[Editor’s Note: this lengthy piece, by Richard Ebeling, primarily based on the “lost papers” of Ludwig von Mises that he and his wife, Anna, discovered in a formerly secret KGB archive in Moscow, Russia, is well worth reading as it shows Mises’s brilliance for understanding the problems of his time as well as purely abstract economics.]
Introduction to Volume 2
The “Lost Papers” of Ludwig von Mises
All of the articles and essays contained in this volume were written by Austrian economist Ludwig von Mises during the twenty years between the two world wars, from 1918 to 1938. The common themes running through most of them concern the monetary disorder and inflation that followed the breakup of the Austro-Hungarian Empire at the end of the first World War; the monetary, fiscal, and interventionist problems in Austria and Europe in general in the 1920s and 1930s, including during the Great Depression; and the collectivist policies and ideas that were leading Europe down the road to the Second World War. Also included from this period are articles on the Austrian economists, the methodology of the social sciences, and the problem of economic calculation under socialism.
They all were originally written in German and about a quarter of them have never been published before. Virtually all are taken from the “lost papers” of Ludwig von Mises.
In the years between the two world wars, Ludwig von Mises was one of the most famous and controversial economists on the European continent. Born in Lemberg, Austria-Hungary on September 29, 1881, Mises entered the University of Vienna in 1900 and was awarded a doctoral degree in 1906. In 1909, the Austrian Chamber of Commerce in Vienna hired Mises as one of its economic staff members. In 1913, he was given the title of Privatdozent, permitting him the right to teach at the University of Vienna as an unsalaried lecturer, with promotion to the title of Professor Extraordinary in 1918.
Over the next twenty-seven years, until his emigration to the United States in July 1940, Ludwig von Mises caused firestorms of controversy. In 1912, he published The Theory of Money and Credit, in which, besides its many other theoretical contributions, Mises formulated what became known as the Austrian theory of the business cycle. Inflation and depression were not inherent to a capitalist economy, but were the result of government control and mismanagement of the monetary system through manipulation of market rates of interest.
It was an article he published in 1920, and which two years later he expanded into the book-length treatise Socialism, that caused the whirlwind of debate that surrounded him for the rest of his life. In this work, Mises demonstrated that the central planners of a socialist state would have no way of knowing how to use the resources of the society at their disposal for least-cost and efficient production. Without market-generated prices, the planners would lack the necessary tools for “economic calculation.” The reality of the promised socialist utopia would be poverty, economic imbalance, and social decay. Furthermore, Mises argued that any type of collectivism that was applied comprehensively would result in a terrible tyranny, since the state would monopolize control over everything needed for human existence.
In 1927, Mises published Liberalism, in which he presented the [xv] classical liberal vision of the free and prosperous society, one in which individual freedom would be respected, the market economy would be free, open and unregulated, and government would be limited to the primary functions of protecting life, liberty and property. He followed this work with Critique of Interventionism in 1929, a collection of essays in which he tried to explain that the interventionist-welfare state was not a “third way” between capitalism and socialism, but a set of contradictory policies that, if fully applied, would eventually lead to socialism through incremental increases in government regulation and control over the economy—and that Germany in the 1920s was heading down a dangerous political road that would lead to the triumph of national socialism.
Not surprisingly, both Marxists and Nazis viewed Ludwig von Mises as a serious intellectual enemy. In fact, in 1925, the Soviet journal Bolshevik published an article calling him a “theorist of fascism.”What was Mises’s “crime” deserving of such a charge? In a 1925 article on “Anti-Marxism,” Mises had written that Marxist Russia and a “national socialist” Germany would be natural allies in a war in Eastern Europe—thereby anticipating the infamous Nazi-Soviet Pact of August 1939, which served as the prelude to the beginning of the Second World War.
By the early 1930s, Mises understood that a Nazi victory in Germany would threaten Austria. As a classical liberal and a Jew, he could be sure that after a Nazi takeover of Austria, the Gestapo would come looking for him. So when in March 1934 he was offered a way out by William E. Rappard, cofounder and director of the Graduate Institute of International Studies in Geneva, Switzerland, who offered him a position as Professor of International Economic Relations, Mises readily accepted and moved to Geneva in October 1934.
Mises kept his apartment in Vienna, where he and his mother had been living since 1911. After she died in April 1937, he returned the apartment to the owner of the building but continued to sublet a room from the new tenant. In this room he stored his papers, manuscripts, family and personal documents, correspondence, and files of his own and other writers’ articles, as well as much of his personal library, which included more than two thousand volumes.
On March 12, 1938, the German army crossed the Austrian border. When Adolf Hitler arrived in Vienna on March 15 he announced that his native Austria had been incorporated into Nazi Germany. Over the next several weeks the Gestapo arrested tens of thousands of Viennese. An estimated seventy thousand were soon imprisoned or sent to concentration camps. Among the immediate victims were the Jews of Vienna, who were harassed, beaten up, tortured, murdered, and humiliated by being made to scrub the streets of Vienna on their hands and knees with toothbrushes while being surrounded by tormenting crowds of onlookers. The new Nazi regime soon began a methodical program of appropriating the 33,000 Jewish-owned businesses and enterprises in Vienna. Among those that the Gestapo came looking for soon after the Anschluss was Ludwig von Mises.
Towards the end of March 1938, the Gestapo came to Mises’s Vienna apartment. He was safe in Switzerland, but the Nazis boxed up everything in his room and carried it away. A year later, on March 4, 1939, Mises sent out a letter of “information” to friends in Europe, explaining what had happened to his possessions:
From 1911 until the death of my mother, I resided at 24 Wollzeile, Apartment 18 (Vienna, I). Upon her death I returned the apartment to the [xvii] owner of the building, who rented it out to the physician, Dr. Joseph Reitzes. However, I kept one room in the apartment as his subtenant. In this room I had my library, as well as my personal correspondence, my family papers, diplomas and other important documents. Furthermore, I had there silver tableware, and a considerable number of other silver items—large platters, candelabras, etc. finally, there was some linen. At the end of March 1938 the Gestapo forcibly entered my locked room and hauled away the contents in twenty-one boxes. Then my room was sealed. In September or October, the rest of the objects in the room were taken away by the Gestapo. Dr. and Mrs. Reitzes have meanwhile left Vienna, and no correspondence from them has reached me. From what I have heard, the Gestapo gave them strict orders not to get in touch with me. In August of last year, I learned from Baron Richthofen that my possessions were in the hands of the Gestapo. When my lawyer, Dr. Rintelen, inquired about what had become of my possessions, he was reportedly given the answer that they could not be found anywhere. My personal library includes about 2,500 books, 1,500 pamphlets and reprints. These works deal with such subjects as economics, economic policy, financial questions, economic conditions in various countries, all varieties of socialism, world and Austrian history, economic history, jurisprudence, philosophy, and belles-lettres.
Mises then listed the collections of books, journals and papers that had been among the property taken away by the Gestapo.
Until his death on October 10, 1973, at the age of 92, Mises believed that everything had been destroyed—either by the Nazis or in the chaos of the war. Considering the manner in which the Nazi regime had earlier burned books as a symbolic rejection of ideas opposed to their own, this was, perhaps, a reasonable assumption. However, Mises’s papers had not [xviii] been destroyed. Instead, they had been kept by the Nazis and ended up in Czechoslovakia, along with most of the other documents, papers, and archival collections the Nazis had seized in various German-occupied countries during the war.
During the first days of May 1945, as the war in Europe was reaching its end, the Soviet army, having conquered eastern Germany, began its conquest of the Czech region of Bohemia. Reaching the small town of Halberstadt, the Soviet soldiers began to fan out and occupied the railway station. On a track siding were twenty-four boxcars that the Nazi authorities had been preparing to evacuate to territory still under their control. When Soviet officials opened the boxcars, they found them stuffed with documents, files, dossiers, and personal and professional papers that the Gestapo had looted from France, Belgium, Austria, Holland, Poland, and many other countries, including Germany itself. Among these literally millions of pages of stolen documents were the “lost papers” of Ludwig von Mises.
This massive cache of material was turned over by the Soviet army to the KGB, who reported the find and its apparent content to Stalin. Stalin ordered the boxcars to be transported to Moscow, where a special building was constructed in the early 1950s to store and preserve these papers. They included 20 million documents from twenty countries. From the outside, the building looked like an ordinary residential complex. It had no nameplate on the door, and only the bars on the windows suggested that it was something other than what it appeared. For the next forty-five years the only people allowed access to the documents stored in the building were members of the KGB and the Soviet Ministry of Foreign Affairs. The employees—all KGB archivists—were forbidden to tell even their families where they worked and were restricted from meeting with foreigners, or even eating at restaurants patronized by foreigners in Moscow.
Each of the archival collections had been carefully studied and organized by the KGB. Mises’s papers were divided into 196 files containing approximately 8,000 items. In 1951, the KGB prepared an index to his papers, with a one-paragraph description of each file. The entire collection was labeled “Fund # 623—Ludwig Mises.”
With the collapse of the Soviet Union in 1991, the documents were declassified and the archive was opened on a limited basis under its new name, the Moscow Center for Historical and Documental Collections. Even foreign researchers could now request to see parts of the collection.
I first heard a rumor that Mises’s papers might be in Moscow in the summer of 1993. My wife and I were in Vienna looking for archival [xix] material about Mises’s life and career. A friend in the Austrian Chamber of Labor, Dr. Gunther Chaloupek, told me that some German diplomats had been in Moscow looking for material about antifascist Germans from the interwar period and had come across a reference to Mises’s name among the indexes to captured documents they were permitted to examine.
In 1994, I found Mises’s “information” letter from 1939 among Friedrich A. Hayek’s papers at the Hoover Institution at Stanford University, so I now had an idea of exactly how and what the Nazis had stolen. It was only in July 1996 that I found out the exact location of Mises’s “lost papers.” I went to the Holocaust Museum in Washington, D. C., hoping that the researchers there could tell me whether, by chance, a Gestapo file on Mises had survived the war. No one could locate such a file. However, I asked a research staff member whether they could find out if any of Mises’s papers were now in Russian hands. She introduced me to a senior researcher, Karl Modek, who specialized in Holocaust material relating to the Soviet Union. Opening a spiral binder containing a full list of the material stored at the Moscow Center for Historical and Documental Collections, he turned to the pages listing the fund numbers and the names of collections in the archive. There it was: “Fund # 623—Ludwig Mises.”
Since the archive had been open to researchers since 1991, the question arises as to why the existence of Mises’s papers had not come to light earlier, and why hadn’t anyone taken the time to examine them and obtain copies? An answer was provided by Kurt Leube, former personal assistant to Friedrich Hayek.
In 1994, Mr. Leube also had heard that Mises’s papers appeared to have survived in Russia. He found out that some Austrian researchers, including Gerhard Jagschitz of the University of Vienna and Stefen Karner of the University of Graz, had traveled to Moscow and seen the indexes to Austrian documents captured by the Soviet army. They confirmed that they had seen an index to Mises’s papers. Mr. Leube had asked them to examine the files and describe their contents, but they replied that their own research schedule did not permit the time to do so.
In March 1997, Dr. Mansur Mukhamedjanov, then Director of the Moscow Center for Historical and Documental Collections, delivered a speech at Hillsdale College and explained:
The Ludwig von Mises fund was accessible to researchers. But from the time when the archive has been opened, not one researcher looked into or worked with the materials of this fund. Russian economists who are involved in working out the concept of market reform never showed any interest in Mises’s fund. I don’t think they even know about its existence. Foreign researchers were interested in anything but Mises. Some of them probably saw the index and knew that such a fund existed, but nobody, I repeat, nobody ever showed any interest or desire to look into the documents. Our careful records show that no researchers ever requested “Fund # 623—Ludwig Mises.”
Mises’s Vienna papers remained unexamined until my wife, Anna, and I traveled to Moscow in October 1996. From October 17 to 27, we spent every working day examining each of the files. We arranged the photocopying or microfilming of virtually the entire collection of papers, manuscripts, articles, correspondence, personal documents, and related materials. They now have been rearranged and computer-cataloged and are restored in the Ludwig von Mises Library Room at Hillsdale College.
The articles and essays in the present volume contain material from Mises’s “lost papers” covering the period from between the two world wars. They offer a view of a different side of Ludwig von Mises in comparison to many of his other works that have been more readily available from this period of his life.
The Economist as the Historian of Decline
In the months immediately after he arrived in the United States in the summer of 1940, Ludwig von Mises set down on paper his reflections on his life and contributions to the social sciences. It is less an autobiography and more a restatement of his most strongly held ideas in the context of the times in which he had lived in Europe. It carries in it a tone of despair and dismay about the direction in which European civilization seemed to be moving at the end of the first four decades of the twentieth century. In clear anguish and frustration, he summarized how he viewed his efforts as an economist in Europe in general and Austria in particular during those years between the two world wars:
Occasionally I entertained the hope that my writings would bear practical fruit and show the way for policy. Constantly I have been looking for evidence of a change in ideology. But I have never allowed myself to be deceived. I have come to realize that my theories explain the degeneration of a great civilization; they do not prevent it. I set out to be a reformer, but only became the historian of decline.
His activities between 1918 and 1938 were divided into two categories: his scholarly writings, and his work as an economic policy analyst and advocate for the Vienna Chambers of Commerce, Crafts, and Industry. The reader of The Theory of Money and Credit, Socialism, Liberalism, and Critique of Interventionism easily would have a conception of Mises as primarily a wide-ranging and interdisciplinary economic and social theorist who was especially concerned with advancing various aspects of monetary and general economic theory in the context of critically evaluating the ideological and policy trends of his time.
This view of Mises would also be easily reinforced from reading his economic treatise, Human Action, a massive work that represents the capstone of his thinking on a vast number of subjects. He writes on a large canvas that incorporates a theory of human knowledge; the conception of the origin and structure of human society; the foundations and construction of a theory of the competitive market process; the nature of money, interest, capital, and the business cycle; and a detailed critique of the socialist, interventionist, and welfare-statist alternatives to the market order.
Some of the articles and essays included in the present volume show him as a clear and concise expositor of these general and critical ideas. In the context of the Austria of this time, however, they also show Mises as a contemporary policy analyst focusing on a variety of specific political, economic, and monetary problems in the wake of the first World War. In these writings he is an advocate of particular policies, reforms, and institutional changes meant to move his native Austria in the direction of freer markets, a more stable monetary order, and a less distorting fiscal regime.
His efforts in these areas of public policy grew out of his position at the Vienna Chamber of Commerce, where he first worked in October 1909 [xxii] as an assistant for the drafting of documents, later becoming a deputy secretary in 1910. Mises was promoted to Leitenden Kammerssekretärs (first secretary) of the Vienna Chamber when he returned to his duties after serving as an officer in the Austrian army during the first World War. He was in charge of the Chamber’s finance department, which was responsible for banking and insurance questions, currency problems, foreign exchange regulations, and public finance and taxation. He also consulted on issues relating to civil, administrative, and constitutional law. Indeed, because of his wide interests and knowledge, practically every facet of the Chamber’s activities concerning public policy and regulation fell within his expertise.
Mises also was assigned special tasks. From November 1918 to September 1919, he was responsible for financial matters relating to foreign affairs at the Chamber. From 1919 to 1921, he was in charge of the section of the Austrian Reparations Commission for the League of Nations concerned with the settling of outstanding prewar debt. After he accepted [xxiii] the appointment as professor of international economic relations at the Geneva Graduate Institute of International Studies, he went on extended leave from the Chamber, though he continued to return to Vienna periodically to consult on various policy matters until February 1938.
At the Chamber, Mises explained, “I created a position for myself.” While always having a superior nominally above him, he came to operate on his own with the assistance of a few colleagues. Though he felt that his advice was not often taken, he viewed himself as “the economist of the country” whose efforts were “concentrated on the crucial economic political questions,” and as “the economic conscience” of Austria in its postwar period.
Friends often suggested to him that he could have had more of a positive impact on Austrian economic policy if he had been willing to give a little and modify his principled stance on various issues. Yet Mises’s only regret, as he looked back on his years at the Chamber, was that he often felt that he compromised too much, though he stated that he had always clearly understood that in politics compromise was inevitable. The challenge was to “give” on the less important issues so as to have a better chance to succeed on the essential ones. This is how he viewed the positions he often took within the Chamber in an effort to get the organization to publicly back policies that he considered crucial at various times during these years.
By the time he left Vienna for Geneva in October 1934, however, Mises believed that he had done little more than fight a series of rearguard actions to delay the decay and destruction of his beloved Austria. “For sixteen years I fought a battle in the Chamber in which I won nothing more than a mere delay of the catastrophe… Even if I had been completely successful, Austria could not have been saved,” Mises forlornly admitted. “The enemy who was about to destroy it came from abroad [Hitler’s Nazi Germany]. Austria could not for long withstand the onslaught of the National-Socialists who soon were to overrun all of Europe.” Still, he had no regrets over the efforts he had made. “I could not act otherwise. I fought because I could do no other.”
To appreciate Mises’s frustration and sense of failure in having begun, as he expressed it, with the hope of being a reformer and instead ending up in the role of a historian of decline requires an appreciation, however [xxiv] brief, of the history of Austria between the world wars. Familiarity with this period will also serve to place into their appropriate context most of the articles and essays included in the present volume, writings through which Mises had clearly attempted to influence the course of events in his native land.
Austria Between the Two World Wars
Austria-Hungary under the Habsburg monarchy had been a vast, polyglot empire in Central and Eastern Europe encompassing a territory of approximately 415,000 square miles with a population of 50 million. The two largest linguistic groups in the empire were the German-speaking and Hungarian populations, each numbering about 10 million. The remaining 30 million were made up of Czechs, Slovaks, Poles, Romanians, [xxv] Ruthenians, Croats, Serbs, Slovenes, Italians, and a variety of smaller groups of the Balkan region.
During the last decades of the nineteenth century and the opening decade and a half of the twentieth century, the empire increasingly came under the strain of nationalist sentiments from these various groups, each desiring greater autonomy and some forcefully demanding independence. The first World War brought the 700-year-old Habsburg dynasty to a close The war had put severe political and economic strains on the country. Power was centralized in the hands of the military command, civil liberties were greatly curtailed, and the economy was controlled and regulated. Yet the more that power was concentrated and the more that the fortunes of war turned against the empire, the more the national groups, most insistently the Hungarians and then the Czechs, Croats, and Poles, demanded self-determination to form their own nation states.
The empire formally began to disintegrate in October 1918, when first the Czechs declared their independence, followed by the Hungarians and the Croats and Slovenes. In early November 1918, the last of the Habsburg emperors, Karl Franz Josef, stepped down from the throne, and on November 12, a provisional national assembly in Vienna proclaimed a republic in German-Austria, as this remnant of the empire was now named. Yetin the second article of the document of independence, it was stated that “German-Austria is an integral part of the German Republic.” Thus the new Austria was born—reduced to 52,000 square miles with a population of 6.5 million inhabitants, one-third of whom resided in Vienna— with a significant portion of the population not wishing their country to be independent but unified (an Anschluss) with the new republican Germany.
For almost five months after the empire had politically broken apart, the Austro-Hungarian National Bank continued to operate as the note-issuing central bank within German-Austria, Czechoslovakia, and Hungary. The Czechs, however, increasingly protested that the Bank was expanding the money supply to cover the expenses and food subsidies of the German-Austrian government in Vienna. In January 1919, the new [xxvi] Yugoslavian government declared that all notes of the Austro-Hungarian Bank on their territory would be stamped with a national mark, and only such stamped money would then be legal tender. The Czech government announced the same in late February 1919. The Czech border was sealed to prevent smuggling of notes into the country, and the notes within Czechoslovakian territory were stamped between March 3 and 10. Soon after, both Yugoslavia and Czechoslovakia began to issue their own national currencies and exchange the stamped Austrian notes for their new monetary units.
In Hungary the situation was more chaotic. In March 1919, a Bolshevik government took power in Budapest and began printing huge quantities of small-denomination notes with Austro-Hungarian Bank plates in their possession, as well as larger notes of their own design, causing a severe inflation. The Bolshevik government was overthrown in August 1919 by invading Romanian armies.
The Austrian Bank notes were not embossed with a national stamp until March 1920, and a separate national currency was introduced in Hungary in May 1921.
The Austrian government, in response to the monetary decisions of the Yugoslavians and Czechs, began their own official stamping of Austro-Hungarian Bank notes within its territory between March 12 and 24, 1919. However, the limiting of notes considered legal tender in the new Austria did not end the problem of monetary inflation. In a matter of weeks after the declaration of the Austrian Republic, the coalition government made up of the Social Democrats, the Christian Socialists, and the Pan-German Nationalists began the introduction of a vast array of social welfare programs. They included a mandatory eight-hour work day, a guaranteed minimum one-to two-week holiday for industrial employees, a continuation and reinforcement of the wartime system of rent controls in Vienna, centrally funded unemployment and welfare payments, and price controls on food supplies that were supplemented with government rationing and subsidies. The cost for these latter programs was huge and kept growing. In 1921, half of the Austrian government’s budget deficit was caused by the food subsidies.
To cover these expenditures, the Austrian government resorted to the printing press. Between March and December 1919, the paper money of the Austrian Republic increased from 831.6 million crowns to 12.1 billion crowns. By December 1920, it had increased to 30.6 billion crowns; by December 1921, to 174.1 billion crowns; by December 1922, to 4 trillion crowns; and to 7.1 trillion crowns by the end of 1923. Prices rose dramatically through this period. A cost-of-living index, excluding housing (with July 1914 = 1), stood at 28.37 in January 1919; by January 1920, it had risen to 49.22; by January 1921, it had gone up to 99.56; in January 1922, it stood at 830; by January 1923, it had shot up to 11,836; and in April 1924, it was at 14,850.
The foreign-exchange value of the Austrian crown also dramatically fell during this period. In January 1919, one dollar could buy 16.1 crowns on the Vienna foreign-exchange market; by May of 1923, a dollar traded for 70,800 crowns.
Adding to the monetary and financial chaos was the virtual political disintegration of what remained of Austria. Immediately after the declaration of the Austrian Republic, political power devolved to the provinces [xxviii] and the local communities, which showed little loyalty to the new national government and great animosity towards the capital city of Vienna. They soon blocked the provincial borders, imposing passport and visa restrictions for entering and exiting their territories. Some of the provinces in 1919 even entered into independent negotiations with Switzerland and Bavaria about possible political incorporation into these neighboring countries. A primary motivation for this provincial “nationalism” or “particularism,” however, was the food and raw materials crisis.
The imperial government had forcefully requisitioned food from the agricultural areas of German-Austria during the war. The new republican government in Vienna continued the practice of forced requisition at artificially low prices, using a newly formed Volkswehr [People’s Defense Force] to seize the food supplies sold in Vienna at controlled prices for ration tickets. The provincial governments used their local power to prevent the export of their agricultural products to Vienna at these below-market prices. Vienna, however, received food from the countryside through a vast black-market network that operated throughout the country.
time after the armistice by the Allied powers but mostly imposed by the Czechs, Hungarians, and Yugoslavians. Coal supplies throughout 1919 and early 1920 were hard to come by. The Czechs and Hungarians refused to supply coal unless they received actual manufactured goods as payment in trade. The inability to acquire coal and other essential raw materials resulted in Austrian and especially Viennese industry grinding to a halt, with no way to produce the goods necessary to pay for the resources required for production. Throughout 1919 and part of 1920, Vienna was on the verge of mass starvation, with food and milk rations almost nonexistent except for the very young. Only relief supplies provided by both the Allied powers and private charities saved thousands of lives in the city..
In October 1920, a new constitution was promulgated as the law of the land. Written primarily by the Austrian legal philosopher Hans Kelsen, it defined the lines of authority between the central government and the [xxix] provinces. The provinces were given wide powers at the local and regional level, but the supremacy of the federal authority over essential political and economic matters that the constitution established ended the provincial nationalism and “particularism.”
One new element resulting from the constitution was that the city of Vienna was now administratively recognized as having a separate “provincial” status. Thus, neither the surrounding province of Lower Austria nor the federal government located in Vienna had jurisdiction over the affairs of the city. From 1920 until 1934, the city became known as “Red Vienna.” Throughout the interwar period, Austrian politics were dominated by the battle between the Social Democrats and the Christian Socialists. The Social Democrats, while rejecting the Bolshevik tactic of dictatorship to achieve their ends, were dedicated to the ideal of marching to a bright socialist future. But outside of Vienna (where they consistently won a large electoral majority) they were thwarted in this mission by the Christian Socialists, who held the majority in the Alpine provinces of Austria and therefore in the National Assembly that governed the country as a whole. The Christian Socialists based their support in the agricultural regions of the country where there was a suspicion and dislike for socialist radicalism. The Christian Socialists, however, were willing to use, in turn, domestic regulations, trade restrictions, and income transfer programs to benefit segments of the rural population at the expense of the larger municipalities, and especially Vienna.
The battle between these two parties had first been fought out in 1921 and 1922, when government expenditures and the mounting increases in the money supply to pay for them were threatening runaway inflation and a financial and economic collapse. After several appeals to the Allied powers, the League of Nations extended a loan to the Austrian government to repay outstanding debts left over from the war and temporarily to cover current expenditures. In return the League supervised a demanding austerity plan that required sizable cuts in government spending, including the ending of the expensive food subsidies for the urban population and the firing of 80,000 civil servants. In addition, the League assisted in the construction of a new Austrian National Bank, for which Mises played a central role in the writing of the charter and bylaws.
In Vienna the Social Democrats remained determined to press on with creating a model socialist community. Huge sums of money were spent in the 1920s on building dozens of schools, kindergartens, libraries, and hospitals in the “working class” districts of the city. They also [xxx] constructed vast new housing complexes, sometimes built literally like fortresses ready to be defended against any counterrevolutionary attacks; one of the most famous of these complexes was Karl Marx Hof. In other parts of the city rent controls kept the cost of apartment housing artificially low at the expense of the landlords. Municipal social and medical insurance programs provided cradle-to-grave protection—including free burials —for the constituents of the Social Democratic Party in Vienna.
To pay for these programs and projects, the Social Democrats imposed a “soak the rich” tax system. Various progressive tax devices were introduced on income, consumption, “entertainment,” and “luxury” expenditures, as well as on rents, business enterprises, and capital assets within the boundaries of the city’s jurisdiction. One newspaper referred to the city’s fiscal system as “the success of the tax vampires,” especially since to cover these municipal expenditures the tax base and rates soon enveloped a large portion of Vienna’s middle class as well as “the rich.”
