup de main or whether it should balefully consider that he was not only gilding a lily, but bedizening one from which the bloom had long since faded, into the bargain?

Courtesy of Bloomberg
The Prodigal returns. Spanish finances & liquidity improving


Nor might you sing Hosannas if you were Swiss or Danish since it is principally in those two peripheral nations that the overspill is most violent. Denmark has cancelled this year’s government bond auction schedule in a kind of QE by omission even as the central bank has continued to force interest rates deeper and deeper into negative territory – to the point where there are apocryphal tales being told of a people who are among the developed world’s most indebted being paid to take out floating-rate mortgages.

That will end well, if true!

As for the Swiss, it seems that the habit dies hard of putting the national balance sheet at the disposal of those wanting to short the euro at subsidised rates. We say this because, even though the €1.20 hard floor was abolished in the middle of the month, in the two weeks since, sight deposit balances have risen by some CHF44 billion – clearly a much higher run rate than during the preceding six weeks when a mere CHF29 billion was accumulated. The most that can be said for this is that the SNB has been improving its average (assuming the very strong hints of continued intervention are confirmed), getting euros on board at rates from CHF0.85 to CF1.05 so far and again depressing bond yields further below zero.

Courtesy of Bloomberg
Courtesy of Bloomberg

With Syriza trying to work out how far they can push a Union which would gladly be shot of them if that were not to open the infamous box of a certain over-inquisitive Greek lady; with Bepe Grillo still trying to engineer a referendum on the euro membership of his native Italy; Podemos pulling the aggrieved of Spain into the streets in their thousands; and the AfD having come out of their conference in Bremen all signed up to fighting the mainstream parties, not each other, the pressure will persist. There will be many trying to find a safer haven for all those shiny new euros with which Mario will be happy to furnish them so they can express their doubts over the course he is taking in cold, hard(er) cash. The Danes and the Swiss may therefore end up with rather more of them than they otherwise might wish.

If we look beyond this to the wider markets, we can see the ripples from the stone thrown in by the ECB spreading as far away as China where the press is starting to run stories about how disadvantageous the rise of the yuan is becoming for a nation tacitly hoping for a quick, external outlet for some of the unwanted goods which its heavily underutilized industrial base is all too capable of producing.

Coupled with the growing unease of some of those who have borrowed those ever rising dollars to dabble in the onshore market – possibly via the medium of one of those commodity plays whose collateral value is not exactly beyond question these days – this is beginning to test the mettle of the PBoC at its idiosyncratic daily fix (the one where it simply refuses to entertain any bids beyond the rate it has settled upon and so allows a recalcitrant market no outlet for its frustrations).

Though nothing definitive has yet occurred and even if, rather than breaking any key levels, the stock market is tending to churn up and down near the highs, one is hard pressed not to give in to the foreboding that the sands are shifting: that, grain by grain, the cosy consensus of the last several quarters is starting to erode.

Courtesy of Bloomberg
Courtesy of Bloomberg

Take for example the fact that the US market is beginning to lose some of the effortless predominance it has so long enjoyed. Indeed, that leadership – wherein a rising stock market draws in the capital with which to move the dollar higher while the rise in the dollar makes the equities denominated therein gain more ground on their global rivals – has been challenged these past three weeks or so to a 2-sigma extent not seen since mid-2010.

Courtesy of Bloomberg
Courtesy of Bloomberg

This reversal, though not yet so large as to magnify our nascent sense of alarm, does add to the suspicion that change is in the air. That said, however, some longer term projections do still allow for the possibility that stocks might yet press on to complete the current 3QE pattern which began with assistance from all three big CBs, back in late 2012, and so map out a full TMT bubble move before the reaction truly sets in (q.v., the Nasdaq Composite). So what we are presented with is another case of letting the market decide which way it wants to move before committing ourselves too heavily to one side or the other. Note, too, that this is a waiting game which itself marks a very different phase from the straightforward momentum chase of recent months.

Courtesy of Bloomberg
Courtesy of Bloomberg

If stocks are ambivalent, fixed income seems to entertain no such doubts. Even that bear market dog-with-fleas, the 5-year T-Note, is back to its lowest yield since the ‘taper tantrum’ while the next quinquennial slice of the curve has made record lows, narrowing the spread between spot and forward 5s by 175bps in three months to reach the lowest level of recent times. We can perhaps best observe the developments by a glance at the eurodollar curve.