Parallel to the electoral combat between Social Democrats and the Christian Socialists were paramilitary battles around the country as well. In 1919 and 1920, under the threat of foreign invasion—especially by Yugoslavian armed forces along Austria’s ill-defined southern border—and the plundering expeditions of private gangs and the government’s Volkswehr attempting to forcibly seize food supplies from the rural population, the farming communities created a Heimwehr [Home Defense Force]. It soon became the paramilitary army of the Christian Socialists. In turn, the Social Democrats created theSchutzbund [Protection League] as their private armed force. Armed with war surplus and other weaponry, they both had training camps, parades, and military drills, and held maneuvers in the countryside during which they would sometimes clash in actual combat.
One of the most serious of these clashes occurred in January 1927, in a town near the Hungarian border southeast of Vienna. In the fighting several people were killed, including a small child. In July 1927, three members of the local Heimwehr where the combat occurred were put on trial in Vienna but soon were acquitted. Mobs from the “working class” districts of the city, who were led by known communists, rampaged through parts of the center of Vienna; they burned down the federal palace of justice, requiring the police to use deadly force to put down the violence. In response, the Social Democratic mayor of the city declared the police incompetent and set up a new parallel police force, the Wiener Gemeindewache [Vienna Municipal Guard], manned mostly by recruits from the Social Democrats’Schutzbund, and all at the taxpayers’ extra expense.
Throughout the 1920s, Austria lived a precarious economic existence. Heavy taxes and domestic regulations hampered private investment in the country with both the private sector and the municipal authorities dependent upon foreign lenders and domestic credit expansion for financing many of their activities. Indeed, the burden of rising taxes and social insurance costs, increasing wage demands by labor unions, and tariff regulations actually resulted in capital consumption in the Austrian economy through the 1920s. In a report for the Austrian government that Ludwig von Mises had coauthored in 1931, it was shown that between 1925 and 1929 taxes had risen by 32 percent, social insurance by 50 percent, industrial wages by 24 percent, agricultural wages by 13 percent, and transportation costs by 15 percent—while an index of the prices of manufactured goods bearing these costs had increased only 4.74 percent between 1925 and early 1930.
This was the political and economic situation in the country as Austria entered the Great Depression in 1929. Austria’s crises in the early [xxxii] 1930s were both political and economic. Between 1929 and 1932, Austria had four changes in the government, with finally Engelbert Dollfuss becoming chancellor in May 1932. The economic crisis became especially severe in May 1931. One of Austria’s old imperial-era banks, the Credit-Anstalt, had taken over the Boden-KreditAnstalt in October 1929. The latter bank had branches throughout central Europe and suffered heavy financial losses through most of 1929 into 1930. To sustain the Boden-KreditAnstalt and its own financial position, CreditAnstalt borrowed heavily in the short-term market. In May 1931, panic set in that CreditAnstalt would not be able to meet its financial obligations, precipitating a run on the bank. At the same time, there was a rush to exchange Austrian schillings for foreign currencies and gold.
The Austrian government responded by passing a series of emergency measures between May and December 1931. Concerned about continuing losses of hard-currency reserves, the Austrian government instituted foreign-exchange controls. Distortions, imbalances, and corruption resulting from that law led to three revisions during the first year, each one loosening the controls a little more. The controls were phased out by 1934, after the Austrian government received loans from a group of foreign sources.
In June 1931, Austria had appealed for financial assistance to provide funds needed to stem the massive loss of gold and foreign exchange. The Bank of England and the Bank for International Settlements in Basil, Switzerland, extended credits to the Austrian National Bank. In August 1931, the Austrian government appealed to the League of Nations for a loan, as it had in 1922. The loan agreement was finally signed almost a year later in July 1932. It supplied funds to repay the credits extended by the Bank of England and the Bank for International Settlements. Refinancing of the loan a short time later at a lower rate of interest significantly reduced Austria’s total foreign debt.
But the events that were to seal Austria’s fate were being played out in [xxxiii] the political arena. The League loan, like the one in 1922, required a League representative to supervise the allocation and use of the funds and insisted upon austerity measures to reduce the government expenditures, in addition to a renewal of the pledge against an Anschluss with Germany. The Social Democrats and Pan-German Nationalists in the Austrian Parliament unsuccessfully attempted to block passage of the loan bill, an action which left a bitter and tense relationship between these two parties and Dollfuss’s Christian Socialists.
In March 1933, a procedural argument arose during a parliamentary vote and the leading members of each of the major parties stepped down from the rostrum, bringing the proceedings to a halt. The next day, Chancellor Dollfuss used this as an excuse to suspend the parliament and announce that he was going to rule by decree. Tensions continued to mount for the next year until finally the situation exploded into civil war. Based on information that units of the Schutzbund, the paramilitary arm of the Social Democratic party, were going to initiate a coup attempt, the Christian Socialists’ Heimwehrattempted to disarm them in several cities around the country, including Linz. When fighting broke out, the Austrian army was called into action to put down the combat.
In Vienna, the Social Democrats called for armed insurrection in “selfdefense” against the “reactionary” forces of the Austrian army and the Heimwehr. For four days, deadly and destructive fighting went on in the outer districts of Vienna, with hundreds either killed or wounded and the government forces using artillery pieces to bombard Social Democratic strongholds. When the fighting ended, the Social Democratic forces were completely defeated. Most of the party’s leadership fled the country, and the party was declared illegal.
Then in July 1934, a group of Austrian Nazis, inspired by Hitler’s rise to power in Germany the preceding year, attempted a coup. They seized the Chancellery building, captured and killed Dollfuss, and proclaimed a National Socialist government. They were swiftly defeated by forces loyal to the Austrian government, as was another Nazi-led uprising in the region [xxxiv] of Styria at the same time. When Mussolini declared Italy’s intention to preserve Austria’s independence by sending military forces to the Brenner Pass at the Italian-Austrian border, Hitler repudiated his Austrian followers (for the time being).
Kurt von Schuschnigg became chancellor following Dollfuss’s death, a position he held until March 1938, when Nazi Germany annexed Austria. Thus ended Austria’s tragic twenty-year history between the two world wars.
Monetary Disorder, Inflation, and Interventionist State (1918–32)
The first three chapters in this volume were written in 1918, before the end of the first World War. At this time, Mises was serving as an economic consultant to the Austrian General Staff in Vienna. The chapters look forward to a return to peace, but they contain nothing suggesting the actual cataclysm of events that were to follow. In his article, “The Quantity Theory,” Mises restated the basic principles behind the quantity theory of money and emphasized that it had been the abuse of the printing press that had caused the wartime inflation. The task ahead would be to end the inflation and restore the soundness and stability of the Austrian currency when the fighting stopped.
In response to questions raised by two commentators, Mises made clear in “On the Currency Question” that monetary theory as a social-scientific endeavor offered no answer to the question as to which policy was best to follow in the postwar period. One option would be to end the printing of bank notes and allow the value of the Austrian crown to stabilize in terms of its then-current depreciated market value in exchange for gold and foreign currencies. A new fixed rate of exchange could be established, Mises suggested, say, one year from the day the war ended. If, on the other hand, there were a strong preference to return to the status before the war began in 1914, including a restoration of the prewar foreign-exchange value of the Austrian crown, it would be necessary for the government to run a budget surplus and pay off its debt to the Austro-Hungarian Bank, which would then take the bank notes out of circulation. The monetary contraction would have to continue until the value of the crown had once again risen to its prewar parity.
Mises emphasized that such a monetary deflation would have various disruptive social consequences in the transition to the higher foreign-exchange rate for the crown. Whether to contract the money supply or stabilize the value of the crown at its depreciated value was a political question that economic theory could not answer, other than to explain the consequences that were likely to follow from either course of action.
In the spring of 1918, following the Treaty of Brest-Litovsk that ended the war on the eastern front that imperial Germany and Austria-Hungary had waged with the new Bolshevik government in Russia, Mises served as the officer in charge of currency control in Austrian-occupied Ukraine, with his headquarters in Odessa. An independent Ukraine had been declared in Kiev during this time, and in “Remarks Concerning the Establishment of a Ukrainian Note-Issuing Bank,” Mises outlined the institutional rules that should be followed by a Ukrainian central bank. All bank notes issued and outstanding should be at all times covered with gold or foreign exchange redeemable in gold equal to one-third of the bank’s liabilities. Bank assets in the form of secure, short-term loans should back the remaining two-thirds of the notes in circulation. Mises admitted that there were particular institutional and historical circumstances that would have to be taken into consideration in setting the conditions under which certain types of borrowers might have access to the lending facilities of the Ukrainian central bank. But what was crucial for Ukraine to have a sound monetary system were ample reserves for redemption of bank notes on demand and limits on the term-structure of the loans made by the bank.
These first essays have an almost surrealistic quality to them in suggesting a postwar period in which there would be a calm, stable, and relatively smooth transition to a restructured monetary system as a complement to the return to a tranquil peacetime economy. Instead, the problems that Mises attempted to grapple with in the essays that followed [xxxvi] concerned an actual situation of monetary disintegration, high inflation, political disorder, and general economic chaos.
The next three essays, “The Austrian Currency Problem Prior to the Peace Conference,” “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” and “The Reentry of German-Austria into the German Reich and the Currency Question,” were all written in the first half of 1919. They deal, respectively, with distinct but interrelated questions: how shall a previously unified monetary system be separated into different national currencies; how might the private banking sector create a transition to a new currency after government mismanagement of the monetary system will have brought about a sudden inflationary collapse of the currency; and how shall two separate national currency systems be unified or reunified into a single monetary regime?
In “The Austrian Currency Problem Prior to the Peace Conference,” Mises outlined alternative possibilities that might be followed in establishing a new monetary order in the wake of the collapse of the Austro-Hungarian empire and its unified currency system. He discussed the possibilities of maintaining a common single-currency area with a single central bank, or a monetary union with independent central banks, or completely independent national currencies issued and managed by separate central banks. Mises assumed that none of the newly independent “successor states” would opt for the first alternative. Thus the issue at hand was how all the people presently holding notes issued by the Austro-Hungarian National Bank would convert them into units of the respective new national currencies. He suggested that those residing in the respective successor states should have the freedom of converting their old notes into either the national currency of the new country in which they resided or into the currency of any other of the successor states, as they found most convenient and useful. The same free choice of currency conversion also should be available to those holding quantities of the old notes in countries outside the territory of the former empire. The additional problem to which the currency conversion would be tied was the distribution of the Austro-Hungarian prewar and wartime debt among the successor states. Mises offered a detailed formula of how the distribution of this debt and the conversion of the old notes into new currencies might be reasonably balanced without an undue financial burden on any one of the new countries.
But in the spring of 1919, a far greater problem that confronted the [xxxvii] new Austria was the danger of runaway or hyperinflation. With state spending seemingly out of control because of the welfare-redistributive programs introduced by the Social Democratic and Christian Socialist coalition government, and especially because of the cost of subsidized food for the urban populations, the monetary system seemed headed for a collapse. Mises was cautious to say that it was neither certain nor inevitable that such a currency collapse had to occur. But if it did, Austria—and particularly Vienna, with its large urban population—could be faced with social disintegration, food riots, and mass destruction and theft of property as the value of the medium of exchange fell to zero. Government would have lost all legitimacy and trust in relation to monetary matters. It was to solve this problem that Mises presented his proposal, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation.”
It would fall on the shoulders of the private sector—banks and businesses—to devise the mechanism to bridge the gap between any dramatic and rapid collapse of the old currency and the spontaneous shift to the use of alternative monies by the citizens of the society. Thus, Mises presented a plan for these elements in the private sector to use export revenues and sales of assets to accumulate cash reserves of small-denomination units of Swiss money to use as the temporary, emergency medium of exchange. It would be used to pay salaries and pensions and to loan to the government and other employers in the market so that the population would have access to a medium of exchange they could have confidence in accepting and using for survival. This only would be necessary until normal export sales and capital transfers supplied over time the required quantities of gold or foreign currencies to be used as the permanent substitute monies in a post-inflationary Austrian economy. Mises also explained the process by which private banks could form an informal consortium to jointly cover the costs and clearings of providing this emergency alternative currency.
While Mises alluded to the possibility of a private monetary order without a central bank in the wake of a currency collapse, realistically central banking was and would remain the prevailing monetary regime. The question then arose as to whether the new Austria should have its own independent central bank and national currency or instead should be integrated into a common currency area with the new Germany. This also related, in the long run, to whether or not there should be political unification,Anschluss, between Germany and Austria, which is the theme of [xxxviii] “The Reentry of German-Austria into the German Reich and the Currency Question.”
If Austria were to be integrated into a common monetary system with Germany, certain preconditions were essential for the unification. first and foremost, both countries would have to renounce inflationary monetary policies if there were to be a stabilization of their respective currency’s value for purposes of conversion and unification. But this was not likely to be possible until and unless both countries brought an end to deficit spending, which usually was the impetus for monetary expansion to cover the government’s spending in excess of tax revenues. Therefore, also essential for currency unification would be the establishment of parallel sets of fiscal-policy rules to govern taxing and spending in the two countries.
For the transition to a common currency, Mises suggested the German mark could first be introduced as a “core” or reserve currency in Austria, with a specified ratio of exchange at which the Austrian bank would be obliged to redeem Austrian notes for German marks, and vice versa. Increases and decreases in the number of units of Austrian currency in circulation would be dependent upon deposits or withdrawals of marks from the Austrian banking system. The Austrian National Bank would no longer be an independent authority that determined the quantity of money in the country (similar to the currency boards in a number of countries around the world). final unification would then come through the German central bank redeeming all Austrian bank notes for marks at a specified ratio of conversion, after which there only would be one monetary system and one currency in use in both countries.
At the same time Mises was considering the currency question, he was working through the Chamber of Commerce to eliminate a major stumbling block to Austrian economic recovery through international trade. In “Foreign-Exchange Control Must Be Abolished,” he argued that exchange [xxxix] control limited the ability of importers to acquire required raw materials and goods for the production of manufactured exports and placed insufferable delays and hurdles in the way of entrepreneurial adjustment to changing market opportunities.
This problem was matched by the economic disintegration of trade between the provinces and regions making up the new Austria, a theme that Mises took up in his essay, “Vienna’s Political Relationship with the Provinces in Light of Economics.” The cause, he argued, was preferential abuse of the fiscal structure through the system of differential tax incidence borne by the rural areas in comparison to the urban population, and Vienna in particular. The price controls on food supplies and the government’s subsidies for Vienna residents at the financial expense of the farmers reinforced the tension. Far worse, considering that Vienna was on the verge of mass starvation, was the loss of the bourgeois spirit of enterprise and work that is both the hallmark and the necessity of city life. Attempting to live off the output of the rural areas by means of either begging or the use of arms would only drive a deeper wedge between the regions of Austria, threatening a further political breakup of what remained of the country. Free trade and division of labor on the basis of market prices was the only path to salvation if the new Austria were to survive.
Mises discussed the fiscal problems of Austria further in his two articles, “Direct Taxation in City and Country” and “Viennese Industry and the Tax on Luxury Goods.” Both during and after the war, the tax burden had been shifted from the agricultural sectors to the urban industrial and commercial centers of the country; consequently, the manufacturing capital of the society was being consumed, which was seriously reducing Austria’s productive capability. In Vienna, the socialist city government had imposed heavy taxes on “luxury goods.” Mises warned that these taxes threatened the income-earning capacity of the city, particularly in relation to the tourist industry and the specialized goods for which Austria had built up an international reputation in its export trade.
Yet the greatest threat facing Austria, Germany, and many other countries over the next three years was worsening inflation, as Mises described in “A Serious Decline in the Value of the Currency,” “The Abolition of Money in Russia,” and “Inflation and the Shortage of Money.” In the latter essay, Mises emphasized that as inflation accelerates people start anticipating future declines in the value of money and rush to reduce their cash holdings before money’s value falls even more. Prices start rising faster [xl] than the increase in the quantity of money, creating the illusion of a “shortage of money.” If the monetary authority tries to compensate for this by expanding the money supply at an even faster rate, this will only succeed in reinforcing popular inflationary expectations and speed up the currency’s race to its collapse.
With the currency reform in Austria in 1922 and the monetary reconstruction in Germany after the inflationary destruction of the mark in 1923, plus the end to inflation in a number of other countries, Europe turned once more to a gold standard. Yet, as Mises argued in his 1924 essay, “The Return to the Gold Standard,” the battle to end inflation now was replaced with a debate over the most appropriate monetary system. Mises explained the merits of a gold standard, most especially the fact that a gold-based currency removed direct control of the printing press from the grasping hand of government. He also critically evaluated the counterproposals of Irving fisher and John Maynard Keynes for “managed currencies,” the value of which would be manipulated by government to stabilize the price level or assure a desired level of employment and output.
Equally worrisome, Mises argued in his essays, “Restoring Europe’s State finances,” “Changes in American Economic Policy,” and “Commercial and Bureaucratic Business Management,” was the direction of government spending, regulation, and nationalization of enterprises. The governments of Europe threatened the longer-term prosperity of their countries with burdensome levels of taxation and spending to finance income-transfer programs and to subsidize bankrupt state enterprises that should, in fact, either be privatized or shut down. Even in America, the bastion of free enterprise, political currents were moving in the direction of increasing government intervention and regulation. Those who hoped that state enterprises could be made profitable by introducing business-management styles into their operation failed to see fully the difference between an enterprise guided by the profit motive and one designed to pursue costly and inefficient “social” ends.
The Political Economy of the Great Depression (1931–36)
This continuing drift toward government intervention, regulation, and planning was accelerated and intensified with the start of the Great Depression in 1929. In an ideological environment dominated by socialist and interventionist leanings, Mises tried hard to defend the market order in a series of articles on “The Economic Crisis and Capitalism,” “The Gold Standard and Its Opponents,” “The Myth of the Failure of Capitalism,” “Interventionism as the Cause of the Economic Crisis,” “Planned Economy and Socialism,” and “The Return to Freedom of Exchange,” as well as in “Two Memoranda on the Problems of Monetary Stabilization and Foreign-Exchange Rates.”
The economic crisis through which the world was passing, Mises explained, was not caused by the market economy but was due to the monetary and credit-expansion policies of the previous years that had brought about a misdirection of resources and a malinvestment of capital. An economic adjustment was unavoidable once the inflationary policies had come to an end, but the severity and duration of the economic crisis was being caused by interventionist policies that prevented the necessary changes in the structure of relative prices and wages to bring the economy back into balance. Instead, governments supported inefficient industries and fostered trade-union resistance to cuts in the level of money wages. The result was idle resources and unemployment. Perversely, all of the disastrous effects resulting from these interventionist policies were being used to claim that it was capitalism that had failed. The new ideal of “planning” that was being advocated in place of the market economy was merely a new name for socialism, and government direction of a society’s economic activities would merely lead to worse economic consequences.
The gold standard, Mises said, was being opposed and overthrown as a complement to the regime of interventionism so governments could have a free hand to manipulate the value of money; he attempted, at the same time, to refute many of the arguments against the gold standard. Through devaluation and monetary depreciation, the goal was to restore [xlii] full employment by lowering workers’ real wages by increasing the prices of goods and services while trying to keep money wages at their initial level or at least not rising as fast as prices were going up. At the end of the day, Mises argued, such a policy would fail. Nor could national prosperity and balance be restored through the introduction of foreign-exchange control. Artificially fixing the price at which a currency might be bought and sold, and putting control over the allocation of foreign exchange in the hands of the government, only intensified the distortions and imbalances in both the domestic and international markets.
Austrian Economic Policy and the Great Depression (1927–35)
In his native Austria, Mises considered that economic policy was continuing to follow the wrong direction even before the Great Depression set in. In “The Balance Sheet of Economic Policies Hostile to Property” and “Adjusting Public Expenditures to the Economy’s financial Capacity,” he emphasized that taxes and government expenditures were strangling the Austrian economy. One indication of this was that the trade balance was in deficit because of foreign borrowing to compensate for capital consumption in the country. At the heart of the country’s problems was a wrongheaded conception that said that, while in the private individual’s budget expenses must be restrained by income, on the government balance sheet taxes should be adjusted to cover any level of expenditures considered desirable. This was a road to ruin, Mises warned, because there were always rationales for government to spend more money and never reduce any existing spending. This attitude had to be turned around to the view that it is the amount of taxes collectable without threatening the capital, standard of living, and growth of the economy to which government spending needed to conform.
Another element in Austria’s policy irrationalities, Mises explained, was its labyrinth of layered and redundant government bureaucracies and regulations at the municipal, provincial, and federal levels. Government administration and regulation needed to be streamlined, simplified, and reduced. This in itself would not only make the economy more flexible and competitive, but also reduce the size and cost of government.
With the start of the Great Depression and the collapse of the [xliii] CreditAnstalt Bank in Vienna in May 1931, Mises’s focus became the financial and economic crisis into which Austria had now fallen. He offered his policy prescriptions in five papers written in 1932 that he prepared for meetings of the Vienna Chamber of Commerce: “Foreign-Exchange Control and Some of Its Consequences,” “An Agenda for Alleviating the Economic Crisis,” “An International Loan as the ‘Breathing Room’ for Austrian Economic Reform,” “On Limiting the Adverse Effects of a Proposed Increase in the Value-Added Tax,” and “Foreign-Exchange Policy.”
To try to save the CreditAnstalt, the Austrian National Bank had extended credits for which there was no gold backing as required by the bank’s reserve requirements; to stop the run on its reserves, the bank had ended redemption on demand. The value of the Austrian schilling fell on the foreign-exchange markets. The government’s response was to institute foreign-exchange control pegged at the former gold-parity rate. Mises explained that this would not bring about recovery in the market or restore balance in the international trade accounts. Instead, it would artificially induce even more imports and stymie the sale of exports—the exact opposite of what the government said it wished to do in terms of the country’s balance of trade. The inconsistencies and contradictions in the foreign-exchange control system manifested itself in the fact that, as the year went on, the government was forced to loosen the restrictions on the sale and purchase of foreign currencies and allow more market-based allocation and pricing of foreign exchange. The only lasting cure, Mises insisted, was to immediately abolish the entire network of controls and return to a free market in foreign-exchange dealings.
The fundamental cure for Austria’s problems in the world economic crisis required, among other things, the restoration of redemption of the Austrian currency at the legal gold parity. To do so, the Austrian National Bank had to reverse the monetary and credit expansion it had been following. Mises clearly stated that this monetary deflation had to be instituted as quickly as possible before the entire structure of prices and wages in the country had fully adjusted to the depreciated value of the schilling. At that point, returning to the legal gold parity would necessitate a wrenching adjustment of prices and wages downwards that might not be possible.
Equally crucial to a return to economic balance and the path to prosperity were reductions in government spending to alleviate the strain on the private sector from a state budget that was pushing the country to live beyond its means. It was government spending that was creating the [xliv] pressure for tax increases, which Mises considered a serious danger to Austrian business. If certain taxes were raised, he maintained, they should at least be imposed in a way that did not unduly discriminate against some sectors of the economy for the benefit of others.
When the Austrian government applied for and received an international loan from the League of Nations to facilitate a solution to its financial difficulties, Mises endorsed it, but only if it was understood and used as a “breathing space” for actual and real institutional reform in the government’s taxing and spending practices. Otherwise, Austria would be merely digging its financial grave even deeper.
At the end of 1934, as Mises was departing for Geneva, Switzerland, to take up his teaching appointment at the Graduate Institute of Economic Studies, he wrote “The Direction of Austrian financial Policy: A Retrospective and Prospective View.” Democratic government had ended in Austria, a brief civil war had been fought and had crushed the Social Democrats, and now Mises hoped that a new calm in the country could serve as the backdrop for returning to the path of economic reform and recovery. He reviewed the course of Austrian economic policy during the preceding fifteen years since the end of the first World War, and emphasized that what the country still needed was less government spending and taxing, more flexibility in the country’s price and wage structure, a stable currency, and acceptance that as a small nation in a large global economy Austria had to adjust to the international conditions of supply and demand. Sadly, in under four years, Austria’s fate would be sealed for the duration of the Second World War.
The Political Economy of Irrationalism, Autarky, and Collective Security on the Road to War (1935–38)
From his new vantagepoint in Geneva at the Graduate Institute, Mises was freed from the everyday affairs of Austrian economic policy that had been the focus of his attention at the Vienna Chamber of Commerce. As he wrote in the foreword to the first edition of Human Action, “In the serene atmosphere of this seat of learning …I set about executing an old plan of mine, to write a comprehensive treatise on economics.”
Still, he devoted his attention to the political, ideological, and economic currents in Europe and periodically commented on them. In “The Cult of the Irrational,” prepared for a Hungarian publication, Mises challenged those who argued against the liberal market economy and for nationalism and protectionism on the basis that there is more to public policy than logic and reason. Humanity’s only tool for evaluating the reasonableness of any course of action is rationality, Mises insisted, otherwise it is blind in deciding what alternatives are more likely to yield the ends desired. Furthermore, if people were, in fact, driven by irrational forces of national “belonging” to prefer those goods that were domestically manufactured, then why did governments need to use their power to prevent their citizens from purchasing foreign commodities?
This led Mises to warn of “Autarky: The Road to Misery.” Self-sufficiency neither guaranteed security nor provided prosperity. European civilization was based and dependent upon the international division of labor. Abandoning it would only lead to societal decay and destruction. In “The League of Nations and the Raw-Materials Problem,” Mises explained that a country’s prosperity did not require “ownership” of mines and raw materials and land in other parts of the world. The market economy brought all of the means of production around the globe to everyone’s service through trade. If the League of Nations was to prove its worth as a force for peace, then it had to challenge the argument that wars were inevitable among nations for control of the resources of the world.
Finally, in “Guidelines for a New Order of Relationships in the Danube Region,” Mises explained that the nations of Eastern Europe had no hope of avoiding being the plundered pawns of their larger, stronger, and aggressive neighbors unless they turned away from their respective policies of political and economic nationalism. They needed to form a political and economic union that would guard their freedom from external enemies and finally secure liberty and prosperity within their territories.
In two essays that he wrote in the 1930s and 1920s, respectively, Mises briefly summarized what he considered to be some of the more important contributions and insights of the Austrian economists, including the theory of marginal utility and the formation of prices for both final goods and the factors of production. He also stated that the ideas of the Austrians still contained insights that could be useful in public policy. At the University of Vienna, Mises had attended the seminar of Eugen von Böhm-Bawerk, who was one of the most famous of the Austrian economists. Mises’s short memorial piece on the tenth anniversary of Böhm-Bawerk’s death shows just how much he considered his old teacher to have contributed to both economic theory and policy.
Methodology of the Social Sciences
In the spring of 1933, Ludwig von Mises published a collection of essays, Epistemological Problems of Economics, devoted to questions of methodology in economics and the social sciences in general.They dealt with the issue of whether economics is an a priori and deductive science that is able to derive qualitative and logical laws of human action and market relationships, or a discipline constructed on the basis of empirical observation, historical induction, and quantitative analysis.
Mises’s position was that economics is inherently an axiomatic-deductive science that derives its insight through introspective reflection, on the basis of which it is able to formulate the logic of action and choice. History is the study of actual actions undertaken and their intended and unintended consequences. However, to do history there first must be a theory of what it means for man to choose: to weigh alternatives, compare costs and benefits, to make evaluations at “the margin,” and to act once a goal in mind has been decided upon. But insight into the logic of action and choice cannot be derived from empirical experience. We discover them, their meaning, and their logical implications, by looking inside ourselves and asking what it means for a person to “act.”
In June 1933, Mises had been asked to contribute a short essay for a volume in honor of the German scholar, Christian Eckert, on “The Logical Problem of Economics.” The volume never appeared because of the “new environment” under the Nazi regime. The unpublished essay, among Mises’s “lost papers,” explored the similarities between positivism and historicism, in spite of their apparent antagonism toward each other. The crucial element, Mises argued, is to understand the difference between the logic of economic theory and the logic of historical analysis—and that, while they are distinct, they are not in conflict with one another.
In June 1937, Mises delivered a lecture at a philosophy conference in Paris on “The Logical Character of the Science of Human Action.” In a nutshell Mises stated his general position on the nature of the social sciences. He emphasized that knowledge in the human sciences is derived from a fundamentally different source—introspection and reflection on the meaning and implications of “action”—from the basis of knowledge in the natural sciences, which comes from empirical investigation and [xlviii] laboratory experimentation. Inanimate matter does not assign meanings to its movements or to the other objects around it. A person most certainly does do these things, and this is what makes one’s movements and doings “actions,” which can only be formally comprehended through introspective reflection.
Economic Calculation under Socialism
After the appearance of Mises’s treatise on Socialism in 1922, a large number of works were written by socialists and others who challenged or questioned his argument that the abolition of private property, market competition, and money prices for the factors of production under central planning made impossible any rational economic calculation for an efficient allocation and use of the resources of society. In the 1932 revised edition of Socialism, Mises added comments and replies to some of his critics. Human Action contains a refined restatement of his critique of socialist planning in the context of criticisms that had been made since that revised edition of Socialism.
In addition, he wrote two articles in the 1920s in direct response to his critics, “New Contributions to the Problem of Socialist Economic Calculation” (1923) and “Recent Writings Concerning the Problem of Economic Calculation under Socialism” (1928), neither of which has been previously published in English. In the first and longer article, Mises pointed out that those who challenged his argument either in fact ended up conceding his main thesis or were confused and misunderstood what the debate was about. He devoted the most attention to writings of the economic anthropologist Karl Polanyi and the Christian socialist Eduard Heimann, as well as to the arguments of a group of Soviet economists and German socialists, including Karl Kautsky and Otto Leichter.
In the 1928 article, Mises discusses the writings of Jacob Marschak, Otto Neurath, and the Russian economist Boris Brutzkus. In Brutzkus’s work Mises finds a reinforcement of his own argument against socialism in the context of the failure of the Soviet experiment with planning during the period of War Communism in Russia between 1918 and 1922.
Also among Mises’s “lost papers” was an unpublished manuscript on “Economic Calculation under Commercial Management and Bureaucratic Administration.” It was written in longhand on the back of the pages of one of his reports for the Chamber of Commerce presented in July 1932. Mises explained that only where there is private property in the means of production and a goal of profit maximization by the enterprise can there be fully rational economic calculation. The very nature of bureaucratic administration is that among its chief goals are management of the public enterprise for purposes other than profit maximization. As a consequence, to restrain expenditures and prevent any arbitrary discretion on the part of the bureaucratic personnel, the public enterprise must be made to follow precisely defined and delimiting rules and regulations concerning all facets of its activities. In other words, there is no escape from it being managed “bureaucratically.” The more government imposes regulations that steer private enterprises away from their market tasks of satisfying consumer demand in the pursuit of profits, the greater becomes the bureaucratic element in all economic activities. Thus, the choice society faces is profit-oriented businesses or bureaucratically directed enterprises. There is no sustainable alternative in between.
The final piece in the present volume, included as an appendix, is the 1925 article by Soviet economist F. Kapelush on “‘Anti-Marxism’: Professor Mises as a Theorist of Fascism,” which appeared in the Soviet journal Bolshevik. It provides a taste of the tone, style, and mode of argumentation by many Soviet scholars in response to antisocialist writings during this time. Readers may draw their own conclusions about the intellectual caliber of some of Mises’s opponents in the Soviet Union.
The essays in this volume, and his other writings from the period between the two world wars, closed off a chapter in the life of Ludwig von Mises. After 1940, when he was living in America, Mises wrote with a different purpose in mind than had been the case to a great extent during the 1920s and 1930s. In America he was not concerned with unraveling and critically arguing against particular policies or offering in their place specific policy prescriptions in the constantly changing currents of political life. He was [li] not obliged to speak as a representative of a coalition of interests, as he had at the Vienna Chamber of Commerce, sometimes having to temper his arguments in the name of winning the endorsement of the Chamber members so he could advance what he considered “sound policy.”
That “liberation,” as Mises called it, had already begun for him when he moved to Geneva in the autumn of 1934. He was free to address himself to wider and more fundamental issues that he had certainly dealt with in many of his writings in the earlier years, but which he had not had the time or the intellectual autonomy to write about without distraction. The majority of his writings, especially after his arrival in America, tend to be written against the backdrop and in the context of fundamentals and first principles. Even his writings touching on various policy problems of the day, such as inflation or price controls, always focus the discussion on general principles or broad historical examples and lessons to be learned from the human experiences of the past.
By contrast, in most of the essays in the present volume, what is offered is Mises having to apply these general principles and historical lessons to questions concerning what is to be done now, in the practical circumstances of the time. They represent, in many instances, examples of “applied” Austrian economics by the person who, besides Friedrich Hayek, is usually considered the twentieth-century exemplification of “the Austrian approach.”
A monetary order is disintegrating. How do you disentangle one monetary regime into several? A country is faced with a monetary collapse due to hyperinflation. How do you prepare for the transition to a substitute currency? Two monetary systems may be combined into one. What are the specific policy and institutional prerequisites for the change to a unified monetary system? Tax incidence and price controls are bringing about the breakup of a country into separate regions. What economic policies would reintegrate them? Layers of bureaucracy and divided political authority burden a society with excessive government expenses and regulations. How do you streamline the administrative structures to reduce both? State-run enterprises are run along costly and bureaucratically inefficient lines. What would have to be done to make them profitable, efficient, and flexible to economic circumstances, and what methods will not work in bringing this about? An economic crisis results in currency devaluation and the imposition of foreign-exchange control. Do you reverse the devaluation, and if so in what time frame should it be introduced? What are the consequences of the exchange-control system, and what are the prerequisites for a full restoration of stability in the foreign-exchange market?
These were the questions, besides others, that Mises was called upon [lii] to discuss and solve in terms of policy prescriptions in those years in Vienna between the two world wars.
We saw that Mises, in clear frustration in the months after he arrived in America, lamented that in Austria he had started out hoping to be a reformer but instead ended up being a historian of decline. But precisely because of this, these essays offer us a clearer understanding of precisely why it was that in the countries of Europe between 1918 and 1938, inflation, interventionism, socialism, and economic nationalism led to stagnation, social disruption, a Great Depression, and finally to a new world war.
In spite of his pessimism, Mises was not a fatalist. He said more than once in his writings that trends can change, that they had changed in the past and could change again in the future. With this in mind, after coming to the United States he devoted a sizable amount of time to working out the political and economic policies and reforms that could bring about a rebirth of freedom and prosperity in Europe after the Second World War.
Likewise, from the perspective of these first days of the twenty-first century, Mises’s writings from his earlier period offer important instructions for the present and the future. Within each of these articles and essays criticizing the direction of economic and social policy are also ideas and prescriptions for free-market oriented alternatives in the areas of monetary and fiscal policy, government regulation and planning, and the social institutional order, ideas which would move a society along the path that leads to freedom and prosperity. I would suggest that is precisely how Mises would want the modern reader to view these writings. He stated this very clearly in the preface he prepared for the 1932 second edition of Socialism:
I know only too well how hopeless it seems to convince impassioned supporters of the Socialist Idea by logical demonstration that their views are preposterous and absurd. I know too well that they do not want to hear, to see, and above all to think, and they are open to no argument. But new generations grow up with clear eyes and open minds. And they will approach things from a disinterested, unprejudiced standpoint, they will weigh and examine, will think and act with forethought. It is for them that this book is written.
These articles and essays, originally penned for audiences more than sixty and seventy years ago in the context of the policy controversies of those times, were, therefore, also written for us. They are warning signs and guideposts left behind by one of the greatest economists of the twentieth century to assist us in thinking about and designing better policies for our own times.
Endnotes to Volume 2↩
For expositions of Mises’s ideas on the rationality of human action, the theory of social order, and the market economy and alternative economic systems, see Richard M. Ebeling, “A Rational Economist in an Irrational Age: Ludwig von Mises,” in Richard M. Ebeling, ed., The Age of Economists: From Adam Smith to Milton Friedman (Hillsdale, Mich.: Hills-dale College Press, 1999), pp. 69–120; Richard M. Ebeling, “Planning for Freedom: Ludwig von Mises as Political Economist and Policy Analyst,” in Richard M. Ebeling, ed., Competition or Compulsion? The Market Economy versus the New Social Engineering (Hillsdale, Mich.: Hillsdale College Press, 2001), pp. 1–85; and Israel M. Kirzner, Ludwig von Mises: The Man and His Economics (Wilmington, Del.: ISI Books, 2001).
Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd. revised ed., [1924; 1953] 1980). For an exposition of the Austrian theory of money and the business cycle in the context of the Great Depression and in contrast to the Keynesian approach, see Richard M. Ebeling, “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run,” in Richard M. Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2000), pp. 15–110. For a comparison of Mises’s theory of money and the business cycle with that of the Swedish economists during this period, see Richard M. Ebeling, “Money, Economic fluctuations, Expectations and Period Analysis: The Austrian and Swedish Economists in the Interwar Period,” in Willem Keizer, Bert Tieben, and Rudy van Zip, eds., Austrian Economics in Debate(London/New York: Routledge, 1997), pp. 42–74.
Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,”  in F. A. Hayek, ed., Collectivist Economic Planning (London: Routledge & Sons, 1935), pp. 87–130; reprinted in Israel M. Kirzner, ed., Classics in Austrian Economics: A Sampling in the History of a Tradition, Vol. 3: “The Age of Mises and Hayek” (London: William Pickering, 1994), pp. 3–30.
Ludwig von Mises, Socialism (Indianapolis: Liberty Fund,  1981). For an exposition of Mises’s critique of socialist planning in the context of the critics of socialism who preceded him, see Richard M. Ebeling, “Economic Calculation under Socialism: Ludwig von Mises and His Predecessors,” in Jeffrey M. Herbener, ed., The Meaning of Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1993), pp. 56–101.
Ludwig von Mises, Liberalism: The Classical Tradition (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,  1996).
Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,  1996). For an exposition of some aspects of the Austrian ideas on interventionism, see Richard M. Ebeling, “The Free Market and the Interventionist State,” in Richard M. Ebeling, ed., Between Power and Liberty: Economics and the Law (Hillsdale, Mich.: Hillsdale College Press, 1998), pp. 9–46.
F. Kapelush, “‘Anti-Marxism’: Professor Mises as a Theorist of Fascism,” Bolshevik, No. 15 (August 15, 1925), pp. 82–87. This article has been translated from the Russian and is included as an appendix to the present volume.
Ludwig von Mises, “Anti-Marxism,”  Critique of Interventionism, pp. 71–95.
See Richard M. Ebeling, “William E. Rappard: An International Man in an Age of Nationalism,”Ideas on Liberty (January 2000), pp. 33–41.
See Joachim C. Fest, Hitler (New York: Harcourt Brace Jovanovich, 1973), pp. 549–50; Ian Kershaw, Hitler, 1936–1945: Nemesis (New York: W. W. Norton, 2000), pp. 84–85; and Getta Sereny,The German Trauma: Experiences and Reflections, 1938–2000 (London: Penguin Press, 2000), pp. 6–8. (Getta Sereny, who was a teenager in Vienna at the time of the German occupation, is the stepdaughter of Ludwig von Mises.)
See Saul Friedlander, Nazi Germany and the Jews, Vol. I: The Years of Persecution, 1933–1939* (New York: HarperCollins, 1997), pp. 242–44. For a more detailed account of the events in Austria following the Nazi annexation of the country, see Dieter Wagner and Gerhard Tomkowitz, Anschluss: The Week Hitler Seized Power (New York: St. Martin’s Press, 1971); and Walter B. Maass, Country Without a Nation: Austria under Nazi Rule, 1938–1945 (New York: Frederick Unger Publishing Co., 1979).
See also Ludwig von Mises, “Bemerkungen über die ideologischen Wurzeln der Währungskatastrophe von 1923” [Remarks on the Ideological Roots of the Monetary Catastrophe of 1923] in Freunduesgabe zum 12. Oktober 1959 für Albert Hahn [Friendly Presentations on the Occasion of Albert Hahn’s Seventieth Birthday] (Frankfurt am Main: Fritz Knapp, 1959), pp. 54–58. Here Mises remarked that he kept notes of his conversations with members of the Verein für Sozialpolitik [Association for Social Policy] on various theoretical and methodological questions, adding “I kept these notes in my apartment in Vienna, which I had maintained after my move to Geneva in 1934. These and other documents disappeared after the Nazis plundered my apartment” (p. 55).
That Mises believed that his papers had been destroyed by the Nazis or in the war was told to me in conversation with his widow, Margit, in 1979.
A companion volume will be published by Liberty Fund that contains material from this collection that relates to Mises’s writings before and during the first World War, his family background, his service in the Austrian army during the first World War, his teaching at the University of Vienna, his private seminar, and his correspondence.
Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press,  1978), p. 115.
Ludwig von Mises, Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996).
See Alexander Hortlehner, “Ludwig von Mises und die Österreichische Handelskammerorganisation” [Ludwig von Mises and the Austrian Chamber of Commerce],Wirtschaftspolitische Blätter, No. 4 (1981), pp. 141–42.
The February 1925 issue of Friedensrecht, Ein Nachrichtenblatt über die Durchführung des Friedenvertrages Enthaltend die Verlautbarungen des Österreichischen Abrechnungsamtes [The Laws for Peace, A Newsletter for the Execution of the Peace Treaty, Containing Announcements of the Austrian Office for the Settlement of Accounts], pp. 9–10, reported
the separation of Professor Dr. Mises from the board of directors of the Office of Accounts [for the settlement of prewar debts]. Due to his responsibilities as a deputy director in the offices of the Vienna Chamber of Commerce, Crafts, and Industry, he has had to resign from his activities in the Office of Accounts. As an economic theorist, Professor Mises has made a name for himself in the German-speaking scientific world far beyond the boundaries of Austria. His wide knowledge and his accurate, clear way of thinking are combined with an extraordinary, practical understanding and a detailed knowledge of the economic life in Vienna and Austria. Given Austria’s present economic and financial difficulties, that the arranging of the debentures for the settlement of prewar debts has been facilitated under such comparatively favorable conditions we owe to his farseeing and able handiwork. With foresight into the requirements necessary for success, he sketched out the rules for the committee overseeing the settlement of the debentures. And it was his proposals for the issuance of the debentures that were adopted by the consortium of nations. It was just as important and beneficial for the work of the Office of Accounts that Mises applied, in a strictly objective way, his knowledge of the economic situation in the selection of the Office’s personnel. Already as a staff member of the Chamber of Commerce, he had won the confidence of wide circles in the business world, and he has kept that confidence in his work with the Office of Accounts.
Mises, Notes and Recollections, pp. 76 & 91.
Ibid., pp. 74–75.
Ibid., pp. 91–92.
The following summary of the course of Austrian political and economic history between 1918 and 1938 is taken mostly from the following works: J. van Walre de Bordes, The Austrian Crown: Its Depreciation and Stabilization (London: P. S. King and Son, 1924); Otto Bauer, The Austrian Revolution (New York: Bert Franklin,  1970); W. T. Lay-ton and Charles Rist, The Economic Situation in Austria: Report Presented to the Council of the League of Nations (Geneva: League of Nations, 1925); The financial Reconstruction of Austria: General Survey and Principal Documents(Geneva: League of Nations, 1926); Carlile A. Macartney, The Social Revolution in Austria (Cambridge: Cambridge University Press, 1926); Leo Pasvolsky, Economic Nationalism of the Danubian States(New York: Macmillan Co., 1928); John V. Van Sickle, Direct Taxation in Austria (Cambridge, Mass.: Harvard University Press, 1931); Malcolm Bullock, Austria, 1918–1919: A Study in Failure (London: Macmillan Co., 1939); David F. Strong, Austria (October 1918–March 1919): Transition from Empire to Republic (New York: Octagon Books,  1974); Antonin Basch, The Danubian Basin and the German Economic Sphere (New York: Columbia University Press, 1943); Mary MacDonald, The Republic of Austria, 1918–1934: A Study in the Failure of Democratic Government (Oxford: Oxford University Press, 1946); Friedrich Hertz, The Economic Problem of the Danubian States: A Study in Economic Nationalism (London: Victor Gollancz, 1947); K. W. Rothschild, Austria’s Economic Development Between the Two Wars (London: Frederick Muller, 1947); Charles A. Gulick, Austria: From Habsburg to Hitler, 2 Vols. (Berkeley: University of California Press, 1948); Klemens von Klemperer, Ignaz Seipel: Christian Statesman in a Time of Crisis (Princeton, N.J.: Princeton University Press, 1972); Eduard Marz, Austrian Banking and financial Policy: Credit-Anstalt at a Turning Point, 1913–1923 (New York: St. Martin’s Press, 1984); David Clay Large, Between Two fires: Europe’s Path in the 1930s (New York: W. W. Norton, 1990); Helmut Gruber, Red Vienna: Experiment in Working Class Culture, 1919–1934 (Oxford: Oxford University Press, 1991); and Gordon Brook-Shepherd, The Austrians: A Thousand-Year Odyssey (New York: Carroll & Graf Publishers, 1996).
See Edmond Taylor, The Fall of the Dynasties: The Collapse of the Old Order, 1905–1922 (New York: Doubleday, 1963), pp. 69–96 & 337–56.
See Joseph Redlich, Austrian War Government (New Haven, Conn.: Yale University Press, 1929).
On the nationalist currents in Austria-Hungary, see Oscar Jaszi, The Dissolution of the Habsburg Monarchy (Chicago: University of Chicago Press, 1929).
On the introductions of separate currencies within the successor states of the former Austro-Hungarian Empire, see John Parke Young, European Currency and finance, Vol. II (Washington, D. C.: Government Printing Office, 1925), on Austria, pp. 9–25; Czechoslovakia, pp. 55–77; and Hungary, pp. 103–24.
Eduard Marz, Austrian Banking and financial Policy: Creditanstalt at a Turning Point, 1913–1923, pp. 290–317. On the effects of rent controls in Vienna in the 1920s, see F.A. Hayek, “The Repercussions of Rent Restrictions,”  in Rent Control, A Popular Paradox (Vancouver: Fraser Institute, 1975), pp. 67–83.
Budget deficits in nominal terms grew from 2.7 billion crowns in 1919 to 137.7 billion crowns in 1922. The deficits averaged between 40 and 67 percent, as a fraction of total federal government expenditure in Austria during this period of time. See Kurt W. Rothschild, Austria’s Economic Development Between the Two Wars, p. 24.
In 1925, at a meeting of the Verein für Sozialpolitik [Society for Social Policy], Mises told the following story: “Three years ago a colleague from the German Reich, who is here in this hall today, visited Vienna and participated in a discussion with some Viennese economists. Everyone was in complete agreement concerning the destructiveness of inflationist policy. Later, as we went home through the still of the night, we heard in the Herrengasse [a main street in the center of Vienna] the heavy drone of the Austro-Hungarian Bank’s printing presses that were running incessantly, day and night, to produce new bank notes. Throughout the land, a large number of industrial enterprises were idle; others were working part-time; only the printing presses stamping out notes were operating at full speed. Let us hope that industry in Germany and Austria will once more regain its prewar volume and that the war- and inflation-related industries, devoted specifically to the printing of notes, will give way to more useful activities.” See Bettina Bien Greaves and Robert W. McGee, eds., Mises: An Annotated Bibliography (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1993), p. 35.
J. van Walre de Bordes, The Austrian Crown: Its Depreciation and Stabilization, pp. 48–50, 83, 115–39.
See Lord Parmoor, et al., The Famine in Europe: The Facts and Suggested Remedies (London: Swarthmore Press, 1920), especially the contributions about the situation in Austria by Friedrich Hertz, “What the Famine Means in Austria,” pp. 17–26; Dr. Ellenbogen, “The Plight of German Austria,” pp. 39–48; and Friedrich von Wieser, “The fight Against the Famine in Austria,” pp. 49–56
See Mises, Socialism, p. 414: “Capital consumption can be detected statistically and can be conceived intellectually, but it is not obvious to everyone. To see the weakness of a policy which raises the consumption of the masses at the cost of existing capital wealth, and thus sacrifices the future to the present, and to recognize the nature of this policy, requires deeper insight than that vouchsafed to statesmen and politicians or to the masses who have put them in power. As long as the walls of the factory building stand, and the trains continue to run, it is supposed that all is well with the world. The increased difficulties of maintaining the higher standard of living are ascribed to various causes, but never to the fact that a policy of capital consumption is being followed.” On the theory of capital consumption, see F. A. Hayek, “Capital Consumption,”  in Money, Capital, and fluctuations: Early Essays (Chicago: University of Chicago Press, 1984), pp. 136–58.
Bericht über die Ursachen der Wirtschaftsschwierigkeiten Österreichs [A Report on the Causes of the Economic Difficulties in Austria] (Vienna: 1931): For a summary of some of the report’s conclusions and related data on capital consumption and the shortage of capital in Austria during this time, see Friedrich Hertz, The Economic Problem of the Danubian States, pp. 145–68; Nicholas Kaldor, “The Economic Situation in Austria,” Harvard Business Review (October 1932), pp. 23–34; and Fritz Machlup, “The Consumption of Capital in Austria,” The Review of Economic Statistics (January 15, 1935), pp. 13–19, especially p. 13, n. 2: “Professor Ludwig v. Mises was the first, as far as I know, to point to the phenomenon of consumption of capital. As a member of a committee appointed by the Austrian government…he also emphasized comprehensive factual information.” The process of capital consumption due to economic miscalculation under inflation was explained by Mises immediately after the war in his work Nation, State and Economy: Contributions to the Politics and History of Our Time(New York: New York University Press,  1983), pp. 161–63; and also in his The Theory of Money and Credit, pp. 234–37.
For accounts of Austria’s experience with foreign-exchange controls between 1931 and 1934, see Howard S. Ellis, Exchange Control in Central Europe (Cambridge, Mass.: Harvard University Press, 1941), pp. 27–73; and Oskar Morgenstern, “The Removal of Exchange Control: The Example of Austria,” International Conciliation, No. 333 (October 1937), pp. 678–89.
For a summary of the economic events in Austria in 1931 and 1932, see Vera Micheles Dean, “Austria: A Nation Paralyzed,” Current History (December 1932), pp. 303–7.
In March 1931, the German and Austrian governments signed a protocol for the establishment of an Austro-German customs union. Under opposition from the governments of Great Britain, France, Italy, and Czechoslovakia, the customs union was prevented from operating after the World Court at the Hague found it to be inconsistent with the international agreements that Austria had signed in 1922. See Mary Margaret Ball, Postwar German-Austrian Relations: The Anschluss Movement, 1918–1936 (London: Oxford University Press, 1937), pp. 100–185.
See Mises, Notes and Recollections, p. 66: “Toward the end of the war, I published a short essay on the quantity theory in the journal of the Association of Banks and Bankers, a publication not addressed to the public. The censor did not approve my treatment of the inflation problem. My tame academic essay was rejected. I had to revise it before it could be published. The next issue immediately carried critical responses, one of which, as far as I can remember, came from bank director Rosenbaum.”
When he looked back at this period immediately after the first World War in his 1940 Notes and Recollections, Mises wrote on the issue of Austrian unification with Germany: “The situation [of Austria’s apparently paralyzed political and economic situation after the first World War] sometimes made me vacillate in my position on the annexation program. I was not blind regarding the danger to Austrian culture in a union with the German Reich. But there were moments in which I asked myself whether the annexation was not a lesser evil than the continuation of a policy that inescapably had to lead to catastrophe” (p. 87). Yet in certain passages of his essays written in 1919, it is clear that at the time Mises was persuaded that unification with Germany was a “political and moral necessity.”
For Mises’s detailed analysis of the hyperinflation in Germany and the methods to end it, see Ludwig von Mises, “Stabilization of the Monetary Unit—From the Viewpoint of Theory,”  in Percy L. Greaves, ed., On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978), pp. 1–49; and Mises, “The Great German Inflation,”  in Richard M. Ebeling, ed., Money, Method and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 96–103.
Mises also presented an analysis of the causes and duration of the Great Depression and the policies needed to overcome the economic crisis in his monograph, “The Causes of the Economic Crisis: An Address,”  in Percy L. Greaves, ed., On the Manipulation of Money and Credit, pp. 173–203.