Courtesy of Bloomberg
Courtesy of Bloomberg

But, far from placating the market, even the remarkable run of successive record lows in bond yields is starting to raise the eyebrows of many of those whose wills are beginning to be bent to the policymakers’ doom-laden croaking about the imminence of ‘deflation’. It would be amusing if it were not so serious: in order to justify their crass, hyperactive heterodoxy, the central bankers are having to scare the very horses they are simultaneously trying to lead oh-so calmly to water.

Another frequently cited storm warning is the 5-year forward break-even inflation reading as derived from the difference between vanilla and index-linked govvies. Your author must here confess to feeling this is far too arbitrary a number. We gauge the ‘inflation expectations’ which the authorities have insisted are key to judging the success of monetary policy from a spread – and now, worse, from a hypothetical forward spread which is the derived difference of two other arbitrary pairs of differences. Yet all this is reckoned in a segmented bond market subject to both institutional and regulatory imperatives, to vicissitudes of issuance, and to a vast official distortion made worse by the fact that, at very low nominal rates the reluctance to price the residual ‘real’ yields on linkers too far into the negative column is compressing the BEI spread between them – a phenomenon additionally exacerbated in the forward version by dint of the rapidly flattening yield curve.

WHAT DOES BEI ADD?   Courtesy of Bloomberg
WHAT DOES BEI ADD? Courtesy of Bloomberg

It would be wiser to bear in mind that just because we can define and measure the 5y5y break-even does not of itself imbue the measure with any genuine informational significance even if one cannot deny that it has come to exercise a certain lurid fascination in the mind of the market as well as in that of the official rate-setter.

Adding a further strand to this hangman’s noose, many of yesterday’s Peak Resource commodity bulls have undergone a temperamental slump which matches for its giddiness that of the prices of the industrial commodities themselves. Again, the spectre of ‘deflation’ has come to peer over our shoulder as we watch the tape.

Here we would only caution that the inferences people are deriving from commodity prices may not be as cast-iron (sorry) as they appear because it is not, in fact, so easy to disentangle the factors contributing to that decline in a world where we have so many broken pricing mechanisms in play.

Take crude, for one. Given the extraordinary growth in supply of which we have long been aware and given, too, the muted growth of (physical) demand in a world unable to shake off the shackles of the last boom, the presence of record long positioning in speculative markets at the end of July was a clear omen of doom, even if the timing of the sudden, catastrophic phase shift from a three-year sideways, ever-narrowing range to a runaway cascade was impossible to predict in advance.

All sorts of commodities in their turn have acted similarly over this last cycle; silver, gold, copper, tin, nickel, iron ore, rubber, uranium, minor metals, some ags, and so on – but the booms and busts have not all been coincident, a divergence from which we can infer that they are as much a story of a rolling wave of fickle, speculative over-exposure and subsequent mass liquidation as they are of anything to do with underlying, real-side economic factors at work in their use.

‘Doctor’ Copper is another commodity to which many outsiders like to refer, yet its medical credentials have been called into question by the huge distortions entailed in many years of shadowy Chinese malfeasance. What is therefore impossible to decide is how much the current slide relates to weaker contemporary real demand and how much is due to the unwinding of the greatly exaggerated, financially-enhanced, apparent demand from which we are presently correcting.

Again, the malinvestment bubble in mining itself was both enormous and – given the echo effects of loose credit firstly on selling prices and then on project finance – thoroughly comprehensible. But to move from diagnosis to prognosis, what we again have to ask is this: if we accept that there was a period of widespread over-expansion in the industry – albeit one formerly hidden by a credit-enabled take-up of the end product at ever higher prices – is today’s fall-out the same thing as evidence of a generally weaker economy, or is it just a belatedly more accurate reflection of what the state of that economy has truly been all along? The solution to that riddle, if one could reach one, would tell one whether the big losses to come will be confined mainly to the commodity sector itself or dispersed more generally across the equity universe.