Mises, Notes and Recollections, p. 137: “For me it was a liberation to be removed from the political tasks I could not have escaped in Vienna, and from the daily routine in the Chamber. Finally, I could devote myself completely and almost exclusively to scientific
Ludwig von Mises, Human Action: A Treatise on Economics (New Haven, Conn.: Yale University Press, 1949), p. iii. This first edition of Human Action was handsomely reprinted in 1998 by the Ludwig von Mises Institute of Auburn, Alabama, with an introduction by Jeffrey M. Herbener, Hans-Hermann Hoppe, and Joseph T. Salerno that tells the history of how the volume came to be published in the United States. In Geneva, between 1934 and 1940, Mises had written the German-language forerunner to Human Action, entitled Nationalökonomie: Theorie des Handelns und Wirtschaftens (Munich: Philosophia Verlag,  1980).
Mises later was to call this cult of the irrational the twentieth-century “revolt against reason.” SeeHuman Action, pp. 72–91; and Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (Spring Mills, Pa.: Libertarian Press,  1985), pp. 112–16.
See also Mises’s “The Disintegration of the International Division of Labor,”  in Richard M. Ebeling, ed., Money, Method and the Market Process, pp. 113–36.
Mises developed the idea of an Eastern European Democratic Union after he came to the United States. See “An Eastern Democratic Union: A Proposal for the Establishment of a Durable Peace in Eastern Europe,”  in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction (Indianapolis: Liberty Fund, 2000), pp. 169–201.
For an overview of the ideas and historical significance of the Austrian School of economics, see Ludwig von Mises, “The Historical Setting of the Austrian School of Economics,”  reprinted in Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 53–76; Ludwig M. Lachmann, “The Significance of the Austrian School of Economics in the History of Ideas,”  in Richard M. Ebeling, ed., Austrian Economics: A Reader, Champions of Freedom Series, Vol. 18 (Hillsdale, Mich.: Hillsdale College Press, 1991), pp. 17–39; and Richard M. Ebeling, “The Significance of Austrian Economics in 20th Century Economic Thought,” in Richard M. Ebeling, ed., Austrian Economics: Perspectives on the Past and Prospects for the Future, Champions of Freedom Series, Vol. 17 (Hillsdale, Mich.: Hillsdale College Press, 1991), pp. 1–40.
Ludwig von Mises, Epistemological Problems of Economics (New York: New York University Press,  1981).
Boris Brutzkus, Die Lehren des Marxismus im Lichte der russischen Revolution [Marxian Theories in the Light of the Russian Revolution] (Berlin: Hermann Sack, 1928). This work is included as the first part of Brutzkus’s volume, Economic Planning in Soviet Russia (London: George Routledge, 1935), pp. 1–94. It has been reprinted in Peter J. Boettke, ed., Socialism and the Market, Vol. III: The Socialist Calculation Debate Revisited (London/ New York: Routledge, 2000).
Mises later further developed this theme of management under private enterprise in the market economy and state management of public enterprises in the interventionist economy and under socialism in his book, Bureaucracy (Spring Mills, Pa.: Libertarian Press,  1983).
The same year Kapelush’s article appeared, Bolshevik carried another article touching on Mises’s criticisms of socialism. See Nikolai Bukharin, “Concerning the New Economic Policy and Our Tasks,”Bolshevik, No. 8–9/10 (April 30–June 1, 1925); reprinted in Peter
J. Boettke, ed., Socialism and the Market: The Socialist Calculation Debate Revisited, Vol. I: The Natural Economy (London/New York: Routledge, 2000), pp. 588–613). Bukharin wrote:
Although bourgeois critics of the policy of the proletarian dictatorship in Russia have offered mainly nonsense and foolishness some of their comments were not so stupid and contained a relative truth. One of the most learned critics of communism, the Austrian Professor Mises, presented the following propositions in a book on socialism written in 1921–22. In agreement with Marxist socialists he declared that one must brush aside all sentimental nonsense and accept the fact that the best economic system is the one that develops productive forces most successfully. But the so-called “destructive” socialism of communism leads to the collapse of productive forces rather than their development. The collapse occurs mainly because the communists forgot the enormous role of private individualistic incentives and private initiative. True, capitalism suffers from certain defects. But capitalist competition leads to growth of productive forces and drives capitalist development forward. As a result of the growth in society’s productive forces, the lot of the proletariat improves as well. So long as the communists attempted to arrange production by commands, with a stick, their policy would lead, and already was leading, to an inevitable collapse. There is no doubt that the system of War Communism, viewed in terms of its economic essence, somewhat resembled this caricature of socialism whose destruction was predicted by all the learned economists of the bourgeoisie. Thus, when we began to reject this system and shift to a rational economic policy, bourgeois ideologists began to cry: Now you are retreating from communist ideas, they are surrendering their positions, they have lost the game, and are returning to time-honored capitalism. That is how they summarized the question. But in fact they were the ones who lost, not we… .When we crossed over to the NEP [New Economic Policy] we began to overcome in practice the above-mentioned bourgeois case against socialism. Why? Because the meaning of the NEP lies in the fact that by using the economic initiative of the peasants, of the small producers, and even of the bourgeoisie, and by allowing private accumulation, we also placed these people objectively in the service of socialist state industry and of the economy as a whole….We control the main commanding heights [heavy industry, banking, and foreign trade] we organize what is essential: then our state economy, by different means, sometimes even by competing with the remnants of private capital through market relationships, gradually increases its economic might and, in diverse ways, draws the backward economic units into its own organization, doing so, as a rule, through the market” (pp. 593–94) [emphasis in the original].
Bukharin avoided Mises’s main argument on the question of rational economic calculation and made Mises appear to have focused attention only on the issue of “incentives” under a socialist regime, while at the same time making a roundabout concession of the most important point by saying that the regime in Russia had now shifted to “market relationships,” in comparison to the earlier phase of War Communism during which private property, money, and competition had been officially abolished.
Ludwig von Mises, “Trends Can Change”  and “The Political Chances for Genuine Liberalism,”  in Planning for Freedom (South Holland, Ill.: Libertarian Press, 1980), pp. 173–84.
That is precisely the theme and purpose of the essays that he wrote in the early 1940s. See Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, Vol. 3: The Political Economy of International Reform and Reconstruction.
Mises, Socialism, p. 13.
[Editor’s Note: this lengthy piece, by Richard Ebeling, primarily based on the “lost papers” of Ludwig von Mises that he and his wife, Anna, discovered in a formerly secret KGB archive in Moscow, Russia, is well worth reading as it shows Mises’s brilliance for understanding the problems of his time as well as purely abstract economics.]
This three-volume set of the Selected Writings of Ludwig von Mises has been published in reverse chronological order. The current volume, the last prepared in the series, in fact, is devoted to some of the earliest of Mises’s writings on a variety of economic issues. They mostly cover monetary, fiscal, and general economic policy matters in the Austro-Hungarian Empire before and during the First World War, with additional articles that Mises wrote in the postwar period that had not been included in volume 2. An appendix to the present volume includes a talk that Mises delivered at his private seminar, which would meet in his office at the Vienna Chamber of Commerce, in the spring of 1934 on the methodology of the social sciences, before he moved to Geneva, Switzerland; and the curriculum vitae that his great-grandfather prepared for the Habsburg Emperor in 1881 as part of his ennoblement that gave him and his heirs the hereditary title of “Edler von.”
It is in the second volume of the Selected Writings (2002), Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, that the reader will find a large collection of Mises’s many articles and policy pieces from the 1920s and 1930s dealing with the Great Austrian Inflation, fiscal and regulatory mismanagement by the government, and the negative effects of numerous forms of government intervention and controls before and during the Great Depression. The volume also includes critiques of socialist central planning and his defense of praxeology, the science of human action.
The third volume of the Selected Writings (2000), The Political Economy of International Reform and Reconstruction, focuses on Mises’s writings mostly from the first half of the 1940s. In the midst of the Second World War, Mises lectured and wrote on the pressing issues of how Europe, small nations, and underdeveloped countries could recover [xii] from war and poverty and start on the path to economic renewal and prosperity.
Each volume begins with an introduction in which I try to explain the historical context in which Mises wrote the pieces in that particular volume. I have also tried to assist the reader with footnotes explaining some of the ideas, persons, events, or geographical locations to which Mises refers in the text.
This project developed out of the discovery of the “lost papers” of Ludwig von Mises in a formerly secret KGB archive in Moscow, Russia, in 1996. Looted by the Gestapo from Mises’s Vienna apartment in March 1938 shortly after the Nazi annexation of Austria into the German Third Reich, they ended up among a huge cache of stolen documents, papers, and archival collections that the Nazis had plundered from all over occupied Europe. At the end of the Second World War the entire cache, including Mises’s papers, was captured by the Soviet Red Army in a small town in western Czechoslovakia. After being informed about what had been captured, Stalin instructed that it all be brought to Moscow and that a secret archive be built to house it. For half a century, only the Soviet secret police and the Soviet Ministry of Foreign Affairs had access to the collections in this archive.
In the introduction to volume 2 in these Selected Writings of Ludwig von Mises, I describe in detail how my wife and I came to find out about this archive and the existence of Mises’s papers among them, amounting to about 10,000 pages of material. In October 1996, we journeyed to Moscow and spent about two weeks carefully going through the entire collection of Mises’s papers. We returned to the United States with photocopies of virtually the entire collection, which includes Mises’s correspondence, unpublished manuscripts, published articles, policy memoranda prepared during the years when he worked for the Vienna Chamber of Commerce, material relating to his teaching at the University of Vienna and his famous private seminar, and his military service during the First World War. Many of the articles, policy memoranda, essays, and speeches that were found among Mises’s “lost papers” have been included in this series, especially in volumes 1 and 2 of his Selected Writings.
Shortly after the discovery of the “lost papers” was announced, Liberty Fund contacted Hillsdale College and me about the possibility of publishing a selection of these and some of Mises’s related essays, lectures, and articles covering the period from before the First World War [xiii] to the 1940s during the Second World War. I most happily accepted Liberty Fund’s kind offer to serve as editor of the translations (mostly from German) and to prepare the volumes for publication.
It has been a labor of love that has ended up taking far longer to complete than I had expected. A good part of the delay in finishing the last of these volumes was due to a five-year “distraction” during which I served as the president of the Foundation for Economic Education (FEE) from 2003 to 2008. But my return to the “calmer” life of academia has permitted me to finally finish the task.
Ludwig von Mises is most famous for his great works on monetary theory, socialist central planning, the general theory of the market process, and the methodology of the social sciences, the leading ones, of course, being The Theory of Money and Credit; Socialism: An Economic and Sociological Analysis;Liberalism; Critique of Interventionism; Epistemological Problems of Economics; Bureaucracy;Omnipotent Government; Human Action: A Treatise on Economics; Theory and History; and The Ultimate Foundations of Economic Science.
But what the Selected Writings of Ludwig von Mises, in general, bring out is the “unknown Mises,” if you will. Not the Mises of grand economic theory and sweeping political economy, or the fundamental problems of human action. Here, instead, is Mises as applied economist, detailed policy analyst, and economic policy problem-solver in the detailed reality of the many pressing public policy issues that confronted the old Austro-Hungarian Empire and the new Austrian Republic in the aftermath of the Great War, and then the need for reconstruction and economic reform after the Second World War.
For those who have sometimes asked, “Well, but how do you apply Austrian economics to the ‘real world’ of public policy?” here is the answer by the economist who was considered the most original, thoroughgoing, and uncompromising member of the Austrian School in the twentieth century!
Indeed, it can be argued that it was having to grapple with the intricacies of these types of everyday economic policy issues during a time of great, and sometimes cataclysmic, change in the Europe and the Austria of the first half of the twentieth century that helped to guide and form Mises’s thinking on those wider and more general problems for which he is most famous.
The Selected Writings of Ludwig von Mises provide an insight into and a better understanding of the first two-thirds of Mises’s long and [xiv] productive life as a professional economist in a way that has not been available before. It also brings into English translation for the first time the vast majority of his practical economic policy writings from this, in many ways his most prolific, period before he left war-ravaged Europe in 1940 to make a new home and career for himself in the United States.
INTRODUCTION TO VOLUME 1↩
The articles and lectures included in this volume by the Austrian economist Ludwig von Mises were written in the years before, during, and after the Great War of 1914-18, as the First World War used to be called. They focus on the monetary, fiscal, and general economic policy problems of, first, the Austro-Hungarian Empire and, then, the new postwar Austrian Republic after the dismantling of the Habsburg Monarchy.
For those who may be familiar with Mises’s more theoretical works on various themes of monetary theory and policy, comparative economic systems—capitalism, socialism, and interventionism—the general nature and workings of the market economy, or the methodology and philosophy of the social sciences, most of these articles and lectures (like the ones in volume 2 and 3 in this series) offer a different [xvi] perspective on Mises as an applied economist. Here is not the broad theorist concerned, often, with stepping back from the particular details of specific historical circumstances to investigate and evaluate the essential and universal properties of human action; or the institutional prerequisites for economic calculation and the rational allocation of resources among competing ends; or the relationships between time preference, investment time horizons, monetary expansion, and the sequential stages of the business cycle.
Instead, these essays investigate and analyze the historical and institutional workings of the pre-World War I monetary system of the Austro-Hungarian Empire, and the issues surrounding legal specie redemption for the banknotes of the Austro-Hungarian Bank; the politics behind the establishment of the gold standard in Austria-Hungary; the growing fiscal imbalances developing in the Habsburg Empire due to the patterns of government spending and taxing policies in the first decade of the twentieth century; and the reasons behind the economic crisis that hit Austria-Hungary in the years immediately before the start of the Great War. Here, too, we see Mises analyzing during the war the motives behind German and Austro-Hungarian trade policy, the impact and significance of emigration from Austria, the effects from the monetary inflation used to fund the government’s war expenditures, and the pros and cons of financing those war expenditures through taxation versus borrowing by the issuance of war bonds.
After the war, Mises explains the distorting effects from the new Austrian government’s control and rationing of foreign exchange for imports and exports; the impact on the Austrian foreign exchange rate of monetary expansion to finance the government’s huge deficit spending; a specific policy agenda to bring the country’s financial house back into order, and the need for cooperation from both businesses and labor unions if this was to be achieved without Austria’s currency collapsing into hyperinflation; the claims that holders of banknotes of the old Austro-Hungarian Bank could make on the new Austrian National [xvii] Bank in the postwar period; Austria’s fiscal problems in the period after the end of the inflation; and the lessons for banking reform after the collapse of several banks in 1931.
Ludwig von Mises became immersed in these issues because he had to earn a living outside the Austrian academic arena. University teaching appointments were few and far between in Austria both before and after the First World War, even though Mises was clearly qualified for such a position. His only formal relationship with the University of Vienna, after graduating in 1906 with a doctoral degree in jurisprudence, was as a privatdozent (an unsalaried lecturer), which permitted him the privilege of offering seminars during the academic year. Mises offered such a seminar almost every term from 1913 to 1934 (except for most of the time during the Great War). He was promoted to professor extraordinary in May 1918, but this was a purely honorific title that was still unsalaried and with a nominal “tenure” as a professor in this status.
However, from 1920 until the spring of 1934, Mises organized and chaired a privatseminar (private seminar) of interested scholars in the fields of economics, history, sociology, political science, and philosophy. It met twice a month between October and June on Friday evenings at 7 p.m. at his office at the Vienna Chamber of Commerce. The private seminar came to an end when Mises accepted a full-time teaching position at the Graduate Institute of International Studies in Geneva, Switzerland, as professor of international economic relations beginning in autumn 1934.
Because an academic career was closed off to him, from 1909 to 1934 Mises made his living as an economic advisor and policy analyst for the Vienna Chamber of Commerce, Crafts, and Industry. First hired as an assistant for the drafting of documents, in 1910 he was promoted to deputy secretary. When he returned from active duty in the First World War, he was made “first secretary” at the Chamber, responsible for matters relating to a wide variety of areas including monetary and fiscal affairs, trade and financial issues, and administrative and constitutional law.
He developed and refined his skills as an economist having to deal with the everyday practical affairs and policy issues of the Austria of his time. He had to master and maintain a thorough and extremely detailed knowledge of the Austrian economy and the impact of Austrian government policy on the industrial, commercial, and monetary and fiscal affairs of the country. As Mises expressed it years later in his Memoirs:
My job with the Handelskammer [the Chamber of Commerce] greatly expanded my horizons. That I now have the material for a social and economic history of the downfall of the Austrian civilization readily at hand is to a great degree the result of the studying that was required of me to be able to carry on with my work in theHandelskammer. Travels that led me to all parts of old Austria-Hungary from 1912-1914 taught me much in particular. In visiting the centers of industry, my intent was to become acquainted with the industrial situation in view of the renewal of customs and trade relations with Hungary, and the adoption of new, autonomous tariffs and trade treaties.
The main thrust of my job with the Handelskammer was not dealing with commercial questions, but those pertaining to finance, currency, credit, and tax policy. In addition, I was given special assignments on [xix] an ongoing basis. From the time of the armistice until the signing of the Peace Agreement of Saint Germain [in September 1919] I was the consultant on financial questions to the Foreign Office. Later, when the terms of the peace treaty were put into effect, I was in charge of the office concerned with the prewar debt. In this capacity I had numerous dealings with the representatives of our former enemies. I was the Austrian delegate to the international Handelskammer [the International Chamber of Commerce] and a member of many international commissions and committees, whose insoluble task it was to facilitate the peaceful exchange of goods and services in a world pervaded by national hatred and the precursors of genocide.
At a relatively early age Mises seems to have formulated in his mind a rather comprehensive classical liberal worldview of the social order. His experience in the role of applied economist clearly left its mark and influenced his understanding of the effects that government intervention could have on the effective functioning of a modern market economy. To appreciate this, and the writings included in his volume, it is necessary to take a glance at the political and economic environment of the old Austro-Hungarian Empire and the Austrian monetary system as it developed in the nineteenth century.
The Habsburg Monarchy and the Austro-Hungarian Empire
The House of Habsburg, which came to rule a vast empire for nearly eight hundred years, had its origin in the thirteenth century. Through [xx] a series of royal marriages, treaties, and some conquests, the Habsburg Monarchy gained control over a large territory in Central and Eastern Europe, and for a period of time large areas in Western Europe as well, including Spain, parts of modern-day France, Italy, Germany, and Switzerland, and what later became Holland, Belgium, and Luxemburg. From the thirteenth century to the middle of the nineteenth century, the Habsburgs also nominally headed the Holy Roman Empire, or its later, loose German Confederation.
It was during this time, when the Habsburgs were beginning to dominate so much of Europe, that Emperor Frederick III (1415-93) had inscribed on official buildings the five vowels, A E I O U, which he interpreted as “Alles Erdreich Ist Österreich Untertan” (“All the earth is subject to Austria”), or in Latin, “Austriae Est Imperare Orbi Universo” (“Austria must rule the universe”).
The Habsburgs ruled as absolute monarchs. But under the influence of the Age of Enlightenment and the early phase of the French Revolution, Empress Maria Theresa (1717-70) and then her sons, Joseph II (1740-90) and Leopold II (1747-92), attempted to introduce various forward-looking reforms while retaining the principle of absolutism. The dark turn taken in the French Revolution and the rise of Napoleon to power shifted the monarchy back in a far more conservative direction under Francis II (1768-1835). With Napoleon’s victories over the German states, the Holy Roman Empire was dissolved and Francis II declared himself emperor of Austria in 1804.
As one of the final victors over the French after Napoleon’s defeat in Russia in 1812, the Habsburg Empire in Central and Eastern Europe was consolidated following the Congress of Vienna in 1815 as one contiguous territory that by the 1880s incorporated what are today Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia, Bosnia, and large parts of Italy, Poland, Ukraine, and Romania.
In the years just preceding the First World War, the Austro-Hungarian Empire covered a territory of about 415,000 square miles and included within its borders a dozen or so national and linguistic groups, including Germans, Hungarians, Czechs, Slovaks, Croatians, Romanians, Italians, Poles, Bulgarians, Serbians, Slovenians, and Ruthenians. Out of a population of 50 million the Germans and Hungarians [xxi] each numbered about 10 million, with the remaining 30 million made up of these other groups.
Europe of the nineteenth century experienced a relentless battle between four powerful ideas: monarchical absolutism, political and economic liberalism, integral nationalism, and revolutionary socialism. Absolutism insisted upon the divine rights of kings to rule without restraint; liberalism demanded the recognition of individual liberty, representative and limited constitutional government, and freedom of private enterprise from state control; integral nationalism (by the middle decades of the nineteenth century) increasingly insisted upon the unification and political independence of peoples sharing a common language, culture, and history, and finally a common ethnicity or race; and socialism called for the overthrow of private property, nationalization of the means of production, and greater economic and social equality by either violent or democratic methods. All four of these ideological forces were at work in the Habsburg Monarchy until the end of the Austro-Hungarian Empire in the ruins of the First World War.
The French Revolution of February 1848 reverberated across much of Europe, including in the Austrian Empire. Within days and weeks of the uprising in Paris, students on the streets of Vienna demanded constitutional change, and the Italians and Hungarians were in open revolt against their Habsburg rulers. By the end of 1849, however, the Italians and Hungarians had been crushed (the latter through the intervention of the Russian Imperial Army), and Habsburg rule was once more imposed with especial ruthlessness against the Hungarians.
At first reforms were promised to the Austrian liberals, with a constitution promised in July 1848. And when eighteen-year-old Francis Joseph (1830-1916) assumed the throne upon the abdication of his uncle, Ferdinand I (1793-1875), in December 1848, the new emperor gave his support to the constitutional changes. Almost immediately, however, [xxii] he reversed himself and insisted upon the reassertion of absolutist authority. What Francis Joseph had inherited from his ruling ancestors was a belief in “his divine right of unlimited monarchical power,” tempered with the idea “that his rule must, before all, produce the best possible results for the peoples of his realm. . . . Yet, up to the end he did not doubt that his empire, composed of so many different races and lands, could be governed successfully only by a hereditary monarch and according to his absolute will.” Thus, he could not make concessions that would have undermined his absolute rule in the name of caring for the well-being of his subjects.
Neither could he completely concede to the increasing nationalist sentiments of the diverse peoples in his large realm without also abdicating his responsibility as that benevolent ruler. Many Austrian liberals who lived a good portion of their lives under the reign of Francis Joseph believed that he twice missed the opportunity to successfully transform his multinational empire into a federal domain that might have reconciled the conflicting interests and demands of the national groups under his rule. The ideal of these liberals from the middle of the nineteenth century to the First World War had been what some of them called “the Austrian idea.” If a federal structure of government could have been set up in which each of these peoples had wide political and social autonomy within their own lands while sharing a common bond of economic freedom and civil liberties, the Habsburg Monarchy could have created on a larger and far grander scale what had been formed in the Swiss confederation with its reconciliation and harmony among its French-, German-, and Italian-speaking citizens.
Francis Joseph’s rejection of constitutional reforms and the reimposition of central authority over the Italians, Hungarians, and his Slav [xxiii] subjects in 1848-49 was the first chance lost for any such reconciliation. The second lost opportunity occurred following his defeat at the hands of the Prussians in 1866, when Bismarck pushed Austria out of the German Confederation. Fearful of the Hungarians taking advantage of the empire’s postwar weakness to claim full independence through another violent uprising, Francis Joseph agreed to the Ausgleich, the “Compromise,” of 1867 that transformed the Austrian Empire into the Austro-Hungarian Empire. While Francis Joseph remained emperor of both halves of his domain, Hungary became widely independent in many of its domestic affairs. Only a common customs and monetary system and a shared military and foreign policy completely linked Hungary to the Austrian “Crownlands” directly ruled by Francis Joseph’s government in Vienna.
As Hans Kohn, one of the twentieth century’s leading experts on the history and philosophy of nationalism, who had grown up under the rule of Francis Joseph in Prague, explained, “In the Compromise with the Hungarian nobility in 1867, the aspirations of the Czechs, Slovaks, Serbs, Croats, and Romanians, who in large majority were then still loyal to the dynasty, were sacrificed for the purpose of winning the assent of the Magyars to a common foreign and military policy on the part of what now became the Dual Monarchy.” Indeed, at first, several leading Czech and Hungarian nationalist leaders believed that the flowering of their people’s cultural and linguistic identities could best flourish in the wider setting of a multinational Habsburg Empire. But as the nineteenth century progressed this sentiment shifted into a belief that only national independence could secure these goals.
A far more liberal-minded voice in the Habsburg family was Francis Joseph’s son, Crown Prince Rudolf (1858-89), the heir to the throne. Among his personal tutors had been Carl Menger (1840-1921), the founder of the Austrian School of economics. Under Menger’s guidance, Crown Prince Rudolf had become well versed in the free trade and relatively laissez-faire ideas of the Classical economists.Menger [xxiv] also had coauthored with Rudolf a scathing criticism of the Austrian nobility, who were accused of having lost their sense of social duty and, instead, had escaped into frivolous court intrigues, pointless social entertainments, and financial irresponsibility. It was a clear call for recognition of and respect for the middle-class values of enterprise, frugality, and personal responsibility. The bourgeois virtues needed to replace the anachronistic role of the aristocracy in society, who had lost their way in the pretensions of power and lure of wasteful pleasures. But whatever influence the crown prince might have had on the course of events in Austria-Hungary was cut short by his suicide in 1889 at his hunting lodge at Mayerling.
The particularly nationalist imperialism of the Hungarians against the other peoples under their control was not the only problem as the nineteenth century progressed in terms of growing antagonism among the subject peoples in the Dual Monarchy. The German-Austrians, also, increasingly became defensive and antagonistic toward the rising nationalist aspirations of the Czechs, Poles, Slovenians, and others in the Crownlands, as well as the growing demands of the Hungarians for independence.
As Hans Kohn pointed out, “The spread of democracy, literacy, and economic well-being in the western half of the monarchy after 1867 strengthened the non-German nationalities there at the expense of the Germans. The result was that many Germans in the monarchy lost their faith in an Austrian idea as much as many Slavs and other non-Germanic peoples did. . . . By the end of the nineteenth century many Austrian Germans looked to the Prussian German Reich as their real home and venerated [Otto von] Bismarck.”
Looking back at the events that brought about the demise of the Habsburg Empire in the immediate aftermath of the First World War, Ludwig von Mises explained why many German-Austrians turned against liberalism as a foundation for the preservation of the monarchy and [xxv] the Austro-Hungarian state. Over the centuries German-Austrian settlers had made their homes in the eastern reaches of the empire. They brought with them the German language, culture, literature, commercial knowledge, and knowhow. They viewed themselves as a “civilizing force” among the lesser-advanced nationalities, especially among the Slavic peoples. Indeed, many of these subject peoples became acculturated into German-Austrian life, since the latter was the dominant group; the German language in particular became the venue for social and economic advancement. But as literacy and national consciousness awakened among these other peoples in the nineteenth century, loyalties to and identification with German-Austria and the Habsburg dynasty were replaced with a growing allegiance and sense of belonging to their own ethnic and linguistic groups.
Furthermore, these peoples had higher birth rates than the Germans living among them. Cities and towns that had been settled and predominantly populated by Germans for centuries became increasingly Czech or Hungarian or Polish or Romanian or Slovenian communities. German-Austrians found themselves shrinking minorities in lands that they had long considered to be their own politically, culturally, and commercially. This was especially true in the Czech lands with Prague at the center.
As the nineteenth century progressed, German-Austrians discovered that adherence to liberal principles of representative government and full individual and cultural equality before the law meant the demise of the German communities sprinkled across the Habsburg domains. For many German-Austrian liberals the choice was between a liberalism that would logically mean the decentralization and possible eventual breakup of the empire along nationalist lines, or advocacy of centralized political control, monarchical dictate when required, and subversion of democratic aspirations among the non-German peoples.
The first course meant the eventual loss of German political and cultural domination in the non-German lands; the second meant holding onto both political and cultural power as long as possible in the non-German areas of the empire, but only by increasingly alienating the other subject peoples. As Mises explained, part of the German-Austrian tragedy was that national and linguistic imperialism won over liberal idealism.
What enabled the Habsburg Empire to endure for fifty years after the establishment of the Dual Monarchy in 1867 was the constitutional order that had been implemented at the same time as theAusgleich (or “Compromise”). The Constitution of 1867, which accompanied the creation of “Austria-Hungary,” was imbued with the spirit of the classical liberal ideas that were then at their zenith in Europe. Every subject of the Habsburg emperor was guaranteed freedom of religion, language, association, profession, and occupation, and could appeal to a special higher court of law if a violation of these rights had occurred. Any subject might live wherever he chose throughout the emperor’s domain. Private property was secure, and relatively free trade prevailed within the boundaries of the empire, though protectionist barriers to international trade not only continued but grew in various ways in the last decades of the nineteenth and first decade of the twentieth centuries.
The economic free trade zone that made up the Austro-Hungarian Empire fostered significant economic development beginning in and especially after the 1880s, though very far from matching the economic progress in Western Europe or in Imperial Germany after 1871. However, various forms of government controls and regulations began to be domestically superimposed on the society, including the nationalization of the railways, starting in the 1880s. As a result, the remaining [xxvii] history of the monarchy was one of liberal freedoms introduced in 1867 being undermined by nationalist discord, periods of rule by central government decree, and the continuation or introduction of interventionist policies that merely intensified the antagonisms among the subject peoples. As A. J. P. Taylor explained:
In another way, the Austrian state suffered from its strength: it never had its range of activity cut down during a successful period of laissez-faire, and therefore the openings for national conflict were far greater. There were no private schools or hospitals, no independent universities; and the state, in its infinite paternalism, performed a variety of services from veterinary surgery to the inspecting of buildings. The appointment of every schoolteacher, of every railway porter, of every hospital doctor, of every tax collector, was a signal of national struggle. Besides, private industry looked to the state for aid from tariffs and subsidies; these, in every country, produce “log-rolling,” and nationalism offered an added lever with which to shift the logs. German industries demanded state aid to preserve their privileged position; Czech industries demanded state aid to redress the inequalities of the past. The first generation of national rivals had been the products of universities and fought for appointments at the highest professional level; their disputes concerned only a few hundred state jobs. The generation that followed them was the result of universal elementary education and fought for the trivial state employment that existed in every village; hence, the more popular national conflicts at the end of the century.
In spite of all this, and the international tensions and foreign policy fiascos that would eventually plunge Austria-Hungary and the rest of Europe into the calamitous cauldron of conflict in 1914, the Habsburg Monarchy succeeded in generating a cosmopolitan culture, especially in Vienna, that brought all the subject peoples together and fostered an inspiring and flourishing world of the arts, music, literature, philosophy, the humanities, and the sciences.
It gave many who lived in the postwar period of rising totalitarianism in the 1920s and 1930s a deep nostalgia for what seemed a far more [xxviii] civilized and humane epoch in turn-of-the-century Vienna. One voice that attempted to capture this “lost world” was that of Stefan Zweig (1881-1942), a renowned Austrian novelist and essayist who fled Vienna in 1934 and committed suicide in Brazil during the Second World War out of despair for all that was happening in the European world that he had known. In his posthumous work The World of Yesterday, he said:
One lived well and easily and without cares in that old Vienna. . . . “Live and let live” was the famous Viennese motto, which today still seems to me more humane than all the categorical imperatives, and it maintained itself throughout all classes. Rich and poor, Czechs and Germans, Jews and Christians, lived peaceably together in spite of occasional chafing, and even the political and social movements were free of the terrible hatred which has penetrated the arteries of our time as a poisonous residue of the First World War. In the old Austria they still strove chivalrously, they abused each other in the news and in the parliament, but at the conclusion of their ciceronian tirades the selfsame representatives sat down together in friendship with a glass of beer or a cup of coffee, and called each other Du [the “familiar” in the German language]. . . . The hatred of country for country, of nation for nation, of one table for another, did not yet jump at one daily from the newspaper, it did not divide people from people and nations from nations; not yet had every herd and mass feeling become so disgustingly powerful in public life as today. Freedom in one’s personal affairs, which is no longer considered comprehensible, was taken for granted. One did not look down upon tolerance as one does today as weakness and softness, but rather praised it as an ethical force. . . . For the genius of Vienna—a specifically musical one—was always that it harmonized all the national and lingual contrasts. Its culture was a synthesis of all Western cultures. Whoever lived there and worked there felt himself free of all confinement and prejudice.
For Zweig, thinking back on that bygone paradise, “It was sweet to live here, in this atmosphere of spiritual conciliation, and subconsciously every citizen became supernational, cosmopolitan, a citizen of the world.”
It was, of course, only an illusion. That twilight of the liberal era in the old Austro-Hungarian Empire about which Zweig was so nostalgic [xxix] had never been as pure and perfect as his mind recalled it. It was certainly true that liberal ideals had been established in the Constitution of 1867, and that they were implemented and enforced for the most part, especially in the Crownlands more directly under Emperor Francis Joseph’s imperial authority. But beneath the surface of tolerance, civility, and cosmopolitanism were all the undercurrents of racial and nationalist bigotry, economic collectivism, and political authoritarianism that poured forth like destructive lava from an exploding volcano during and in the aftermath of the First World War.
The Austrian Monetary System, 1867-1914
A leading theme of Mises’s articles in the first part of this volume concerns the reasons for and the resistance to the full implementation of a gold standard in Austria-Hungary. His arguments in these essays can be better understood against the backdrop of Austria’s monetary policies and experiences during the nineteenth century leading up to the currency reform act of 1892.
The story of the Austrian currency in the late eighteenth century and the first two-thirds of the nineteenth century is one of almost continual financial mismanagement. The government would debase the currency to cover its expenses, then make promises to put its budget on a sound footing, only to see another crisis arise requiring once again turning the handle on the monetary printing press.
The Austrian government made several experiments with state-chartered [xxx] banks in the 1700s. But each of these banks soon collapsed or was closed due to lack of public confidence following large quantities of paper monies being issued to cover government expenditures. These expenditures reached huge proportions during the long years of war between the Austrian Empire and first Revolutionary and then Napoleonic France.
Between 1797 and 1811, the supply of government paper money increased from 74,200,000 florins to 1,064,000,000 florins, yielding a fourteen-fold increase over this period. Not surprisingly, whereas the price of silver coin expressed in paper money was 118 in 1800, it rose to 203 by 1807, then to 500 by 1810, and reached 1,200 by 1811.
The government announced its intention in 1811 to stop the printing presses and issue a new currency that would be converted at the ratio of five old florins for one new florin, with the total amount of paper money in circulation to be reduced to 212,800,000 florins. But the renewal of the war with Napoleon in 1812 resulted in the new currency being increased to 678,716,000 florins by 1816, a near tripling of the “reformed” currency in five years.
With the final defeat of Napoleon, the Austrian government announced that it would use a portion of the war reparations being paid by France to retire about 131,829,900 florins from circulation, leaving the paper money supply outstanding at around 546,886,000 florins. This process was assisted with the establishment of a new National Bank of Austria, with the Bank withdrawing government paper money in circulation in exchange for its own banknotes, until by early 1848, the total currency supply in circulation had been reduced to 241,240,000 florins; that is, there was an almost two-thirds reduction in the paper money supply over a thirty-year period. The National Bank, in February 1848, had silver reserves of about 65,000,000 florins, or, an approximate 25 percent specie cover for its outstanding currency in circulation.
But all of these monetary reforms began to unravel with the outbreak of the revolution of 1848, especially the Hungarian revolt against Austrian rule. Within days, panic runs on the National Bank reduced its silver reserves to 35,023,000 florins, a 53 percent loss in specie. The Austrian government suspended silver redemption and banned the exporting of silver and gold. Putting down the revolution forced the government to again borrow heavily from the National Bank. As a result, confidence in the Bank fell so low that in 1849 the government publicly promised to stop borrowing and cease increasing the currency.
But the process started again in a few years with Austria’s military mobilization during the Crimean War, and then its wars against Italian nationalists and their French ally in a vain attempt to maintain control of portions of northern Italy. In 1850 government indebtedness to the National Bank had stood at 205,300,000 florins. With the Crimean War of 1854, the government’s debt increased to 294,200,000 florins. It was reduced to 145,700,000 florins by 1859. But the start of the Italian campaigns that year pushed it up again to 285,800,000 florins, along with a renewed suspension of specie payments as the public wished to redeem the paper currency representing the value of this enlarged debt.
In 1863, an attempt was made, once again, to introduce a currency reform—the Plener Act—this time along the lines of Britain’s Peel’s Bank Act of 1844. But Austria’s disastrous war with Prussia in 1866 pushed the supply of paper money in circulation from 80,000,000 florins before the conflict to 300,000,000 florins at its end.
The Compromise of 1867 that formally created the Austro-Hungarian Empire granted Hungary its own parliament, government, and domestic budget. It established a customs union and a common military and foreign policy between the two parts of the Habsburg domain, and a monetary union with the Austrian National Bank retaining its monopoly of note issue throughout Francis Joseph’s domain. Some of the Hungarian liberals had advocated a system of competitive note-issuing private banks in place of the National Bank, but secret agreements between the emperor’s government and the Hungarian nobility eliminated this as an option.
On July 1, 1878, the Austrian National Bank was transformed into the Austro-Hungarian Bank. The emperor, under joint nomination of the Austrian and Hungarian parliaments, appointed its governor. He was assisted by two vice-governors—one Austrian and the other Hungarian—appointed by the respective governments. The Bank’s operating privileges were renewed in 1887, 1899, and 1910, with few substantial changes in their detail.
Formally, from 1816, Austria had been on a silver standard. But as we saw, the Austrian National Bank maintained unofficial specie redemption only for limited periods of time, soon interrupted usually by another war crisis requiring currency expansion to fund the government’s expenditures.
The paper currency florin, not surprisingly, traded at a significant [xxxii] discount against the silver coin florin. Between 1848 and 1870, this discount was never less than about 14 percent and was often between 20 and 23 percent. But restrictions on note issuance under the operating rules of the Bank limited the expansion of the supply of banknotes. The provisions of the 1863 Bank Act limited the circulation of “uncovered” florins to 200,000,000. Any amount above that had to be covered by gold or silver coin or bullion. Any additional “uncovered” banknote issuance was subject to a penalty tax against the Bank of 5 percent.
With many of the major governments of Europe and North America establishing or reestablishing their economies on a gold basis in place of silver in the 1870s, the world price of silver began to fall. After the Austro-Prussian War of 1866, the government’s pressures on the Bank to fund deficits were greatly reduced, and the Bank could more or less follow the rules against uncovered note issuance. As a result, the paper florin’s discount relative to silver disappeared by 1878. Silver began to flow into Austria-Hungary in such quantities that the Bank was instructed by the government to end the free minting of silver.
As a result, the paper florin actually rose to a premium against silver. As Friedrich von Wieser expressed it, “Silver had become of less value than paper!” In addition, the florin was significantly appreciating in value against gold. The price in paper florins for 100 gold florins between 1887 and 1892 was:
|Average for the year
||Austrian florin notes
The major monetary issue, therefore, during these years was to bring a halt to any further increase in the value of the Austrian paper currency. In February 1892, the Austrian and Hungarian governments invited a group of professional and academic experts to meet and address a set of questions relating to whether a gold standard should be [xxxiii] adopted; if so, should it be monometallic or partly bimetallic with silver; what should be the status of government notes in circulation; how should the conversion from the existing florin to a gold standard be undertaken; and what monetary unit should be chosen?
Some of the most illustrious people in the field were brought together to offer their views and opinions on these questions. Thirty years later Ludwig von Mises described them in the following manner:
From March 8 to March 17, 1892, the government-convened Currency Inquiry Commission met in Vienna. The chairman was Finance Minister [Emil] Steinbach; beside him stood the memorable Eugen von Böhm-Bawerk, as section head. Thirty-six experts appeared before the commission to answer five questions that were posed by the government. No Austrian was left off the list of participants at the inquiry who had anything of importance to say on currency matters. Along with Carl Menger, the founder of the Austrian School of economics, there was Wilhelm von Lucam, the highly honored longtime secretary general of the Austro-Hungarian Bank; Moriz Benedikt, the publisher of Neue Freie Presse [New Free Press]; Theodor Thaussig, the spiritual leader of the Viennese banking world; and Theodor Hertzka, the well-known writer on monetary matters and social policy. The thick quarto volume that makes up the stenographic minutes of the inquiry remains today a source for the best ideas on all matters relating to monetary policy.
Virtually all of the participants spoke in favor of Austria’s adoption of a gold standard. Menger, for example, at one point said: “Gold is the money of advanced nations in the modern age. No other money can provide the convenience of a gold currency in our age of rapid and massive commodity exchanges. Silver has become a troublesome tool of trade. Even paper money must yield to gold when it comes to monetary convenience in everyday life. . . . Moreover, under present conditions only a gold currency constitutes hard money. Neither a bank note and treasury note nor a silver certificate can take the place of gold, especially in moments of crisis.”
Later summarizing the work of the commission, Wieser supported the adoption of the gold standard in colorful language:
Money is like speech; it is a means of intercourse. He who would have dealings with others must speak their language, however irrational he may find it. Language is rational by the very fact that it is intelligible to others, and more rational in proportion as it is intelligible to more people or to all. There can no more be an independent money system than independent speech; indeed, the more universal character of money, as compared with language, appears in this, that while a national language has its justification and significance in the intercourse of the world, there is no place for a national monetary system in the world’s intercourse. If Europe errs in adopting gold, we must still, for good or evil, join Europe in her error, and we shall thus receive less injury than if we insist on being “rational” all by ourselves.
The Currency Commission, in its official report to the Upper House of the Austrian Parliament, was no less adamant that gold, and only gold, was the recognized and essential international money. For that reason Austria-Hungary needed to adopt gold as the nation’s standard if it was to successfully participate in the commerce and trade of the world.
The commission proposed and the government accepted that the monetary unit would be renamed thekrone (the crown), with the new crown being equal to one-half the replaced florin. Standard coins would be gold pieces of ten and twenty crowns, each one being of 900 parts gold to 100 parts copper. The twenty-crown coin would have a full weight of 6.775067 grams, and a fine weight of 6.09756 grams. In 1892 an exchange rate for the crown was fixed at 1.05 Swiss francs and 0.8505 German marks.
Silver was kept as a secondary medium of exchange of limited legal tender status for smaller transactions. Government paper money was temporarily kept in circulation up to a certain maximum, but with the expectation of its eventual retirement. For the transition to a full gold standard with legally mandated redemption of banknotes for specie, it was expected that the Austro-Hungarian Bank would continue to accumulate sufficient supplies of gold until at an unspecified date formal redemption would be instituted.
An obligation to redeem crowns for gold was, in fact, never made into law. Yet from 1896 and most certainly after 1900 up until the outbreak of the war in 1914, the Austro-Hungarian Bank acted as if it now had that obligation and did pay in gold for its banknotes presented for redemption. Indeed, the oversight of this “shadow” gold standard (as it was called) by the Austro-Hungarian Bank, with maintenance of the exchange rate within a margin not much off the “gold points,” was praised by authorities at the time as an exemplary case of a highly successful “managed currency.”
Ludwig von Mises’s Writings on Monetary and Fiscal Policy Before the Great War
Ludwig von Mises’s earliest writings on monetary and fiscal policy were published between 1907 and 1914, and focused on these currency reform and related issues. He devoted a chapter in his Memoirsto explaining the background behind some of these articles. He details his frustrations when the articles resulted in his coming face-to-face for the first time with opposition by government officials to reasonable and publicly endorsed policies due to political corruption and misappropriation of “secret” slush funds that would be threatened by implementing a fully convertible gold standard.
But he does not go into very great detail about the content of these early essays. They may be grouped under two headings. The first consists of articles concerning the political pressures that finally led to putting Austria formally on the path of a gold standard in 1892, and the reasons for the resistance and delay in legally establishing gold convertibility up to the beginning of World War I. The second group deals with fiscal extravagance and the regulatory and redistributive intrusiveness of the Austro-Hungarian government, which was leading the [xxxvi] country to a potential financial and economic crisis. Even if the events of the war had not intervened to accelerate the process that culminated in an end to the nearly eight-hundred-year reign of the Habsburgs, the growth of the interventionist state was weakening the foundations of the country.
The earliest of these essays is “The Political-Economic Motives of the Austrian Currency Reform.” It is primarily an analysis of the changing factors influencing various interest groups that finally led to a sufficient coalition of these interests endorsing the move toward a gold standard. It highlights the fact that a major shift in economic policy is often dependent upon the vagaries of unique historical events, without which such a change might never have the chance to be implemented.
From 1872 to 1887, the Austrian currency had been depreciating on the foreign exchange market. Many of the agricultural and manufacturing interests in both Austria and Hungary did not object to this trend, since it reduced foreign competition by raising the costs of imports and worked to make Austrian goods more competitive in other countries. But beginning in 1887, the currency began to appreciate, and continued to do so until 1891. The same interests that were quite happy living with a currency losing value were extremely anxious with an appreciating currency that lowered the costs of imports and raised the costs of Austrian exports.
By the time the Austrian Currency Commission was convened in 1892, all the leading manufacturing, agricultural, and financial interests had agreed behind the scenes on the necessity for currency reform to bring the appreciation of the Austrian florin to a halt. And they all concurred on the desirability for Austria-Hungary to establish a gold standard, while they initially argued over the particular rate of exchange at which the new currency—the crown—would be stabilized.
Mises’s essay reads partly as what, today, would be considered a “public choice” analysis of the special-interest politicking that often guides [xxxvii] public policy. It brings out how a concentrated benefit to a wide array of interest groups served to generate a consensus on a significant institutional change in the existing monetary system. It also demonstrates how the costs or burdens imposed on a variety of smaller interest groups—particularly creditors and a number of medium-sized businesses who gained from currency appreciation, and conservatives who opposed a gold standard on ideological grounds—could be outweighed and outmaneuvered into being unable to prevent the monetary reform.
But at first, the Austro-Hungarian Bank was not legally compelled to redeem its notes for specie (gold). Its initial task was to prevent any further appreciation of the new crown from its formal foreign exchange rate. It was not given any direct instruction to prevent any renewed depreciation, if it were to occur. This, too, was consistent with the dynamics of the coalition of interest groups that had opposed any further increase in the value of the currency, but had not objected to the earlier years of currency depreciation.
But after 1896, the Austro-Hungarian Bank had accumulated enough gold and foreign exchange that it could assure the stability of the Austrian crown’s foreign exchange rate within both the upper and lower ends of the gold points, and in fact kept it within less than one percent of the parity rate most of the time. And after 1900, the Bank was redeeming and issuing its notes for gold as well as for foreign exchange on an unofficial de facto basis, while still not legally required to follow a policy of specie redemption.
This was the context in which Mises wrote four of the essays in this volume: “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” “The Foreign Exchange Policy of the Austro-Hungarian Bank,” “On the Problem of Legal Resumption of Specie Payments in Austria-Hungary,” and “The Fourth Issuing Right of the Austro-Hungarian Bank.”
Mises’s argument was that nothing was keeping the Austro-Hungarian Bank from now being given the legal obligation to redeem gold on demand for its banknotes, and thus formally joining the international community of gold standard nations. He insisted that this would immediately raise the creditworthiness of debt issued by the Austrian and Hungarian governments on foreign markets, and therefore lower the costs of borrowing from international creditors. It would also improve global confidence in Austria-Hungary as a developing nation desirous [xxxviii] of attracting foreign investment and lower the cost of international capital for Austrian entrepreneurs.
Opponents of formal specie redemption argued that requiring the Austro-Hungarian Bank to redeem gold would risk a large hemorrhage of specie reserves at any time an international crisis induced holders of crown notes to transfer their liquid capital out of the country. If during such an international crisis other central banks were to raise interest rates to protect their gold reserves from the danger of capital flight, the Austro-Hungarian Bank would be compelled to also raise its interest rate to prevent loss of its own gold reserves. Domestic manufacturing and commerce would then find that the cost of capital was held captive to the uncontrollable market forces of international finance. Domestic interest rates could experience swings that would carry negative effects for business within the country, merely to counteract speculators who wished to move gold in and out of the country to take advantage of interest rate spreads that had nothing to do with the legitimate needs of the import and export trade to facilitate international transactions. These critics argued that it was far better to maintain the present system of de facto specie payments, which gave the Austro-Hungarian Bank the latitude and liberty to, at any time, refuse gold or foreign exchange redemption for its notes to shelter the domestic economy from unnecessary and destabilizing interest rate changes.
Mises counterargued in these articles that since the 1860s, first the old Austrian National Bank and then its successor, the Austro-Hungarian Bank, had had legal authority to hold a sizable portion of its reserves against notes outstanding (even when official redemption was not imposed) in foreign bills of exchange, foreign currency, and other foreign-denominated assets that were, themselves, redeemable abroad in specie money. In other words, the Austrian central bank operated on the basis of a gold-exchange standard rather than a full gold standard. Through this method the Austro-Hungarian Bank was able to earn a significant interest income from its reserve holdings instead of letting its gold sit idle in the Bank’s vaults. At the same time, these foreign earnings not only went to the Bank’s stockholders, but were shared by law with the Austrian and Hungarian governments, thus reducing what otherwise might have been higher taxes to cover government expenditures.
For a long time the Bank already had been utilizing its holdings of foreign exchange and other foreign-denominated assets precisely to [xxxix] substitute for having to meet every demand with an actual gold outflow. This not only was an effective tool for meeting “legitimate” needs for specie in international transactions, but served to counteract speculative demands for gold or foreign exchange to keep the crown’s foreign exchange rate within the gold points, beyond which it would become profitable to export or import gold.
Furthermore, the Austro-Hungarian Bank did, in fact, export gold at times of international crisis, as well as on a regular basis. In normal times it exported gold precisely to replenish its stock of foreign exchange, foreign bills of exchange, and other foreign-denominated assets redeemable in specie abroad to maintain a supply sufficient to cover its international dealings and obligations. And during international financial crises it consciously exported gold to markets in Germany, Great Britain, and France to help alleviate the pressure for gold abroad, and at the same time earned a handsome return when gold prices were high. By supplying gold to foreign markets at such times, it also reduced the need to raise interest rates at home since the gold exports reduced the need for other central banks to raise their interest rates to protect their own gold reserves.
Finally, even while not legally obligated to redeem its notes for specie, the Austro-Hungarian Bank used its discount rate when it deemed it necessary to dampen the demand for both gold and other foreign-denominated assets among its reserves on the part of “speculators” and any others. Thus the Bank was already doing all the things that it would be required to do or could do under formal specie redemption to both maintain the official parity rate and preserve its gold reserves from undesired withdrawals. From any of the critics’ perspectives, no case could be reasonably made against the Austro-Hungarian government’s legislatively enacting the final completion of the currency reform process that had begun in 1892.
So why did the Austrian and Hungarian governments never pass legislation establishing formal specie redemption on the part of the Austro-Hungarian Bank? Mises gave no fully satisfactory answer in these articles, which were all published in respected scholarly journals of the time. However, in his MemoirsMises explained that behind the scenes the opposition to formal convertibility was partly because a portion of the rather large funds earned from foreign exchange dealings by the Austro-Hungarian Bank were hidden away in a secret account from which senior political and ministerial officials could draw for [xl] various “off the books” purposes, including influencing public opinion through the media. He learned about this special fund from Eugen von Böhm-Bawerk (1851-1914), the internationally renowned Austrian economist and Mises’s mentor, who told him about it off the record. Böhm-Bawerk was disgusted by the whole business and frustrated that even when he was finance minister (1900-1904), he had not been able to abolish the fund. A good part of the opposition and anger expressed against Mises’s defense of legal convertibility was the fear by those accessing these special funds that this source of money would dry up under the more transparent accounting procedures that would come with legal redemption.
In his 1909 article “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” Mises did point out that one reason behind the opposition to legal convertibility was the resistance of the Hungarians. They wanted to weaken the power of the joint Austro-Hungarian Bank as a way to continue their drive for independence from the Habsburg Monarchy. Since the Compromise of 1867,
Hungarian politics have ceaselessly endeavored to loosen the common bonds that connect that country to Austria. The achievement of economic autonomy from Austria has appeared as an especially important goal for Hungarian policy as a preliminary step leading to political independence. The national rebirth of the non-Magyar peoples of Hungary—Germans, Serbo-Croatians, Romanians, Ruthenians, and Slovaks—will, however, pull the rug out from under these endeavors and contribute to the strengthening of the national ideal of Greater Austria. At the moment, however, Hungarian policy is still determined by the views of the Magyar nobility, and the power of the government rests in the hands of the intransigent Independence Party.