What today’s reverse Malthusianism does overlook is the inarguable case that, if we made a miraculous scientific breakthrough tomorrow which unlocked what was an essentially limitless and near-free source of energy, we would all be unequivocally better off. Reasoning from such a Garden of Eden scenario, we can be resolute in maintaining that a supply-led fall in prices is good overall – not just for ‘consumers’ – but for intermediary producers of all other goods and services, too. And, yes, it may well be, as has been bandied about, that some 10% of US earnings are energy related and so in jeopardy, but devotees of Bastiat’s Things Which are Not Seen will have already asked themselves how much the earnings of energy users have been depressed by the success of the energy providers and whether, therefore, the ongoing rebalancing is the unmitigated evil some fear it to be.

Above all, we might take comfort from the realisation that oil & gas consumption still only amounts to 5% or so of global GDP. Or we could, were we not also to bring to mind the injunction that in a non-linear system such as ours we cannot entirely discount that large effects emanate from small causes or that, given its high profile, the sector’s travails could contribute meaningfully to a souring of general sentiment and so perhaps take us across that critical mass threshold beyond which rotations and reversals morph into landslides of liquidation. But to see why we think this is even possible, we need to go back a step or two to explain what we think is the source of such fragility.

Back in the immediate aftermath of LEH, we wrote that the scale of the coming reflation would be unprecedented and that it would certainly boost commodity and asset prices in the short run, but we also warned that we needed the debt overhang to be rapidly eradicated, renewed entrepreneurship to be promoted, and heavy-handed state intervention to be avoided (we entertained few real hopes on that that last score) if the recovery were to take root. Otherwise, we predicted, we would find ourselves on a tedious roller-coaster of anaemic growth interspersed with weary episodes of recurrent stagnation where the supposed triumph of the authorities’ 1933 moment would give way to their dread of repeating a 1937 one, meaning they could never pull the trigger on ending their stimulus programmes. This, we envisaged, would ensure that the whole system would become ever more addicted to the medicine and ever more subject to its unwelcome side-effects.

We also felt, back then, that if we were to avoid this switchback turning into a negative-g log flume of downturn, the West had to have its house in order by the time that China realised it was doing more harm than good with its own gargantuan injections and that it had to revise its whole approach as a consequence. So it is proving to be.

In the interim, we have all been strung along by the persistent faith that, this quarter, the next, or the one after that, Europe would once more arise from the ashes. When that seemed too much of a stretch we were briefly distracted instead with the foolishness that was Abenomics, and all the while we had the cheery presumption that the Daddy of them all, the US, was slowly getting back on track and so would be enough to keep our illusions alive.

But now we have nothing – or close thereto – to which to cling except for the fact that while so many central banks remain so doggedly accommodative we cannot seem to bring ourselves not to plunge for a further rise in the market. The pockets of our trousers have, after all, long since burned through as a result of all the hot money which has been thrust into them these past several years.

But, whatever the imperatives to remain fully invested and highly leveraged, it cannot be denied that the underpinnings of our optimism are becoming ever more slender. Japan has predictably disappointed. Europe again stands on the verge of major political upheaval and the reaction to the oft-promised QEuro has either been muted (in the real world) or actively counter-productive (in its disruptive, possibly system-threatening effect on the capital and currency markets), suggesting that clinical tolerance is setting in there, too.

EMs are over-owned, are becoming disfavoured, and are anyway not weighty enough to swing the balance. Add to this the sad fact that America is fostering conflict and instability all around the Eastern and Southern rim of Europe and we are left only with the belief in US economic recovery – at first stoutly resisted, but later held with all the fervour of the true convert – to maintain our faith. Hence, as we said, the outperformance of Wall St amid the growing strength of the dollar, a constellation which has even induced high-ranking pundits of the kind who should – but somehow never do – know better to start exulting recklessly at the putative ‘decoupling’ of the Land of the Free from the rest of the poor, huddled mass of humanity.

Now though, the States is starting to stutter as well – with a run of softer-than-expected macro data, fears of what the shale shock will mean both for jobs and credit, and a few wobbles on the corporate earnings front (even if many of these are only strong-dollar, money illusion effects).

In the recent past, such bad news would have been perversely seen as market positive for its capacity to call forth more from the Mighty Oz’s bag of monetary tricks. But what can we now expect from the ‘Goldilocks’ scenario of weakness calling forth some form of official, ‘Greenspan Put’ compensation? Only the weak, negative assistance that it might further delay the day the Fed finally takes its first baby steps to renormalization. There is therefore not much by way of porridge in that particular bowl, we fear!

In such a world, it would not take much for the multitude of stale longs to become anxious. Though it will be said – as it always is – that there is copious ‘cash on the sidelines’ waiting for exactly such an opportunity or, conversely, that a setback in one market must lead to a rise in another (‘the money has to go somewhere’), this overlooks the fact that asset prices can only advance on such a broad and enduring front as they have if they are being fed a steady nourishment of a credit created expressly for that purpose.

When this is the case, it is just as true in reverse; that when people take fright and the assets begin to fall, or the carry trade starts to go awry, the associated credit can quickly evaporate – that where the money ‘goes’ is whence it came: into fractional reserve oblivion. The one place where the classic Fisherian ‘debt deflation’ – or, if you prefer, the Hayekian ‘secondary depression’ – can most easily occur is in the market for financial claims, especially when that market may already have reached its ‘permanently high plateau’.

It may not happen just yet, but it certainly pays to be alert to the possibility that, one fine morning, it surely will.


Technical Update

Wracked by the actions of the various central banks – which gave us another key reminder that volatility does not equate to risk – yet not wishing to start rethinking their entire thesis, a characteristic loss confidence has started to set in among those who were telling themselves over the Christmas trukey just what geniuses they were. We could have an interesting couple of weeks in store – not helped by the fact that we are about to enter the great Chinese data avoid as the lunar new year approaches.

In China, the poorest industrial profit and revenue results in years, the slowest growth in the money supply, and the not unrelated presure on the yuan – where CNY6.27 looks increasingly important –  are still none of this is enough to halt the flood of hot money into equities.

15-01-28 China PftThe main boards may have temporarily found a ceiling but the Nasdaq/Neumarkt equivalent, ChiNext, has just threatened to resume the upmove. Sentimentals, remember, can always trump fundamentals. Or, as Frederick Lewis Allen put it a l-o-n-g time ago: ‘Hope can be exchanged for cash on a speculative market.’

Courtesy of Bloomberg
Courtesy of Bloomberg
Courtesy of Bloomberg
Courtesy of Bloomberg

As for other stock markets, it appears that something of a tug-of-war has developed. Just enough bad news to keep the bulls from becoming too enthusiastic, but not enough gloom to cede dominance to the bears. Another one of those situations where you have to wait to see who takes control before throwing your weight behind the move. Eg, MSCI World ex-USA:-

Courtesy of Bloomberg
Courtesy of Bloomberg

And the USA itself. Still some upside if this broad brush picture is going to deliver some wonderfully symmetric culminating action. But…..

Courtesy of Bloomberg
Courtesy of Bloomberg

…buyer beware: the ‘one-off’ shocks are starting to add up and the resulting rise in uncertainty can be seen in the usual places – vols, junk and EM spreads, the gold/industrial ratio and, arguably, the safe haven dollar trade (or, if you prefer, the end of carry).

Courtesy of Bloomberg
Courtesy of Bloomberg

Look, too, at how swings in yield differentials between the bellies of the US and German curves tend to signal turning points in the economic cycle.

Courtesy of Bloomberg
Courtesy of Bloomberg

The T-Bond, too, is pausing for breath after making a minor new historic yield low. While below 2.45/50%, the post-87 profile suggests a bottom at 2.25% (as we have already pointed out), but if things get really hairy, we might have to widen the range and plump for 1.50% for the Bond and 1.10% for the T-Note. RIP all bond vigilantes – a short memorial service will take place, followed by a reading from Homer & Sylla.

Courtesy of Bloomberg
Courtesy of Bloomberg

There is also a possible, very neat confluence of time and price coming together for USDDEM/EUR – a pairing which seems to oscillate on a cycle of roughly 15 years – 1970, 1985, 2000, and 2015 (?) marking the peaks for the dollar/troughs for the mark. $1.065/00 suggests itself as an objective. If we have to go beyond that, $0.9250/00 marks the log middle

Courtesy of Bloomberg
Courtesy of Bloomberg

As for commodities, the plain gold-in-dollar 2-year profile mapped out since 2013’s collapse looks balanced and, hence, potentially ready for a new trend move away from the mid-mean levels either side of $1300. Behaviour is somewhat harder to read of late for, since the turn of the year, the dynamic has not so much been dollar up, gold down (and v.v.) but euro weakness = gold strength. Such a confusion of signals – and hence of the underlying reasoning – is what we might expect at a turning point but do note that there is now a whole lot of positioning already in place betting on a further rise.