The nationalistic “rebirth” of these peoples under the often oppressive control of the Hungarians did not strengthen the “national ideal of Greater Austria”—that “Austrian idea” of a harmonious multinational empire under the reign of the Habsburgs—that Mises assumed and clearly hoped would triumph. Instead, the appeal of nationalism over individual liberty and liberalism that had been developing throughout [xli] the empire for decades finally contributed to the death of the Habsburg dynasty in 1918.
But if the centrifugal forces of nationalism were pulling the empire apart from within, it was also being undermined by the fiscal cost and growth of the state. This was the second theme in Mises’s policy writings before the First World War, in two essays: “Financial Reform in Austria” and “Disturbances in the Economic Life of the Austro-Hungarian Monarchy During the Years 1912-13.”
After having its financial house in order for almost twenty years, Mises pointed out, the Austrian government was now threatening the fiscal stability of the society with increasing expenditures, rising taxes, and budget deficits. Government spending was likely to significantly grow in future years partly due to the expenses of maintaining costly military forces in an environment of an international arms race. The other major factor at work on the spending side of the government’s ledger were social welfare expenditures that the Austrian authorities were taking on, and which would only grow in the years ahead. Already in the preceding ten years, government spending had increased by over 53 percent, and over the same decade the cost of funding the government’s debt had increased by nearly 20 percent. The cost of financing many of the ministries was exploding; the nationalized railway system was running large deficits that had to be covered from other government funding sources; and the Austrian Crownlands were managed with a three-layered bureaucratic system of administrators at the national, provincial, and municipal levels, each with its own rules, regulations, [xlii] and taxing authorities—and often in contradiction with each other.
To cover these expenditures, a wide variety of taxes were being increased, including inheritance taxes, sales and excise taxes, and income and corporate taxes. They frequently were manipulated to shift the incidence of the tax burden away from the agricultural and rural areas of Austria onto the shoulders of the urban populations and especially onto industry and manufacturing. In addition, the finance ministry wanted to implement legislation giving the government the authority to examine the books of businesses and industries. Mises observed that “Austrian entrepreneurs rightly see in this arrangement an intensification of the harassment that the authorities display toward them.” Although the tax rates and burdens that Mises analyzes and criticizes seem by today’s higher and more intrusive fiscal standards to be part of that bygone, idyllic world of limited government liberalism before the First World War, they all represented significant increases at the time, and all pointed in a dangerous direction for the future.
What Mises also found most disturbing in the coalition of political forces raising taxes and shifting them onto industry and the urban areas was a clear ideological bias against modern capitalist society. There were conservative and rural interests who wished for a return to the preindustrial era, Mises claimed, and were using their preponderant representation in the Austrian parliament to place roadblocks in the way of modernization, and delay if not stop the economic development of the country.
The economic crisis in Austria-Hungary in 1912 and 1913, Mises argued, showed that fiscal irresponsibility was pervasive in both the government and the private sector. Everywhere consumption spending was growing at the expense of savings, while everyone did all in their power to avoid work. Government expenditures were expanding and eating away at the hard-won wealth and capital accumulation of previous years as a result of government deficit spending. But the private sector was no more frugal than government. In every walk of Austrian life, people attempted to live beyond their means. Everyone lived on credit that depended upon the illusion that debts accumulating on the books of retailers and wholesalers eventually could be repaid. Retailers extended credit to their customers; wholesalers extended credit to retailers; and the financial institutions extended credit to the wholesalers, manufacturers, and merchants.
It was a financial game of musical chairs in which everyone throughout the entire chain of production and sales appeared to be prosperous and profitable only because of the claims on the books against others up and down the payment structure of the economy. A serious default anywhere along the line could set off repercussions that would threaten the entire financial system. And precisely because of this, whenever anyone failed to pay even a fraction of the balances owed, the lines of credit were extended further to put off the inevitable day of reckoning and keep the illusions going.
The financial crisis of 1912-13, Mises explained, had been partially that day of reckoning in which the financial system was found to be built on sand. Mises could only hope that some lessons would be learned: that consumption needed to be based on production, and debts undertaken needed to be repaid through savings, work, and investment. He feared that the lessons had not been learned. Within a matter of months after writing in early 1914 his analysis of the causes and consequences of this crisis, Austria-Hungary was plunged into a far more disastrous crisis from which it would not survive as a political entity.
In two pieces written in 1913, “The General Rise in Prices in the Light of Economic Theory” and “On Rising Prices and Purchasing Power Policies,” Mises had attempted to explain the monetary mechanism by which increases in the supply of money and credit bring about a general rise in prices. Mises develops part of the argument that he had formulated in 1912, in The Theory of Money and Credit, that the period of inflation through which Austria-Hungary and much of the world was passing was due to the expansion of credit by the banking system in the form of fiduciary media. The latter, in Mises’s terminology, are money substitutes in the form of banknotes and checking deposits that are claims against specie currency held as reserves by the central bank and other lending institutions. However, such fiduciary media may be of two sorts: those that Mises calls “commodity credit,” which is fully backed by bank reserves, and “circulation credit,” which is only partially backed by reserves in the banking system. It is the fractional reserve basis behind a growing amount of the fiduciary media in circulation, Mises insists, that is the real cause of price inflation and the business cycle. Creating and lending unbacked fiduciary media at [xliv] artificially lowered rates of interest produces an imbalance between savings and investment that leads to an unsustainable boom, which finally has to end in an economic downturn and a period of readjustment in the market.
But Mises suggested that another influence was generating a general rise in prices, which he argued was caused by the nature of monetary transactions in an increasingly complex market order. In a developed market with multistaged processes of production, in which producers no longer meet face-to-face with their ultimate consumers, each seller must fix his prices on the basis of his expectations about what he thinks buyers further down the production chain may be willing to pay. This expectation about what his buyer will be willing to pay, in turn, influences the price he will be willing to pay to the producer or wholesaler from whom he purchases goods.
To the extent that such a seller expects that his buyer may be willing to pay more, he then will be willing to pay prices to those who sell to him that he otherwise might consider too high. Thus, Mises argued, a dynamic is set in motion that results in a continuing rise in prices throughout the various sectors of the economy in a certain temporal sequence. For example, trade unions may demand wages higher than employers consider the workers’ labor to be worth. But if those employers are confident that they can pass on the cost of paying higher money wages to those to whom they sell their products, they acquiesce in money wage demands that would otherwise be unjustifiable. At the same time, the higher real wages that those workers hope to obtain through an increase in their money wages will be eroded as prices of finished goods continue to rise in the economy due to this general inflationary process throughout the market. What trade unions might consider their demonstrated capacity to improve the real wages of workers was illusionary, since over time any temporary gains would be washed out by the general rise in prices. In the long run workers [xlv] could not obtain real wages in excess of the value of their marginal product.
Mises went as far as to say that nothing really could be done about this inherent price-increasing process; he even suggested that it was indicative of a dynamic and growing economy in which constant shifts in supply and demand and the conditions and methods of production required pricing decisions to be made on the basis of expectations under inescapable uncertain future market conditions. Mises concluded that the fact that the economy was not static, and therefore not more fully predictable, was a reason for optimism that these changing economic circumstances were bringing about improvements all the time.
What is missing in this part of Mises’s analysis is any clear link with either a prior or simultaneous increase in the supply of money and fiduciary media that permits this price-inflationary process to continue, or an indication that the process implies an increase in the velocity of money that would allow the same number of market transactions to be facilitated at rising prices. As he formulated it in these two articles, his argument seems to represent a version of what in the post-World War II period became known as cost-push inflation.
War Financing, Inflation, and the Goals of International Trade Policy
When war broke out in summer 1914, Mises’s artillery reserve unit was called up for active duty. For part of the next four years he sometimes saw intense action on the eastern front against the Russian Army. However, in 1918, during the last year of the war, Mises was assigned to work in various consulting capacities for the Austrian High Command in Vienna. And for a short time he served in Austrian-occupied Ukraine involved with currency matters.
In 1916, he published “On the Goals of Trade Policy,” in which he presents a clear analysis of the gains from division of labor and international trade. But Mises goes on to explain that what motivated nations such as Germany and Austria-Hungary was a particular dilemma. For [xlvi] these relatively overpopulated countries in Europe, the greater economic opportunities in foreign countries resulted in emigration that meant a loss of manpower both for future wars and as part of the work-force during peace as well as at times of international conflict. Also, in the cultural struggles between countries, emigration meant a loss of part of a nation’s human heritage, since over time many such emigrants were absorbed into the culture and language of the host nation.
Thus, in countries like Germany and Austria-Hungary the task was to develop policies that would raise the living standards and opportunities in the homeland to reduce the incentive to leave and be “lost” to the fatherland. The nationalist trade method rejected free trade and erected protectionist barriers to artificially raise prices and secure domestic employments for the population. Alternatively, such a country could attempt territorial expansion into surrounding areas to gain the land and resources that would overcome the too densely populated condition within the pattern of existing political boundaries in which, for example, Germany was currently confined. One other method was to acquire colonies abroad to which emigrants could move while retaining their cultural identity and political allegiance to the fatherland.
Writing at a time of war, Mises carefully emphasized that these political trade policy goals were in the long run incompatible with the economic forces of an increasingly global market society. These forces were constantly working to guide both labor and capital to where their productive capacity was most highly valued, which inevitably would result in redistributions of people around the world to reflect their most optimal employments in the international division of labor. In the long run, the logic and incentives of the market would transcend the political goals of nationalist ideology.
In “Remarks Concerning the Problem of Emigration,” a memorandum that Mises prepared in 1918 for the Austrian government commission to which he was assigned in Vienna, he suggested a variety of domestic policies that would reduce the incentive for workers to leave Austria. These included making more farmland available out of existing larger estates for the benefit of small landholders who currently could not support their families on the properties they owned. It would be useful for the government and private associations to assist seasonal migrant labor in finding more attractive wage and work condition opportunities abroad, thus increasing the likelihood they would return home to a country that cared about their well-being. It was also necessary [xlvii] to reduce the burden and inconveniences of compulsory military service that too often induced some workers employed abroad to not come home.
Also in the summer of 1918, Mises delivered a public lecture, “On Paying for the Costs of War and War Loans.” He praised the military successes of Austria’s armed forces in its fight against the Allied Powers and the industrial efficiencies of Austrian business that had provided the manufacturing wherewithal for, Austria to do so well, even in the face of Allied blockades that cut Austria off from foreign sources of supply. But production had to be paid for, and the issue arose of whether the government’s war costs should be covered by taxation or debt.
Mises reminded his listeners that borrowing did not enable the current generation to shift any part of the costs of war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by forgoing all that could have been produced and used, if not for the war. Mises also explained to his audience what today is often referred to as the Ricardian equivalence theorem, named after British economist David Ricardo (1772-1823). In his 1820 essay, “Funding System,” Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.
But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. First, many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. [xlviii] This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and need for ready cash to pay the tax obligation. Second, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than the government’s. As a consequence, these private individuals would have to pay a noticeably higher interest rate than that at which the government could finance its borrowing. Thus, the interest burden from government borrowing to be paid for out of future taxes would be less for the citizenry than the financial cost of their having to borrow money in the present to cover all the costs of war through current taxation. Hence it was both patriotic and cost-efficient for those listening to Mises’s presentation to buy war bonds in support of the war effort.
Finally, in “Inflation,” another lecture delivered in the late summer of 1918, Mises explained the impact of the government’s financing a large amount of its war expenditures through monetary expansion. First, all creditors who had failed to anticipate the resulting depreciation in the value of the Austrian crown are paid back in money possessing less purchasing power than when the loan was issued. This might seem to be a desirable side effect, since clearly the debtor gains by paying back his loan in depreciated crowns, especially if it is “the poor” who are the predominant debtor group. But it was worth recalling, Mises said, that in modern society the debtors were most often businesses that had borrowed to cover investment costs, while the creditors were middle-class citizens, widows and orphans, civil servants, and members of the lower-income working class who had put their savings into the financial institutions that did the lending. Hence, Mises pointed out, in this debtor-creditor relationship, under inflation the “rich” benefited at the expense of the middle class and the “poor.”
Some saw the benefit from inflation in that it also reduced the real value of the government’s accumulating debt, thus reducing the “real” cost of the war. At the same time, rising money incomes and profits in the private sector due to inflation meant that the government gained higher tax revenues in money terms. On the other hand, to the extent [xlix] to which the government had covered part of its debt with foreign borrowing denominated in another currency, the falling value of the crown on the foreign exchange market due to inflation increased the amount of crowns the government had to pay to meet its foreign financial obligations. Also, some taxes were fixed at a specified level, so in this instance the taxpayer gained in real terms during inflation while the government lost. Furthermore, the worse and more continuing the inflation, the more reluctant citizens would be to buy war bonds and other government debt instruments, thus increasing the difficulties of financing the war other than through inflation. Thus, from a variety of perspectives, inflation was a dangerous and undesirable method of covering the costs of war, since it undermined the real wealth of the middle class and those in the working class who saved in an attempt to improve their position in society.
After War: Hyperinflation and Fiscal Mismanagement in the New Austria
In October and November 1918, the Austro-Hungarian Empire began to disintegrate as various national groups began to break away and declare their independence, most notably the Czechs and Slovaks, who joined in creating their own country, then the Hungarians, who were then followed by the Serbs, Croats, Slovenians, and Bosnians, who formed a new Yugoslavia. The Romanians soon began to incorporate Transylvania within their borders, and Italy seized south Tyrol and the port of Trieste. Galicia became a battleground between the Poles, the Ukrainians, and the Russian Bolsheviks in the next few years.
In what was declared the new state of German-Austria a coalition government was formed between the Social Democrats, the Christian Socialists, and the Nationalist Party. Almost immediately, they began a campaign of expensive food subsidies for the urban population at controlled prices, compulsory requisitioning of agricultural goods from the rural parts of the country, foreign exchange controls on all imports and exports at an artificial rate of exchange, a vast array of social welfare [l] programs, and the use of the monetary printing press to finance it all. By the middle of 1919 and then into 1920 and 1921, serious inflation had degenerated into hyperinflation.
Mises’s articles “Monetary Devaluation and the National Budget” and “For the Reintroduction of Normal Stock Market Practices in Foreign Exchange Dealings” explained that the foreign exchange rate was a market-created price that could not be simply fixed and manipulated by the state. The value of any one currency in terms of another was ultimately a reflection of each currency’s purchasing power. Guided by the “law of one price,” the market tendency was to establish the exchange rate at that point at which the attractiveness of buying some quantity of a good in either country was the same. Setting the exchange rate at some level other than the market-determined rate merely meant that it was artificially fixed at too dear or too cheap a price. In the face of the currency shortages that the exchange control resulted in, the government then commanded that all foreign exchange earnings be sold to the Austrian Exchange Control Authority at the fixed rate, with the government bureaucracy now determining the rationing of it to both importers and exporters.
Prohibiting normal foreign exchange dealings merely drove transactions underground into the black market, and prevented the functioning of those institutional arrangements through which individuals can hedge against uncertain fluctuations in the foreign exchange rate by utilizing a legal futures market. Instead, the inflationary environment, with limited legal avenues to “take cover” against the effects of a depreciating currency, meant that more and more people were shifting into the use of foreign monies in domestic Austrian business transactions. The foreign exchange controls needed to be abolished, and the printing presses needed to be brought to a halt if a monetary disaster was to be averted.
The fundamental cause for Austria’s problems was that it was in the stranglehold of the socialist idea, with all of its negative consequences. This was the theme in two pieces by Mises: “The Austrian Problem” and “The Social Democratic Agrarian Program.” The socialists were [li] determined to control and spend their way into the destruction of the country. Under this administration, taxes and inflation ate away at the accumulated wealth of the past and hindered any capital formation in the present. They demagogically promised wealth while causing waste by nationalizing and regulating industries that ended up suffering losses that needed to be paid for through even more inflation. Their agricultural agenda was to do with the rural economy the same harm they were doing with industry and manufacturing in the cities.
What was to be done? In February 1921, Mises presented the outline of a plan in answer to the question, “How Can Austria Be Saved?” The first order of business was to stop the monetary printing presses. But this could be done only if the costly food subsidies were eliminated and the nationalized industries were reprivatized to end the huge expenses to cover their deficits, so the national budget once again could be brought into balance. Foreign exchange controls had to be abolished with a free market in all currency dealings. At the same time, the value of the Austrian crown had to be stabilized once the central bank had stopped issuing paper money and the depreciation of the currency was brought to a halt. All domestic regulations and controls inhibiting free commerce among the various provinces of Austria had to be lifted, and free trade had to be reintroduced in all forms of foreign trade. This was the path to a revitalized and prosperous Austria.
A sound monetary system was unlikely if the governments of those new states that had formerly been part of the Austro-Hungarian Empire looted the assets of a reconstructed Austrian central bank. Thus, in “The Claims of Note Holders upon Liquidation of the Bank,” published in February 1921, Mises argued against those who asserted that those other governments had a right to a portion of the old Austro-Hungarian Bank’s gold reserves. Under the Treaty of Saint-Germain, which had ended the war between Austria and the Allied Powers, the successor states were obligated to redeem the old crown notes on their territories for their own respective currencies. The old Austro-Hungarian Bank notes were then to be turned over to the new Austrian central bank, which would take them out of circulation. Mises argued that everyone knew that the huge expansion of banknotes to fund the government’s war expenses were backed by nothing, and certainly not by whatever gold may have remained in the central bank’s vaults. To demand anything else would be to plunder the gold and other assets upon which a reconstituted Austrian monetary system would be built.
Mises observed in an article early in 1922, “The Austrian Currency Problem Thirty Years Ago and Today,” that the key to ending Austria’s problems was stopping inflation. Thirty years earlier, in 1892, the task had been to stabilize a currency that was appreciating in value. The task in 1922 was to bring a halt to its depreciation. But the method was the same: link the currency to gold and do not manipulate its quantity in circulation.
As the situation worsened, Mises put together a proposal on behalf of the Vienna Chamber of Commerce for “The Restoration of Austria’s Economic Situation,” which was submitted to other trade and labor union associations in the country to devise a way to bring an end to the government budget deficits as a prelude to stopping the inflation. In a nutshell, Mises recommended the establishment of price indexation throughout the economy. Already government expenditure levels were automatically adjusted in line with a cost-of-living index. Now the same arrangement had to be set up for government revenues. Otherwise nominal expenditures would keep growing while nominal tax revenues would always lag behind, never leading to an end to the deficits. Incomes, profits, and wages and prices all had to be indexed to the market value of gold. This would continually adjust government tax revenues to government expenditures. It would mean that government nationalized sectors, such as the railway system, would have their prices rise in tandem with the average rate of depreciation of the currency reflected in its link to the price of gold, which would help to reduce their losses and maybe even earn a profit from transit fees for cargos passing through Austria. At the same time, gold indexation would assist in keeping the wages and salaries of many workers rising to maintain a certain real value of their income.
Mises emphasized that such an indexation policy was desirable not only due to questions of equity in a period of rapid depreciation and the need to bring the government’s budget better into balance. It was also needed because inflation distorted the very essence of a money-using economy: the ability for economic calculation to reasonably estimate profit and loss, and relative profitability of alternative lines of production. Price and wage indexation linked to the price of gold would help to reduce the miscalculations that inflation caused, and which often resulted in capital consumption. This measure, Mises stated, was meant to be a transition method to bring stability to the Austrian economy, or, as he concluded, “We must make up our minds to return from [liii] the extravagant intoxication of spending ‘billions’ to the sober, more modest financial figures of a smaller state. The object of the proposed plan is to avoid a sudden and disastrous collapse.”
The inflation was brought to a halt in late 1922 and early 1923 with the financial assistance and supervisorial oversight of the League of Nations. In 1925, in “The Gold-Exchange Standard,” Mises pointed out that while Austria and a number of other countries were moving back to a gold-backed currency, it was not a full gold standard system. Most countries did not have large amounts of actual gold reserves, and gold coins were nowhere in circulation. Instead, their monetary systems (like that under the old Austro-Hungarian Bank) were gold-exchange standards, under which most reserves were held in other countries in the forms of financial assets that were, in principle, redeemable in gold in those other countries. The entire system depended upon at least a few countries, like the United States at that time, being willing to serve as ultimate gold reserve redeemers. Mises thought that this was only a shadow of the type of real gold-backed system that could assure noninflationary stability to the various countries of the world.
In 1926, Mises had spent three months traveling in the United States. When he returned he delivered the talk “America and the Reconstruction of the European Economy.” Any further European recovery from the effects of the Great War could not count upon American political or economic leadership. Both manufacturing and agricultural interests in the United States were heavily protectionist and therefore resistant to imports. This, in turn, made it difficult for Europeans to find markets for their goods or to earn the dollars to pay back their wartime loans to America. While the United States was a creditor nation with the means to invest in Europe, money would not be given away but would depend on the profitability of such investments. Thus Europe would have to rely upon itself if it was to continue to overcome the legacy of the war.
Mises pointed out the difficulty for such stable recovery and growth in a summary he presented in 1928, “The Currency and Finances of the Federal State of Austria.” Five years after the end to Austria’s inflation, the currency was on a relatively sound basis. A new schilling had replaced the old crown and was fixed at a specific value in terms of gold. The rules under which the new Austrian National Bank operated made it difficult for it to serve as a means to finance the expenses of the government.
However, the fiscal affairs of the nation were far from sound. The government was still running budget deficits, but all of it was due to cost overruns in the nationalized sectors of the economy, especially the railway system and the lumber industry in the nationalized forest system. Financial pressures were placed on the federal authority because of the tax and related transfers to the provincial governments, which were all overlaid with bureaucratic regulatory structures and mismanagement. And in Vienna, where the Social Democrats controlled the municipal government, the financial extravagance on public projects was exceptionally large. For domestic growth and international competitiveness, Austria had to make its economy more productive. Cutting wasteful government and radically reducing taxes was the only avenue to a prosperous future for Austria.
When the Great Depression began in the early 1930s, the banking system was badly shaken. The collapse in May 1931 of the Austrian bank, Credit-Anstalt, in particular, sent shock waves throughout the financial markets. Shortly afterward, Mises wrote “The Economic Crisis and Lessons for Banking Policy.” In his eyes, the banking systems in Germany and Austria had two weaknesses. First, too many banks had become financially entangled with the industrial corporations to whom they lent. In fact, they often had become major shareholders in the very companies whose financial status they were supposed to oversee with a critical eye in terms of continuing creditworthiness. Instead, they unsoundly extended more credit to companies they should have pulled back from because their own balance sheets were too closely linked to the illusion of their continuing profitability. Finally the situation imploded, taking the banks down with those companies.
Second, those same banks had poorly managed the term structure of their investment portfolios. They lent long, while being liable for depositor withdrawals on demand. In other words, they had become caught in the system of fractional reserve banking, in which the amount of claims payable on demand far exceeded their available cash reserves to meet depositor liabilities.
The banking crisis, as far as Mises was concerned, was not the end of capitalism, but showed the need to reorganize the way banks managed their liabilities and investments after the crisis had passed. Sounder banking principles in a market economy were the avenue to avoid similar crises in the future.
Interventionism, Collectivism, and Their Ideological Roots
In the 1920s, one of the contributions for which Mises was most famous was his theory of government intervention. In 1930, he published “The Economic System of Interventionism,” a brief summary of his critique of this practice, with particular emphasis on the deleterious effects from all forms of control over prices. While various forms of production regulations had the tendency to reduce productivity, price controls were a far more directly harmful type of intervention. They inevitably distorted the relationship between supply and demand, artificially generated either shortages or surpluses, and deflected production from those avenues most likely to satisfy consumer demand. They also had a tendency to spread out to more and more sectors of the economy, as the government imposed similar controls on other markets and industries in a vain attempt to compensate for the imbalances the earlier price controls had created. If followed to their logical conclusion, such price controls led to a fully planned economy through piecemeal interventions imposed one after another.
Where did all this lead? In “Economic Order and the Political System” (1936), Mises pointed out that in the eighteenth and early nineteenth centuries, political democracy, civil liberty, and economic freedom had grown hand in hand. But in the second half of the nineteenth century the idea had taken hold that political democracy and personal freedom could be preserved even if the government increasingly intervened in and controlled the economic affairs of the citizenry in the name of social justice and socialist planning.
What the twentieth century was showing, however, was that political democracy and individual freedom could not last long when government planning increasingly replaces the market economy. Economic planning means planning people’s lives, and people must then conform in all their affairs to what the plan dictates. In countries like Soviet Russia, fascist Italy, or National Socialist (Nazi) Germany even the appearance of preserving democratic and personal liberties had been discarded and the reality of where planning leads could be most clearly seen. This was the crossroads that now confronted the remaining relatively free and democratic societies in the West: freedom or planning.
More than twenty years later, in 1959, Mises offered “Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923,” when hyperinflation had brought Germany to the edge of total economic [lvi] collapse. He reflected back to when he was a young man before the First World War, during the years when he wrote those early pieces on the gold standard and had only just published The Theory of Money and Credit. He had attended the meetings of the Verein für Sozialpolitik (Society for Social Policy), the leading and most influential social science association in the German-speaking world, which was dominated by members of the German Historical School. Here he came face-to-face with the enemies of economic liberalism, who rejected most of economic theory in the name of a historically based approach to social analysis, on the basis of which they rationalized aggressive nationalistic conclusions, all leading to an eventual war. They had contempt for the Austrian economists and ridiculed the idea that there were “laws of economics” that should stand in the way of markets and money being controlled by the state. These were the thinkers who were the harbingers of many of the disasters of the twentieth century. Their aggressive nationalism had led to two world wars; their belief in the interventionist state had cultivated the coming of the planned and regulated society; and their confidence that money and its value were creatures of the state had fostered the inflations of the twentieth century.
And though Mises did not point it out, many of these German thinkers laid the ideological groundwork for the mass murder of millions at the hands of the National Socialists, including the destruction of six million Jews. Indeed, it was because of such ideas and their consequences that Mises himself was forced to flee a Nazi-dominated Europe and find sanctuary in America in the midst of the Second World War.
Leaving Europe for America had not been an easy decision for Mises. Indeed, he said in a letter to Friedrich A. Hayek in May 1940, as he was approaching his departure from Switzerland for the United States, “The decision to leave is truly difficult. For me, it represents saying good-bye to a life which I have always lived, it is for me an ‘adieu’ to a Europe which is about to disappear forever.”