Courtesy of Bloomberg
Courtesy of Bloomberg


Courtesy of Bloomberg
Courtesy of Bloomberg

Industrial metals are again staring into the abyss,  as are iron ore, rebar, and coking coal on Shanghai.

Courtesy of Bloomberg
Courtesy of Bloomberg

Ags, too, are threatening support once more. Not only have harvests been good, but the collapse in crude is neutralising the single most important factor in the sector’s repricing these past ten years – biofuel. Ethanol is at 10-year lows, soy and palm oil are at levels not seen since 2009, sugar was first here all of four decades back and cheap petchems are forcing cotton and rubber lower, too.

Courtesy of Bloomberg
Courtesy of Bloomberg

Finally, oil itself. We have had almost three weeks of relative calm – itself a newsworthy event given what went on prior to that. But nothing seems able to actually reverse the trend, rather than simply suspend it. Specs are still heavily long, cracks are back to normal, production continues to defy the rig count, inventories are bulging, RSIs are now neutral – and all the while, value is building, not rejecting, right down here at the extremes.

Even allowing for the fact that the dollars you hand over for oil are themselves worth more these days, it is hard to resist the feeling that we will probe lower still before we are done. And some where down there lurks the 1974-2004 mean….

Courtesy of Bloomberg
Courtesy of Bloomberg linear scale
Courtesy of Bloomberg
Courtesy of Bloomberg log scale

Free Trade

Global Free Trade Makes For Mutual Prosperity And World Peace

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.

Trade Barriers - Democratic and Republican cartoon

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.

Europe's Trade Walls Cartoon

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.)


On Money And Society: An Exclusive Interview With Steve Baker MP

A former RAF aviation engineer and software engineer in the financial sector, Steve Baker has been the Conservative MP for Wycombe, Buckinghamshire since 2010. Recently he was elected by his colleagues to the Treasury Select Committee, where he has put questions to Bank of England Governor Mark Carney, and he has also sponsored a Parliamentary debate on ‘Money Creation and Society’. He is an outspoken follower of the Austrian Economic School, and is an advocate of ‘free banking’ and the de-nationalisation of money. In this interview, Steve shares his views on money, banking and economics generally; why he chose to enter into politics; his plans for the next Parliament; and the prospects for sound money and banking in the UK and around the world.


Steve Baker has been fascinated by machines since his youth growing up in Cornwall. He studied Aerospace Engineering at Southampton University through a University Cadetship programme, entering the RAF on graduation, and served his country in multiple international locations for 10 years.

Also fascinated by information technology, on leaving the RAF in 1999 he studied towards a degree in Computer Science at St Cross College, Oxford. He then worked in a number of IT roles, including at Lehman Brothers in 2006-08, leading into the global financial crisis. His personal website (here) makes plain that, “My work at Lehman Brothers particularly informs my present work on reforming the financial system.” He decided to enter politics in 2007 and was elected to Parliament on his first attempt in 2010.

Steve is hardly the only sitting MP to focus on financial and banking issues. But he is the only Conservative MP to openly advocate for fundamental reform of not just banking, but of money itself. This is due to his outspoken belief in the key tenets of the Austrian Economic School, which teaches that activist monetary and fiscal policies undermine long-term economic health. To begin our discussion, we explore how Steve experienced the 2008 financial crisis and the impression it made.

JB: Steve, you had been working at Lehman Brothers for about two years when the financial crisis hit in 2008. Did you ever have a sense that the firm was dangerously exposed to a potential crisis? That the firm’s high leverage and a reliance on short-term financing could bring it down? That the financial system in general was as fragile as it demonstrably was?

SB: Back when Lehman was posting record quarter after record quarter, I was focussed on delivering value through software and I still believed our masters understood the institutional superstructure of the economy. It was only when the bust came that I realised the Austrian School had crucial insights to offer which were missing from the mainstream.

JB: How exactly did you come to believe that the Austrian Economic School provided the best explanation for the 2008 financial crisis and also for understanding economics more generally? Was this a gradual process or rather something more like a sudden epiphany?

SB: It was a long process. I first read Mises’ The Causes of the Economic Crisis and Hayek’s Monetary Theory and the Trade Cycle in 2000 during my MSc in Computer Science. I was planning to make my fortune in software, but then the dot-com bust happened. I wanted an explanation and found it in these books. However, my priority was business and I didn’t have the confidence to start telling economists where they were going wrong. It was only after working for banks and their regulators that I realised key insights about epistemology and method were absent from mainstream economics in important ways. That caused me to read more deeply, co-found The Cobden Centre with Toby Baxendale and then use my Parliamentary position to promote better economic policies.

JB: Please describe what it is you mean by free banking and money. Most people just take national fiat money and heavily-regulated banking for granted. Of course this was not always the case. But then have free banking and money really ever been the norm? Why is this topic of such importance to you?

SB: By ‘free-banking’ I mean money and a banking system produced by the spontaneous co-operation of free individuals in markets. It is what Hayek proposed in his Denationalisation of Money and HM Treasury briefly worked in that direction as an alternative to the euro. Usually, free banking means gold (or silver) as the base money and banking conducted under the ordinary commercial law, usually with unlimited strict liability. Canada and Scotland historically came closest to free banking. In a future free-banking system, cryptocurrencies or blockchain technologies of some sort are likely to have a role. Sound money is crucial to the justice of social processes.

JB: When and how did it occur to you that, by entering politics, you could contribute to changing the terms of debate around money and banking, when neither major UK party seemed to have any interest in doing so?

SB: Originally, it was the scandal of the Lisbon Treaty – the mangled EU Constitution – which prompted me to seek election to deliver an in/out referendum. It seems I may have played my part in reaching that objective but that decision was reached in 2007, before the crash. Once the crash came, when I had no realistic expectation of being elected, I decided to establish an Austrian School think tank. My surprise selection for a Conservative-held seat and election to Parliament changed everything.

JB: Please describe your experience in Parliament to date. What is it like to be something of a ‘maverick’ MP on the issues of money and banking? Is it encouraging? Discouraging?

SB: It’s hugely encouraging but hard work and I always appreciate support. As far as I am aware, I have no original ideas in this field and, being wary of the fringes of debate, I keep close to established literature. As a result, I seem to be attracting colleagues to at least consider the possibility that the Austrian School has a better answer to the question—famously asked by HM the Queen—of how the financial crisis could have happened. People know I am unorthodox but they also know I am grounded in credible literature. They also recognise the call for lower taxes, balanced budgets and sound money as distinctively Conservative. I suppose the difference is I really mean it; I don’t just say such things in hope of being elected.

JB: You recently sponsored a Parliamentary debate on ‘Money Creation and Society’? What was the purpose of the debate and do you believe that it achieved your objectives?

SB: Prominent Constitutional fiat money advocates Positive Money were agitating for a debate and they have strong national support. Despite disagreeing on many things, I am one of their best contacts in Parliament. The timing of the debate corresponded with their campaigning activity. However, of course I have spoken many times in the same vein, beginning with my maiden speech. Positive Money had created sufficient support for a debate in the main chamber to be possible and I was glad to lead it. We meant to move the debate forward and we did: I have received messages of support from around the world.

JB: Having recently achieved selection to the Treasury Select Committee, you have now had the opportunity to engage with Bank of England governor Mark Carney on multiple occasions. While he is obliged to answer your questions, do you find his answers satisfactory? Or evasive? Does it seem to you that the Bank of England is properly accountable to Parliament? Or is it able more or less to set policy on its own? If you could change anything about the existing governance of the Bank of England—other than abolishing it—what would that be?

SB: It is always a huge pleasure and privilege to ask questions of the Governor, who also chairs the G20 Financial Stability Board. Mark Carney is undoubtedly the central banker of his generation, full of talent and statesmanship. He knows where I stand. Perhaps our good-natured jousting can sometimes be seen in the sessions. His answers are mainstream and remember he has a dreadful power to shift markets with every word. He is sometimes breathtakingly honest—for example in relation to the shortcomings of mathematical models—but it is right that he has regard to the potential for his words to reverberate through markets. This factor has no place in a free society, of course, but we are where we are. The Bank is accountable to Parliament and the officials evidently take this seriously. The Bank operates within its mandate and that means it reaches policy decisions independently of politicians.