It is only appropriate, therefore, that before concluding this introduction we should take a look at Mises’s Jewish family roots in the old Habsburg Empire and how the fate of the Austrian Jews led to a man [lvii] like Mises having to say good-bye to the life and world in which he made his career and won his reputation as one of the leading economists of his time, and his having to make a new start at the age of fifty-eight in the New World.
Liberating Liberalism and the Austrian Jews
Ludwig von Mises was born on September 29, 1881, into a prominent Jewish family in Lemberg (Lvov in present-day Ukraine), the capital of the Austrian Crownland of Galicia, far to the east of Vienna and near the border with the Russian Empire. In the last decades of the nineteenth century, more than 50 percent of the population of some parts of Galicia was Jewish, with the center of Jewish life and culture being in Lemberg.
The documents that Ludwig von Mises’s great-grandfather, Mayer Rachmiel Mises (1801-91), prepared as background for his ennoblement by the Austrian emperor, Francis Joseph, in mid-1881 (just a few months before Ludwig was born), record the history of the Mises family in Lemberg going back to the 1700s. Mayer’s father, Fischel Mises, had been a wholesaler and real estate owner who had received permission to live and conduct business in the “restricted district” reserved for non-Jews. At the age of eighteen, Mayer married a daughter of Hirsch Halberstamm, the leading Russian-German export trader in the Galician city of Brody.
Mayer took over the family business following his father’s death and also served for twenty-five years as a commissioner in the commercial court of Lemberg. For a time he also was on the city council and was a full member of the Lemberg Chamber of Commerce. He also was a cofounder of the Lemberg Savings Bank, and later was a member of the board of the Lemberg branch of the Austrian National Bank. He also was one of the founders of the Cracow-Lemberg railway line. In addition, he was a founder of a Jewish orphanage, a reform school, a secondary education school, a charitable institution for infant orphans, and a library in the Jewish community. Some of these charities were [lviii] begun with funds provided by Mayer for their endowment. Indeed, it was for his service to the emperor as a leader of the Jewish community in Lemberg that Mayer Mises, great-grandfather of Ludwig von Mises, was ennobled.
Mayer’s oldest son, Abraham Oscar Mises, ran the Vienna office of the family business until he was appointed in 1860 the director of the Lemberg branch of the Credit-Anstalt bank. Abraham also was the director of the Galician Carl-Ludwig Railroad. His other son, Hirsch Mises, was a partner in and a director of the Halberstamm and Nirenstein banking company.
It is perhaps because of the family’s connection with the railroad business that Hirsch Mises’s son, Arthur Edler von Mises, took up civil engineering with a degree from the Zurich Polytechnic in Switzerland, and then worked for the Lemberg-Czernowitz Railroad Company. Arthur married Adele Landau, the granddaughter of Moses Kallir and the grandniece of Mayer Kallir, a prominent Jewish merchant family in the city of Brody. Arthur and Adele had three sons, of whom Ludwig was the oldest. His brother, Richard, became an internationally renowned mathematician who later taught at Harvard University. The third child died at an early age.
Members of the Mises family also were devout practitioners of their Jewish faith. The vast majority of the Galician Jews were Hasidic, with all the religious customs and rituals that entailed. But the Mises family was part of that movement in the Jewish community devoted to theological and cultural reform, and participated in the liberal-oriented political activities that were attempted in nineteenth-century Galicia. As a small boy, Ludwig would have heard and spoken Yiddish, Polish, and German, and studied Hebrew in preparation for his bar mitzvah.
Ludwig’s father, Arthur, like many of his generation, chose to leave Galicia and make his life and career in the secular and German cultural world of Vienna, where he accepted a civil servant’s position with the Austrian Ministry of Railways. But from the documents among [lix] Ludwig von Mises’s “lost papers” found in the Moscow archives, it is clear that his mother maintained ties to her birthplace, contributing money to several charities in Brody, including a Jewish orphanage. In Vienna in the 1890s, Arthur was an active member of the Israelite Community’s Board, a focal point for Jewish cultural and political life in the Austrian capital.
Until the early and middle decades of the nineteenth century, Jews throughout many parts of Europe were denied civil liberties, often being severely restricted in their economic freedom, and, especially in Eastern Europe, confined to certain geographical areas. In the 1820s it was still not permitted for Jews to unrestrictedly live and work in Vienna; this required the special permission of the emperor.Commercial and civil liberation of the Austrian Jews occurred only in the aftermath of the Revolution of 1848, and most especially with the new constitution of 1867, which created the Austro-Hungarian Dual Monarchy following Austria’s defeat in its 1866 war with Prussia. The spirit and content of the 1867 constitution, which remained the fundamental law of the empire until the collapse of Austria-Hungary in 1918, reflected the classical liberal ideas of the time. Every subject of the emperor was secure in his life and private property; freedom of speech and the press was guaranteed; freedom of occupation and enterprise was permitted; all religious faiths were respected and allowed to be practiced; freedom of movement and residence within the empire was a guaranteed right; and all national groups were declared to have equal status before the law.
No group within the Austro-Hungarian Empire took as much advantage of the new liberal environment as the Jews. In the early decades of the nineteenth century a transformation had begun among the Jewish community in Galicia. Reformers arose arguing for a revision in [lx] the practices and customs of Orthodox Jewry. Jews needed to enter the modern world and to secularize in terms of dress, manner, attitudes, and culture. The faith had to be stripped of its medieval characteristics and ritualism. Jews should immerse themselves in the German language and German culture. All things “German” were distinguished as representing freedom and progress.
With the freedoms of the 1867 constitution, Austrian and especially Galician Jews began a cultural as well as a geographical migration. In 1869, Jews made up about 6 percent of the population of Vienna. By the 1890s, when the young Ludwig von Mises moved to Vienna from Lemberg with his family, Jews made up 12 percent of the Vienna population. In District I, the center of the city where the Mises family lived, Jews made up over 20 percent of the population. In the neighboring District II, the Jews made up over 30 percent.
But in the late nineteenth and early twentieth centuries, there was a stark contrast between these two districts of the city. In the central District I, the vast majority of the Jewish population had attempted to assimilate with their non-Jewish neighbors in dress, manners, and cultural outlook. In District II, bordering on the Danube, on the other hand, the Jewish residents were more likely to have retained their Hasidic practices and orthodox manners, including their traditional dress. It was the visible difference of these Jews, who often had more recently arrived from Galicia, which so revolted the young Adolf Hitler—who was shocked, and wondered how people acting and appearing as they did could ever be considered “real Germans.” They seemed such an obviously alien element in Hitler’s eyes.
The characteristic mark of most of the Jews who migrated to Vienna (and other large cities of the empire such as Budapest or Prague) was their desire and drive for assimilation; in many ways they tried to be more German than the German-Austrians. The Czechs, the Hungarians, and the Slavs, on the other hand, often were still focused on their traditional ways; the Hungarians in particular were suspicious of the Enlightenment, civil liberties, and equality—these threatened their dominance over the subject peoples in their portions of the empire (the Slovaks, Romanians, and Croats). To constrain the Hungarians, the emperor increasingly put the Czechs, Poles, and Slavs under direct imperial administration on an equal legal footing with the German-Austrians. For the Jews, Austrian imperial policy meant the end of official prejudice and legal restrictions, and a securing of civil rights and educational opportunities. Their continuing and generally steadfast loyalty to the Habsburgs, however, led many of the other nationalities to be suspicious and anti-Semitic as the years went by. The Jews were viewed as apologists and blind supporters of the Habsburg emperor, without whose indulgence and protection the Jews might have been kept within the ghetto walls.
Civil liberties and practically unrestrained commercial and professional [lxii] opportunity soon saw the Jews rise to prominence in a wide array of areas of Viennese life. By the beginning of the twentieth century more than 50 percent of the lawyers and medical doctors in Vienna were Jewish. The leading liberal and socialist newspapers in the capital were either owned or edited by those of Jewish descent, including the New Free Press, the Viennese newspaper for which Mises often wrote in the 1920s and 1930s. The membership of the journalists’ association in Vienna was more than 50 percent Jewish. At the University of Vienna, in 1910, professors of Jewish descent constituted 37 percent of the law faculty, 51 percent of the medical faculty, and 21 percent of the philosophy faculty. At the time Mises attended the university in the first decade of the twentieth century almost 21 percent of the student body was Jewish. The proportion of Jews in literature, theater, music, and the arts was equally pronounced.
The main avenue for social and professional advancement was education in the gymnasium system—the high school system in the German-speaking world. But the gymnasium education not only offered a path to higher education and a university degree for many Jews, it also was an avenue for acculturation and assimilation into European and especially German culture. For example, Mises and his fellow student Hans Kelsen (who later became an internationally renowned philosopher of law and the author of the 1920 constitution of the Republic of Austria) attended the Akademisches Gymnasium in the center of Vienna. It was meant for students preparing for the university and professional careers. Here a wide liberal arts education was acquired, with mandatory courses in Latin, Greek, German language and literature, history, geography, mathematics, physics, and religion, with electives in either French or English—Mises selected French. At the core of the curriculum was the study of the ancient Greek and Roman classics. Mises and other Jewish students at the Akademisches Gymnasium, as a part of their religion training, had courses in Hebrew. According to memoirs written by people who attended theAkademisches Gymnasium in the 1880s and 1890s, most of the students ridiculed [lxiii] the religion classes as “superstition.” The Greek and Roman classics were considered literary avenues for entering the mainstream of modern European and Western culture. And while it was not assigned, the students absorbed on their own contemporary writings in history, social criticism, literature, and the sciences as their way to integrate themselves into modern and “progressive” society.
In the 1890s, during Mises’s time at the Akademisches Gymnasium, 44 percent of the student body was Jewish. But there were some gymnasiums at which Jewish admission was informally restricted. For example, the Maria Theresa Academy of Knights in Vienna was reserved for the children of the nobility and senior officials. Joseph Schumpeter attended it in the 1890s, but only because his stepfather was a lieutenant field marshal. No matter what his academic qualification, Mises would have had virtually no chance to be accepted there. Thus clusters of these gymnasiums were clearly closed to Jews, even if they were converts to Christianity, while other clusters represented the high schools where middle-class Jewish businessmen, professionals, and civil servants sent their children.
But for all their assimilationist strivings—their conscious attempts to be German-Austrians in thought, philosophy, outlook, and manner—the Jews remained distinct and separate. Not only was this because they belonged to schools, professions, and occupations in which they as Jews were concentrated, but because non-Jewish German-Austrians viewed them as separate and distinct. However eloquent and perfect their German in literature and the spoken word, no matter how contributing they were to the improvement of Viennese society and culture, most non-Jewish Viennese considered these to be Jewish contributions to and influences on German-Austrian corners of cultural life.
Name, family history, gossip, and mannerisms made it clear to most [lxiv] people who were Jewish and who were not. The wide and pronounced success of so many Viennese Jews made non-Jews conscious of their preponderance and presence in many visible walks of life. This success also served as the breeding ground for anti-Semitism.
In the Habsburg domain, part of this anti-Semitism was fed by conservative and reactionary forces in society who often resented the emperor’s diminishment or abolition of the privileges, favors, and status of the Catholic Church and the traditional landed aristocracy. The high proportion of Austrian Jews involved in liberal or socialist politics made them targets of the conservatives who said they were carriers of modernity, with its presumption of civil equality, unrestrained market competition, and a secularization that was said to be anti-Christian and therefore immoral and decadent. Preservation and restoration of traditional and Christian society, it was claimed, required opposition to and elimination of the Jewish influence on society. Jews were the rootless “peddlers” who undermined traditional occupations and ways of earning a living, as well as the established social order of things. They pursued profit. Honor, custom, and faith were willingly traded away by them for a few pieces of gold, it was said. Craft associations became leading voices of anti-Semitism, especially when economic hard times required small craftsmen and businessmen to go hat in hand to Jewish bankers for borrowed sums to tide them over.
German nationalism also was a vehicle for growing anti-Jewish sentiment. The paradox here is that in the 1860s and 1870s a sizable number of Jewish intellectuals were founders and leaders in the Austrian and German nationalist movements. German culture and society were viewed as representing the universal values of reason, science, justice, and openness in both thought and deed. German culture and political predominance within the Austro-Hungarian Empire restrained the backward-looking forces of darkness—the Hungarian, Czech, and Slavic threats. At the same time, German culture in Central Europe offered rays of enlightenment in the regions of Eastern Europe.
Mises estimated that before the Second World War, Jews made up 50 percent of the business community in Central Europe and 90 percent of the business community in Eastern Europe. Indeed, in Omnipotent Government he asserted that in Eastern Europe “modern civilization was predominantly an achievement of Jews.” What the Jews in these parts of Europe introduced and represented, at least in their own minds, was the enlightened German mind, with its culture and institutions. But to those other nationalities being introduced to and “threatened” by this German cultural influence, it was perceived as being Jewish as much as German—a dominating, imperial, and “foreign” culture.
At the same time, in both Germany and German-Austria, the Jews in the forefront of the Pan-German nationalist movements were viewed as interlopers by many of the Christian German nationalists. As a consequence, there emerged in the second half of the nineteenth century [lxvi] rationalizations to justify the rejection of Jewish participation in the cause of German nationalism and culture. First, it was said that only Christians and the Christian faith were consistent with true German life and culture. But when a significant number of German and Austrian Jews converted to Christianity, it still was found not to be enough. Now it was claimed that to be a true German it was not sufficient to be a convert to Christianity. “Germanness” was a culture, an attitude toward life, and a certain sense of belonging to the Volk community.
As a growing number of Jews immersed themselves in all things German—language, philosophy, literature, dress, and manner—it was found, again, not to be enough. Really to be a German was to share a common ancestry, a heritage of a common blood lineage. This was one barrier the German and Austrian Jews could not overcome. In the emergence of racial anti-Semitism in the 1880s and 1890s, there were laid the seeds of the “final solution.”
In Vienna, Karl Lueger, who was mayor of the capital city in the first decade of the twentieth century and a leader of the Christian Social Party, represented the spirit of anti-Semitism. He insisted that only “fat Jews” could weather the storm of capitalist competition. Anti-Semitism, Lueger said, “is not an explosion of brutality, but the cry of oppressed Christian people for help from church and state.” He blended anti-Semitism with social-left reforms, which included civil service and municipal government restrictions on Jewish access to city jobs or contracts. On the other hand, when Lueger was challenged as to why he had Jewish friends and political associates, he replied, “I decide who is a Jew.”
But in spite of the presence and growth of anti-Semitic attitudes in [lxvii] the late nineteenth and early twentieth centuries in Austria in general and Vienna in particular, Mises’s seeming lack of attention to his own Jewish family background or any hint of the impact of anti-Semitism around him—there were anti-Jewish student riots at the University of Vienna during the years when he was a student there around the turn of the century—was in fact not uncommon. One can read Stefan Zweig’s fascinating account of everyday life in the Vienna of this time and have the distinct impression that anti-Semitic attitudes or municipal government policy were virtually nonexistent.
Yet many invisible walls characterized the circles in which people moved in Viennese society both before and after the First World War. Traditional or Orthodox Jews lived and worked within a world of their own in the city. Secular and assimilated Jews, like Ludwig von Mises and Hans Kelsen, moved in circles of both Jews and non-Jews, but even the nonreligious and German-acculturated Jews clustered together. A review of the list of participants in Mises’s famous private seminar in Vienna, for example, shows a high proportion of Jews. And even after Mises had moved to Geneva, Switzerland, in 1934, his agenda books for this time show that many of his social engagements were with other Jews residing in or visiting that country.
The end of the nineteenth and the beginning of the twentieth century saw the eclipse of liberalism in Austria and the rise of socialism in its place, centered in the political ascendancy of the Social Democratic Party. A sizable number of Jews were prominent in the Austrian socialist movement; they were anticapitalist and viewed the entrepreneurial segment of the society as exploiters and economic oppressors. The capitalist class would be swept away in the transformation to socialism, including the Jewish capitalists in the “ruling class.” Most of the Jews in the socialist movement not only were secular and considered themselves harbingers of the worker’s world to come; they were contemptuously opposed to cultural and religious Judaism as well.
These three political movements in Austria and Vienna when Mises was a young man—conservatism, German nationalism, and radical socialism—were, each for its own reasons, enemies of liberal society, opponents of free-market capitalism, and therefore threats to the ideas and occupations of those middle class, or “bourgeois,” walks of life heavily populated by the Jews of Austria and Vienna.
The history of Austrian Jewry during this time is a story of triumph and tragedy. The winds of nineteenth-century liberalism freed the Austrian Jewish community, both internally and externally. Internally, the liberal idea pried open Orthodox Jewish society in places such as Austrian Galicia. It heralded reason over ritual; greater individualism over religious collectivism; open-minded modernity over the strictures of traditionalism. Externally, it freed the Jewish community from legal and political restraints and restrictions. The right of freedom of trade, occupation, and profession opened wide many opportunities for social improvement, economic betterment, and political acceptance.
Within two generations this transformed Austrian Jewish society. And that same span of time saw the rise of many Jews to social and economic prominence, with greater political tolerance than ever known before. If these two liberating forces had not been at work, there would not have been Ludwig von Mises—the economist, the political and social philosopher, and the notable public figure and policy analyst in Austria both before and between the two world wars.
At the same time, these two liberating forces set the stage for the tragedy of the German and Austrian Jews. Their very successes in the arts and the sciences, in academia, and in commerce fostered the animosity and resentment of those less successful in the arenas of intellectual, cultural, and commercial competition. It set loose the emotion of envy, the terror of failure, and the psychological search for scapegoats and excuses. It ended at the gates to the Nazi death camps.
In Mises’s case and for many others it meant leaving the country of their birth and seeking refuge in other lands. Among those who left before or immediately after Germany’s annexation of Austria were many members of the Austrian School of economics or Mises’s private seminar circle (both Jews and non-Jews): Martha Steffy Browne, Gottfried Haberler, Friedrich A. Hayek, Felix Kaufmann, Fritz Machlup, Ilse Mintz, Oscar Morgenstern, Paul N. Rosenstein-Rodan, Alfred Schutz, and Erich Voegelin, to name just a few.
Mises had departed in autumn 1934 for a teaching position at the Graduate Institute of International Studies in Geneva, when it was clear that the collectivist darkness was starting to fall over the center of Europe. He made a new life for himself after 1940 in the United States, like many of his Austrian colleagues and friends, where the spirit of freedom was not yet in the same shadow of tyranny as in their native Austria. America, for them, was still a land where Austrian Jews such as Mises could breathe the air of liberty.
He continued to explain and defend the principles and ideals of classical liberalism and the free market in his new home in America until his death on October 10, 1973, at the age of 92.
Endnotes to Volume 1↩
It took me until my 43rd year to read The Selfish Gene, written in 1976 by Richard Dawkins. In many respects, it is a testament to its success that I felt no compelling desire to read it. What I perceived to be its central message had been absorbed into the very fabric of our culture. I thought the message was simply put. To summarize: we are driven to survive by our genes and via competitive and selfish natural selection; we follow our own self-interest in order to survive and procreate; genes that adapt more quickly and better to the competitive world survive at the expense of the others, and so forth. The state of nature is a Hobbesian nightmare of there being “no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.” It is survival of the fittest for most, but armed with this knowledge, we could overcome some of these rough edges of life.
This message became his new self-christened “meme” that has seeped into our own cultural way of thinking. Also, armed with this knowledge, Dawkins concludes we should restrain our biological drive and build a more cooperative world.
Needless to say, the book is rich with information on Darwinian evolution and easily communicated to the intelligent layperson. However, I think that he has at least one thing the wrong way around: we should not restrain our genes to build a more cooperative world, but embrace them and their phenotypic effects. As I will suggest, successful phenotypic effects are not as he assumes them to be when it comes to the catallactics of the market place.
The view of Dawkins — that we need to put restraint on our genes to effect a more cooperative outcome for all — would imply that if we do not, we get what is called social Darwinism which is as natural as the selfish gene itself. In the closing lines of The Selfish Gene, Dawkins urges us to rebel against this natural disposition.
It is possible that yet another unique quality of man is a capacity for genuine, disinterested, true altruism. … We have the power to defy the selfish genes of our birth. … We can even discuss ways of deliberately cultivating and nurturing pure, disinterested altruism.
Dawkins then concludes that this ability to force ourselves to work well with others is “something that has no place in nature.”
Being new to biology, I thought I should read some Darwin to see if it really does follow that if you accept natural selection you must move, as night moves toward day, to the whole of human society running itself as a group of individualistic selfish replicators.
Social Darwinism has nothing, seemingly, to do with Darwin himself. He never advocated a social policy of promotion of the natural tendency to the survival of the fittest. He thought that appropriation by others was the key in advancing man in society.
The Descent of Man is his book that touches most on these issues. Darwin himself imagines that primeval man was “influenced by the praise and blame of his fellows,” and that for individuals, there were many social rewards in avoiding purely selfish behavior since the “tribe would approve of conduct which appeared to them to be for the general good, and would reprobate that which appeared evil.” Primeval individuals knew that the acceptance of the group was important to survival, so, Darwin concludes, “[i]t is, therefore, hardly possible to exaggerate the importance during rude times of the love of praise and the dread of blame.”
Moreover, that which strengthens the group rather than the individual, Darwin reasoned, led to greater survival for the groups that avoided selfish infighting:
It must not be forgotten that although a high standard of morality gives but a slight or no advantage to each individual man and his children over the other men of the same tribe. … A tribe including many members who … were always ready to aid one another, and to sacrifice themselves for the common good, would be victorious over most other tribes; and this would be natural selection.
It would appear that Darwin very much did not advocate anything that has come to be associated with the term “social Darwinism,” if we mean by this that we should relish in the economic survival of the fittest at the expense of our fellow compatriots. Dawkins sits firmly in the same tradition as his great inspiration on these matters: Darwin no less. From this I conclude that social Darwinism is more of a “straw-man” style argument, used by people unfamiliar with the works on Darwin and market catallactics.
Concerning the social implications of social Darwinism, liberalism plans for eternal peace, social Darwinism for a war of all against all and, as discussed, neither the great master Darwin and his most modern advocate, Dawkins, would agree with the former extrapolation from biology to social science. I am sure — as Ludwig von Mises notes in Human Action — that what applies to relations between men and microbes are very different indeed, as we have the power of reason and they don’t. Thus, he says:
It need not always be a war of extermination such as in the relations between men and morbific microbes. Reason has demonstrated that, for man, the most adequate means of improving his condition is social cooperation and division of labor. They are man’s foremost tool in his struggle for survival.
Ancient man — maybe even Nick the Neanderthal — must have rationally had to think: “if I do X service(s) or provide Y good(s) to my fellow man — stone-age Sid — he will in return give me X service(s) or Y good(s) which he is doing/producing that I want that he can make/do better than me.” The ability to reason this is our key distinguishing feature from the rest.
Mises posits three conditions that satisfy the need for the social cooperation entailed in the division of labor. First, man is unequal; second the resources of the earth are unequally distributed over various geographies and climates. If neither of these distinctions existed, the division of labor would not offer any advantages to man. The third and most important point is that cooperation is needed for man to work with his fellow man to produce things more productively. A lasting society is built on permanent cooperation. A war of all against all or a violent competitive struggle is anti-societal.
We must always remember that one of the phenotypic effects of our genes — to aid procreation and successful multiplication — is the undeniable fact that if you cooperate with others, satisfy their most urgent needs, and seek the same in return, you will prosper and multiply.
Seventeen million people walk though the doors of Tesco Plc, voluntarily, each and every week in the UK because Tesco gives them better goods and services at more affordable prices, when they want it. This is voluntary cooperation writ large and no coercion abounds in this model. Their competition with the others is peaceful and driven solely by the wishes of the consumers expressing their sovereign choices by spending their money where they do. From the consumer preferences down, the management shapes its offer to serve them.
Wherever you see disharmony, if you look carefully, you will see government intervention, or a strongman/bandit at work, to favour one party over another party, or a court ruling to do the same. All intervention is anti-social and thus anti-cooperative and we should be very wary of it as some one, or some class of persons, is usually being exploited at the expense of others.
Reject social Darwinism, as it has nothing to do with Darwin or his modern apostle Dawkins. Dawkins has stimulated me to show how potentially the phenotypic effects of cooperation could coherently link biology with economics. This is a magnificent thing!
This allows us to lift ourselves out of autarkic or small hunter gatherer groupings in order to seek to cooperate, in peaceful social harmony with our fellow man. Then I say, in the language of Dawkins: embrace and glorify our genes. Don’t rebel against them.
This article was previously published at Mises.org and in expanded form at TobyBaxendale.com.
“The goods and services traded on the semi-secretive website Silk Road since February 2011 with the virtual currency Bitcoins were so varied that the Federal Bureau of Investigation described it as “the most sophisticated and extensive criminal marketplace on the internet today”.
￼Its philosophical underpinnings, however, were not solely a desire to get rich quick but, according to the FBI complaint published on Wednesday after the site was shut down, “Austrian economic theory” and the works of Ludwig von Mises and Murray Rothbard, economists closely associated with the Mises Institute, in the US state of Alabama.”
– More obnoxious anti-Austrian School slurs from the Financial Times, on this occasion by John Aglionby and Tracy Alloway.
The Daily Mail no longer has a monopoly on libelling the dead: the Financial Times is also doing a pretty good job. John Aglionby’s story this week (‘Libertarian economics underpinned Silk Road Bitcoin drug website’) was, even by the standards of a paper coloured pink that should really be coloured yellow, an extraordinary piece of character assassination. You do not have to be a believer in Austrian business cycle theory to find the linkage between an apparently criminal website and two widely respected economic theorists to be utterly objectionable. Those FT readers who were moved to respond on the paper’s website tended to think similarly:
“the lowest of lows..”
“FT trying to discredit Ludwig von Mises, the Austrian business cycle theory and Bitcoins all in one go.. for god’s sake, you do not have any decency left..”
“childish, glib and misleading.. a new low for the FT.. Disgusting, to say the least”
“Another shining example of the death of journalism”
“The goods and services traded on the semi-secretive website Silk Road since February 2011 with the virtual currency Bitcoins were so varied that the Federal Bureau of Investigation described it as “the most sophisticated and extensive criminal marketplace on the internet today”.
￼￼“Sorry to say, but you all seem to fail to understand that the FT is making a heroic attempt to switch from factual financial reporting to a top position in entertainment of the masses. Don’t you think they are doing well? I most certainly do.”