Given that, like Walter Bagehot [ed. note- Bagehot was Editor-in-Chief of The Economist from 1860 to 1877 and wrote extensively on fundamental economic and financial issues], I think the ideal system would not include central banks, your last question is hard to answer. I would have the Bank produce research that questions their groupthink and they are doing so. It will be a long time yet before we win the argument but having the Bank itself challenge orthodoxy may be an important breakthrough.

JB: Assuming that you and the Conservatives are re-elected in the coming months, what plans do you have for the next Parliament? What goals are realistic? And if you’re optimistic, what might be achieved over the next five years?

SB: Nationally, we must balance the budget. In all the circumstances, this will remain a tough problem. Personally, I would like to be re-elected by my colleagues to the Treasury Committee so I can continue to work on changing the terms of debate.

JB: How do you feel about the growing UK independence movement? Do you believe that the UK is more likely to fundamentally reform money and banking inside or outside the EU?

SB: People across the political spectrum are awakening to the reality that state power has escaped democratic control and that awakening is a good thing. The challenge is to hold politics together while a coalition for democracy and liberty is built, especially bearing in mind that it is the classical liberal and conservative family that is awakening first. A further fragmentation of the centre-right would be bad news for democrats and advocates of liberty.

Realistically, monetary reform is likely to come from either spontaneous market action or global reform of the post Bretton-Woods system. I don’t think the UK is likely to reform sterling unilaterally but this could happen provided we retain our own currency. I imagine Switzerland is culturally better-placed to reform independently, especially now they have decoupled from the euro. Maybe Russia will dramatically disrupt geopolitics with the reform you describe in your book. [Ed. note- I have suggested that Russia might respond to escalating international tensions by backing the rouble with gold. See here.]

JB: Do you regard the government’s ‘austerity’ policies to have been a success? How would you define ‘success’?

SB: Success would be a balanced budget. More work is required and the longer I spend in politics, the clearer it becomes that turning around a democracy is not like turning around a private company. The Chancellor has been more successful than most other finance ministers. I will continue to support him in so far as I can.

JB: To expand on the above, you are more aware than most about the deteriorating state of UK public finances and of the large imbalances in the economy more generally, such as the excessive reliance on property and financial services, and the chronic trade deficit with the rest of the world. Is it hard to be optimistic for the future when history suggests that the UK economy is going to remain weak for many years even in a relatively benign, non-crisis scenario in which these imbalances and excesses are worked off?

SB: In truth, it is often hard to be optimistic when you have “taken the red pill” of Austrian School economics. On the one hand, I am glad so many more people are now in private sector employment but on the other, as I have explained many times, the trajectory of debt and the continuing abuse of currencies is of grave concern. The future of our civilisation may be at stake.

JB: You co-founded the Cobden Centre, the leading sound money and banking think-tank in the UK. What do you see as the CC’s core mission? How exactly do you see the CC making a difference in future? Through education? Practical policy recommendations?

SB: The Cobden Centre’s core mission is to promote classical liberalism and specifically the Austrian School, that is, social progress through honest money, free trade and peace. It does not do politics but ideas and education. There is much more to do. Those interested in learning more can visit the website at and potential donors are welcome to send an email to!

JB: Thanks so much for your time Steve. Before we conclude, are there any other thoughts you would like to share with our readers, many of whom work in the financial industry and would be profoundly affected by the sort of money and banking policies you advocate. What sort of impression would you hope they would take away from our discussion today?

SB: I hope readers will read your reports and your book, The Golden Revolution, and Detlev Schlichter’s complimentary work Paper Money Collapse. I hope they will read Mises and Hayek. If financial professionals cease opposing honest money and banking will we achieve the greatest institutional reform of our age: money and banking subject to competition and free of ruinous state control.

JB: Thank you so much Steve for your time.



The value of Steve’s prominent role in promoting sound money and banking cannot be overstated. His leadership is an inspiration to all who would seek a better economic future. The best hope for real reform is to pressure the system both from within and from without. I encourage all readers to support Steve in his efforts in Parliament; through the educational resources of the Cobden Centre; and through their own private initiatives, whatever they might be.

Care to comment on this Report? Please contact me at

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Lessons For Winning Liberty In a World Of Statism

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.

Uncle Sam and Lady Liberty Searched cartoon

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!

Obama and the Declaration of Independence

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.