That the Austrian business cycle theory should be held in such low esteem by such a prominent financial journal might be taken as an admission of guilt for not having noticed the credit bubble while it was inflating, and for then having continually defended the (neo-Keynesian) establishment line rather than debate the practical value of any alternative policy course.
In Austrian business cycle theory, the central bank is the culprit responsible for every boom and bust, firstly in fuelling excessive bank credit growth and maintaining interest rates at overly stimulative lows; then in prolonging the inevitable recession by propping up asset prices, bailing out insolvent banks, and attempting to stimulate the economy via the mechanism of deficit spending. It is difficult to see why the theory is so problematic given that the US Federal Reserve, for example, is not an agency of the US government per se but rather a private banking cartel. When push comes to shove, whose interests will the Fed ultimately protect – those of the banks, or those of the rest of the productive population?
But in any discussion of the ‘long emergency’ enduring throughout the insolvent West, the role of politicians should not be ignored. If politicians had moderated their tendencies to make unaffordable promises to their electorates, western fiscal disasters and the attendant debt mountains would now be less dramatic. And if politicians were not slaves to the electoral calendar, it is fair to assume that difficult choices might even have been taken in the long term interests of their respective economies.
The current gridlock in the US political system (first over the shutdown and latterly over the debt ceiling) is a perfect example of grandstanding politicians abdicating all responsibility for the electorate they claim to serve. And as a glaring example of cognitive dissonance, Treasury bond investors’ responses to fears over a looming default really do take some beating. That beating should, of course, be reserved for investors stupid enough to believe that debt issued by the world’s largest debtor country should be somehow treated as risk-free, especially when the possibility of formal default is only a matter of days away.
Treasury bond defenders will no doubt point out that in a fiat currency world where the central bank has the freedom to print ex nihilo money to its heart’s content, the very idea of default is absurd. But that is to confuse nominal returns with real ones. Yes, the Fed can expand its balance sheet indefinitely beyond the $3 trillion they have already conjured out of nowhere. The world need not fear a shortage of dollars. But in real terms, that’s precisely the point. The Fed can control the supply of dollars, but it cannot control their value on the foreign exchanges. The only reason that US QE hasn’t led to a dramatic erosion in the value of the dollar is that every other major economic bloc is up to the same tricks. This makes the rational analysis of international investments virtually impossible. It is also why we own gold – because it is a currency that cannot be printed by the Fed or anybody else.
On the topic of gold, the indefatigable Ronni Stoeferle of Incrementum in Liechtenstein has published his latest magisterial gold chartbook. (FT: if you’re reading, Ronni is an Austrian, so you’ll probably want to start the character assassinating now.) Set against the correction in the gold price 1974-1976, the current sell-off (September 2011 – ?) is nothing new. The question is really whether our financial (and in particular debt) circumstances today are better than they were in the 1970s. We would merely suggest that they are objectively worse.
Trying to establish a fair price for gold is obviously difficult, but treating it as a commodity like any other suggests that the current sell-off is not markedly different from any previous correction during its bull run:
To cut to the chase, it makes sense to own gold because currencies are being printed to destruction; the long term downtrend in paper money (as expressed in terms of gold) remains absolutely intact:
And we cannot discuss the merits of gold as money insurance over the medium term without acknowledging the scale of the problem in (US) government debt:
Whatever happens in the absurd and increasingly dangerous debate over raising the US debt ceiling, the fundamental problem remains throughout the western economic system. Governments have lived beyond their means for decades and must tighten their belts. Taxes are certain to rise, and welfare systems certain to contract. Even if western governments manage to rein in their morbidly obese consumption patterns without a disorderly market crisis, their legacy will be felt by generations yet to come. The debt mountain cannot and will not resolve itself. (Why, again, we own gold; because we think there is a non-trivial chance of a gigantic financial system reset.) The piper must, at some point, be paid. Western economic policy can be distilled down into just four words: the unborn cannot vote.
This article was previously published at The price of everything.
Lots of people talk about “The” Quantity Theory of Money and “The” Equation-of-Exchange. The terms have a familiar feel to them, they’re part of the furniture of Economics. On careful examination, that appearance changes. There isn’t really one Equation-of-Exchange, there are many. One reason for this is that different economists have different ideas about what counts as a transaction and should be included. The Quantity Theory is similar, most of the arguments against it criticise only one version. This is why arguments about these things often descend into confusion.
Anthony Evans and I investigated these problems. We looked at Ludwig Von Mises’ monetary theory and compared it to others. We found that Mises was aiming at something quite different to Fisher, Friedman or present-day quantity theorists. Our paper on this has now been published in the Review of Austrian Economics.
For those lucky people who work in Universities with journal access:
For us plebs without here’s a slightly earlier version:
This excerpt from Omnipotent Government by Ludwig von Mises was recently featured at Mises.org.
The gold standard was an international standard. It safeguarded the stability of foreign exchange rates. It was a corollary of free trade and of the international division of labor. Therefore those who favored etatism and radical protectionism disparaged it and advocated its abolition. Their campaign was successful.
Even at the height of liberalism governments did not give up trying to put easy money schemes into effect. Public opinion is not prepared to realize that interest is a market phenomenon which cannot be abolished by government interference. Everybody values a loaf of bread available for today’s consumption higher than a loaf which will be available only ten or a hundred years hence. As long as this is true, every economic activity must take it into account. Even a socialist management would be forced to pay full regard to it.
In a market economy the rate of interest has a tendency to correspond to the amount of this difference in the valuation of future goods and present goods. True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression.
The gold standard put a check on governmental plans for easy money. It was impossible to indulge in credit expansion and yet cling to the gold parity permanently fixed by law. Governments had to choose between the gold standard and their—in the long run disastrous—policy of credit expansion. The gold standard did not collapse. The governments destroyed it. It was as incompatible with etatism as was free trade. The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports. Stability of foreign exchange rates was in their eyes a mischief, not a blessing.
No international agreements or international planning is needed if a government wants to return to the gold standard. Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard. The only condition required is the abandonment of an easy money policy and of the endeavors to combat imports by devaluation.
The question involved here is not whether a nation should return to the particular gold parity that it had once established and has long since abandoned. Such a policy would of course now mean deflation. But every government is free to stabilize the existing exchange ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.
All governments, however, are firmly resolved not to relinquish inflation and credit expansion. They have all sold their souls to the devil of easy money. It is a great comfort to every administration to be able to make its citizens happy by spending. For public opinion will then attribute the resulting boom to its current rulers. The inevitable slump will occur later and burden their successors. It is the typical policy of après nous le déluge. Lord Keynes, the champion of this policy, says: “In the long run we are all dead.” But unfortunately nearly all of us outlive the short run. We are destined to spend decades paying for the easy money orgy of a few years.
Inflation is essentially antidemocratic. Democratic control is budgetary control. The government has but one source of revenue—taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control.
If war becomes unavoidable, a genuinely democratic government is forced to tell the country the truth. It must say: “We are compelled to fight for our independence. You citizens must carry the burden. You must pay higher taxes and therefore restrict your consumption.” But if the ruling party does not want to imperil its popularity by heavy taxation, it takes recourse to inflation.
The days are gone in which most persons in authority considered stability of foreign exchange rates to be an advantage. Devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations’ currency systems. Why should they venture to demolish their own trade walls?
Some of the advocates of a new international currency believe that gold is not fit for this service precisely because it does put a check on credit expansion. Their idea is a universal paper money issued by an international world authority or an international bank of issue. The individual nations would be obliged to keep their local currencies at par with the world currency. The world authority alone would have the right to issue additional paper money or to authorize the expansion of credit by the world bank. Thus there would be stability of exchange rates between the various local currency systems, while the alleged blessings of inflation and credit expansion would be preserved.
These plans fail, however, to take account of the crucial point. In every instance of inflation or credit expansion there are two groups, that of the gainers and that of the losers. The creditors are the losers; it is their loss that is the profit of the debtors. But this is not all. The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent. These people profiteer by virtue of their fortunate position. For them inflation is good business. Their gains are derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services and commodities whose prices have not yet risen at all or not in the same degree as the prices of things they buy for their own consumption. Two of the world’s greatest philosophers, David Hume and John Stuart Mill, took pains to construct a scheme of inflationary changes in which the rise of prices and wages occurs at the same time and to the same extent for all commodities and services. They both failed in the endeavor. Modern monetary theory has provided us with the irrefutable demonstration that this disproportion and nonsimultaneousness are inevitable features of every change in the quantity of money and credit.
Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antagonisms would originate for which there would be no satisfactory solution. The populous poor nations of Asia would, for instance, advocate a per capita allotment, a procedure which would result in raising the prices of the raw materials they produce more quickly than those of the manufactured goods they buy. The richer nations would ask for a distribution according to national incomes or according to the total amount of business turnover or other similar standards. There is no hope that an agreement could be reached.
The crypto-currency Bitcoin is still merely a speck on the global monetary landscape. It is young, experimental, and for all we know, it may ultimately fail to break into the monetary mainstream. However, on a conceptual level I am willing to call it a work of genius and arguably the most exciting development in the field of money for more than 130 years. Let’s say since the start of the Classical Gold Standard in 1879. Does this sound like hyperbole? Well, let me explain.
The Decline and Fall of Capitalist Money
The 20th century was, broadly speaking, a period of almost constant monetary decay. At around 1900 most economists, politicians and bankers would have correctly stated that global capitalism – an international market economy facilitating the free exchange of goods and services across political borders and thus allowing extensive human cooperation through trade – required an international, apolitical, and hard form of money. Such money was gold. It was the basis of the capitalist economy and it imposed strict discipline on all market participants. Crucially, that included governments and banks. Governments had to operate pretty much like private businesses. They had to balance their books, i.e. live within the means provided by taxation, and if they borrowed money in the marketplace their lenders were at full risk of default as no government could print money (gold) to repay loans or even meet interest payments on loans. Banks, of course, issued banknotes or bank-deposits that were not backed by gold but still used by the public as if they were money proper – these were and still are ‘money-derivatives’ – but again they did so at full risk of default as nobody could ‘print’ bank-reserves (gold again) to bail out the banks in case the public tired of the ‘derivatives’ and wanted to hold gold instead.
Over the course of the 20th century – or to be precise, from 1914 to 1971 – the monetary system was completely changed as a consequence of a number of entirely political maneuvers, all of them undermining the quality of money. Today, hard, international and apolitical money has everywhere been replaced with entirely elastic, national and politicized money, with money that central banks issue under a territorial monopoly at no cost and with no meaningful constraints on issuance, and that the central bankers use to ‘manage’ the ‘national’ economy (itself increasingly an out-of-date-concept), and to fund the state and grow the domestic banks (which, under the protection of a lender-of-last-and-first-resort, now issue unprecedented amounts of money derivatives).
Today the global monetary map resembles a patchwork of local, “nationalistic” paper monies, each of which is a political tool, often openly manipulated in an attempt to benefit the local export industry at the expense of foreign competitors or to ‘stimulate’ the ethereal concept of ‘aggregate demand’. Not surprisingly, the global economy is drowning in debt (increasingly public sector debt), suffers from a bloated financial sector and international trade tensions, and stumbles from one crisis to another, each one worse than its predecessor.
Bizarrely – but not entirely surprisingly – politicians, bankers and modern ‘enlightened’ economists now tell us that this unhinged financial system is to our benefit, really, just trust us.
Truth be told, the present monetary system is a hindrance to free trade, properly functioning markets and human cooperation across borders, and it might already be on its last leg. Yet a powerful but entirely misguided, consensus seems to have taken hold of public opinion, namely that ‘elastic’ money could be beneficial if money’s supply was only managed astutely by some clever monetary central planners.
I wrote Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown to challenge that consensus, to show that ‘elasticity’ of supply is always a negative for money. Elastic money is not needed. It is entirely superfluous. Moreover, elastic money is always disruptive. A monetary system based on an inherently elastic and constantly expanding supply of money is unstable and ultimately unsustainable. The reason why gold made such good money for thousands of years is precisely its essentially inelastic supply.
The word ‘Bitcoin’ does not even appear in my book. The reason is simply that I had not heard of Bitcoin by the time I handed in my final manuscript in early 2011. But when I learnt about Bitcoin soon afterwards I was immediately fascinated. Like many others, I could conceive of ‘internet money’ or ‘virtual money’. As I had explained in the book, money does not have to exist in physical form and the fact that most money today is electronic money poses no problem for the monetary theoretician. The problem with this type of money is not that it is immaterial but that its supply is completely elastic, and I simply could not see how money that was not based on a nature-given and strictly limited commodity could have an entirely inelastic supply. It was Bitcoin’s inelasticity by design that I saw immediately as one of its greatest strengths and its true genius.
My work rehabilitates the gold standard. It shows that it was a mistake to abandon gold as the basis of our financial system and replace it with entirely elastic state fiat money. When (not if) the present fiat money system finally ends we could and should return to gold. The only alternative I now see, at least on a purely conceptual level, is Bitcoin, or something like Bitcoin: hard, apolitical, immaterial, virtual money.
Bitcoin is cryptographic gold
By now most readers will probably have heard of Bitcoin and have some notion of what it is. But in any case, let me give you a quick run-down. The economist Nikolay Gertchev, in a blog on the Mises Institute website (republished here), explains it quite well, although Gertchev, like many other members of the “Austro-Libertarian” movement, is somewhat reserved when it comes to embracing Bitcoin. I am surprised by the extent of scepticism in that community and believe that in general it is unfounded. But first the description:
“A bitcoin is a unit of a nonmaterial virtual currency, also called crypto-currency, by the same name. (Bitcoin is a medium of exchange that only exists in the virtual world. DS) They are stored in anonymous “electronic wallets,” described by a series of about 33 letters and numbers. Bitcoins can travel from a wallet to a wallet, by means of an online peer-to-peer network transaction. Any inter-wallet transfer is registered in the code of the bitcoin, so that the record of its entire transaction history clearly identifies its owner at any single moment, thereby preventing potential ownership conflicts. Bitcoins can be further divided into increments as small as one 100 millionth of a bitcoin. The current outstanding volume of bitcoins is above 10 million and is projected to reach 21 million in the year 2140.”
“This brings us to the truly fascinating production process of the bitcoins. They are “mined” based on a pre-defined mathematical algorithm, and come in a bundle, currently of 25 units, as a reward for carrying out a large number of computational operations that aim at discovering the solution to what could be described as a randomized mathematical puzzle. The role of the algorithm is to ensure a declining progression of the overall stock of bitcoins, by halving the reward every four years. Thus, somewhere in the beginning of 2017, the reward bundle will consist of 12.5 units only. Also, the more bitcoins are produced, the harder are the randomized mathematical puzzles to be solved.”
Bitcoin is immaterial money yet strictly limited in its supply. Once 21 million units are in existence, probably in 2140, that’s it. No more Bitcoin can be issued. In fact, the supply of Bitcoin is more inelastic than the supply of gold. Also, the available supply of Bitcoin at any moment in time is substantially more transparent than that of gold.
If Bitcoin ever became money in its own right (how it could do so, I will discuss below), then it would be international, hard and entirely inelastic money. Like gold it also does not decay, is homogenous and (almost) perfectly divisible. Bitcoin fulfils all the requirements of good money. In the long run, gold does not have to fear fiat money, which is always suboptimal as it always is national, politicized, manipulated, unstable and inflationary money. For one thousand years, state paper monies have come and gone. Gold (and silver) stayed. Gold just has to sit still and wait for this, the latest and most audacious and arrogant, experiment with global free-floating paper money to fail, and it will come back. But now it faces, potentially, its first meaningful challenger: inelastic crypto-currency, Bitcoin.
Money of no authority
There is no central authority that issues Bitcoin and can manipulate its supply for its own gain or for any alleged ‘greater good’ of society. Positively cringe-inducing, although sometimes unintentionally funny, are the embarrassing attempts by establishment spokespeople to discredit Bitcoin on account that, unlike all that astutely managed state fiat money, Bitcoin would not constantly be losing purchasing power. In fact, just as in the case of gold, Bitcoin’s purchasing power can reasonably be expected to constantly appreciate over time.
But, so we hear the assorted ‘enlightened’ economists of the Keynesian persuasion exclaim in horror, that would mean we would all suffer from dreadful deflation, from which only an elite of highly-qualified government-appointed central bank bureaucrats and a well-oiled printing press can save us. Apart from the fact that these self-appointed money masters have neither proper economic theory nor the experience of a thousand years of financial history on the side of their destructive agenda, they obviously do not even comprehend how far their system of manipulated funny money has already discredited itself.
Inelastic money can satisfy ANY demand
As I have explained in Paper Money Collapse no society (not even a healthily growing one) needs a constantly expanding supply of money. Money is a unique economic good. Because it is the medium of exchange, money is the only good that is demanded exclusively for its exchange value, not for any use-value its substance (if it has a substance at all) may also have.
Nobody who has demand for money has demand for a certain quantity of paper notes, or a certain weight of gold, or a certain number of digits on a computer hard-drive. Money-users have demand for the exchange value that these items contain in exchange for other goods and service, i.e. qua being accepted by others as money. Demand for money is always demand for readily exercisable purchasing power.
Once a good is widely accepted as a medium of exchange (whether that good is gold, paper tickets, or sequences of digital ones and noughts), the public can, at any moment in time, hold precisely the amount of money – readily exercisable purchasing power – it wants to hold. If the demand for money goes up, the public will sell non-money goods for money or reduce money-outlays for non-money goods. As a result, the money-prices of non-money goods fall and the purchasing power of each monetary unit (whether gold, paper tickets, or digital code) will rise. This process satisfies – automatically, instantly and naturally – the higher demand for money. The public now holds more readily exercisable purchasing power in the form of money, not because a clever, über-prescient money producer has created new money units, but simply and much more straightforwardly, because the exchange-value of the existing money stock has increased.
Once a good is widely accepted as money, no further production of that good is required. In fact, as I also demonstrated in Paper Money Collapse, any attempt to flexibly inject money into the economy in order to ‘stabilize’ money’s purchasing power, or, as is declared policy today, to constantly debase it at an officially sanctioned rate, must not only fail in its primary objective (‘price level stability’) but must cause grave distortions in the wider economy. Furthermore, the steady secular deflation that is to be expected under inelastic money, such as gold or Bitcoin, is not only not economically disruptive, it is even beneficial. Just consider one aspect: as money will then have a moderate positive real return, people who have no knowledge of financial markets and investing, and who do not have the resources to hire professional advisors, can save by simply holding money. This is impossible in our fiat money economy of constant inflation and increasing monetary instability.
As Bitcoin has no issuing authority it has no country of residence or origin. It is truly global money. It can be used for payment anywhere in the world without going through banking systems or foreign-exchange markets. It is undeniable that the multitude of local paper monies poses a considerable hindrance to free trade and thus the rise of living standards in large parts of the world as this system necessarily introduces an element of partial barter into international trade relations. Today’s massive foreign-exchange markets are nothing but a make-shift, a crutch to deal with the suboptimal and politically motivated arrangement of various local currencies. This market ties up capital (both financial and human) without adding any real wealth to society.
If Bitcoin were to get widely accepted – and that is still a big if – it could become a great platform for connecting potentially any two counterparties in the world in direct financial transactions. It is the ultimate disintermediator: no banks needed.
At this point it might be objected that it only connects people who have access to the internet or smartphones but this is obviously a rapidly shrinking barrier. On my travels in Africa last year, I found that internet access was usually more ubiquitous than bank branches. And by the way, Kenya and Tanzania already have M-Pesa, the world’s most developed mobile payment system that uses the mobile phone network to facilitate money transfers. These countries could easily make the transition to smartphone-based payment systems without ever making the detour through clunky bank branch networks.
On the issue of tying down capital, Bitcoin wins hands-down against any other financial system, including a gold standard. Bitcoin does not require any physical storage, which naturally is always expensive. Bitcoin is monetary raw material and payment system in one. (Although, fascinatingly, the free market has already created physical Bitcoins.)
Money requires trust. We presently do not live under a gold standard but, as Jim Grant has observed so astutely, a PhD-standard, a system of flexible, state-sponsored money, managed by people like Ben Bernanke and his team at the Fed, who enjoy the privilege of implementing policies based on their own faulty monetary theories and hair-raising interpretations of economic history, while a cheap-money-addicted class of speculators plays them like a fiddle and laughs all the way to the bank. The appeal of gold has always been that it does not require the public to put trust in a ‘money elite’ but that it only has to trust gold’s creator: mother nature. With Bitcoin you only have to trust the algorithm, and as this is open software, there cannot even be a hidden agenda. Bitcoin, just like a proper gold standard, is hard, capitalist money with no politics, no Federal Open Market Committee meetings, no monetary policy, no central banking bureaucracy. It is free market money.
Common objections to Bitcoin
Given its free market and ultra-hard-currency credentials, the scepticism towards Bitcoin in parts of the Austro-Libertarian community is somewhat surprising. I think some of the objections are easily refuted. There is, first of all, the idea that Bitcoin could have many imitators, which would undermine its uniqueness and reduce its attractiveness. If Bitcoin itself cannot be inflated, what about the concept of crypto-currencies, could it be inflated by too many different currencies on offer?
This argument strikes me as weak. By all accounts Bitcoin’s design and cryptographic robustness are an exceptional accomplishment. It is not as if any hacker of medium talent could pull off something similar tomorrow. But even if he could, the argument completely underestimates first-mover advantage in the area of goods and services with substantial network effects. How many people have launched a second Facebook or a second Twitter since these inventions kicked-off the social media craze, although technologically, these inventions are much simpler than crypto-currency? – Nobody. The network effects of these goods are immense. Once they have a certain acceptance it is hard, if not impossible, for late-comers to break in. These goods and services have value for their users predominantly because others use them too, and the more people use them, the more valuable they get. There is no good for which this is truer than money – the general medium of exchange. Customized money is an oxymoron. Consequently, once a form of money is accepted, it is very difficult to take business away from it.
This feature of money is obviously a problem for Bitcoin in its fight against established state paper monies but is equally a big plus when it comes to keeping potential new entrants into the crypto-currency arena at bay. Bitcoin now dominates the market for crypto-currencies (it pretty much IS the market for crypto-currencies, in my view) and I believe that only the discovery of major flaws in Bitcoin – none seem to have surfaced in its four-year life up to now, and every day they are less likely to appear – or if some vastly superior crypto-currency came along but I am hard-pressed to see in which aspect it could outperform Bitcoin. But just launching another crypto-currency – a Bitcoin clone – is certainly not going to put a dent into Bitcoin.
Menger and Mises would love Bitcoin
Many ‘Austrians’ get thrown off by Menger’s theory of the origin of money and Mises’ so-called ‘regression theorem’, and somewhat rashly conclude that Bitcoin can never achieve money-status because it did not originate from a non-money commodity. Mises was correct when he stated that something could only become money if it had previously, that is, before it was used by somebody as a medium of exchange in its own right for the first time, established some value in trade. For if that had not been the case, how could the first person to employ the commodity as money have any point of reference by which to assess its value and determined its exchange value for the first monetary transaction? However, this theorem, which remains unrefuted in my view, does not apply to Bitcoin. Bitcoin can simply piggyback on established forms of money that already have exchange-value and derive its original value from them before it does, over time, establish its own value.
The same has, in fact, happened in the case of paper money. The paper notes that are used as money today did not start their ascent to widely used and generally accepted monetary assets from humble beginnings as commodities – that is, as mere paper – but started out as paper-claims on physical gold. Gold was money and the paper tickets simply a technology to transfer ownership of gold. When the first banknote was used it did not derive its exchange value from its paper content but from the fact that it could be exchanged for a fixed amount of gold. That was the necessary reference point – in accordance with Mises’ regression theorem. Paper money started as payment technology and as the public got used to paying with paper rather than with gold coins and gold bars, the underlying gold content could be reduced over time and ultimately the link to gold completely severed. What gives value to these paper tickets today? – The fact that the public still accepts these paper tickets in exchange for goods and services. That is all. And in fact, it is all that is needed. Any form of money – even gold, which still retains some functionality as industrial commodity or consumption good (jewellery), although that functionality is now irrelevant for its role as monetary asset – any form of money derives its money-value from the trading public and the public’s willingness to exchange the monetary asset for goods and services.
And herein lies in fact Bitcoin’s biggest challenge. However, this challenge is not of a conceptual nature. The concept of Bitcoin as money is, as I have tried to show above, extremely compelling. But Bitcoin has to offer something to the average money-user that state paper money cannot offer. Just as the banknote bestowed an instant and discernible benefit to each money-user relative to heavy gold coins, that allowed it to become a widely used medium of exchange in its own right and ultimately even operate without any link to gold, so Bitcoin has to set itself apart from fiat money and overcome fiat money’s powerful network advantage. The fact that fiat money is suboptimal in terms of its inflation characteristics and its disruptive effects on the broader economy is not something that bothers the average money user at the moment he desires to engage in monetary transactions, and do so as conveniently, securely and easily as possible. The state paper money system today offers easily useable ‘computer money’ and the broader public is still happy to use it. Why switch to Bitcoin?
Will Bitcoin get accepted by the wider public?
It is my impression that the community of Bitcoin users, although apparently growing strongly, is still largely composed of those who are fascinated by the technology as such and who want to be part of something new, and those who like it for ‘ideological’ reasons, i.e. those who detest state paper money or dislike the banking system. Thus, there is apparently still a big contingent of computer ‘nerds’, hackers, crypto-anarchists, anti-government libertarians and Occupy-Wall-Street-types among its user base (which is not to say that there are not many who do not fall into any of these categories). How could Bitcoin attract a broader base of money-consumers beyond these groups?
One powerful aspect is cost. Bitcoin transactions are free, so Bitcoin could become – or maybe it is already – the Skype of payment systems. Another attraction could simply be the usually reasonable, and with some effort potentially considerable, anonymity and untraceability that Bitcoin offers. This seems to be a hotly debated topic. On the one hand, Bitcoin is incredibly transparent. All transactions are literally in the open domain. However, each ‘user’ is only identified by his ‘address’ and the number of addresses is practically unlimited. One could use a new address for each transaction. This may not mean instant untraceability from ‘the authorities’ but then again, certain techniques and add-ons, some of which are still being developed, have the potential to increase anonymity and untraceability even further. Additionally, it is possible to acquire Bitcoin for cash – rather than via the established and already regulated exchanges – and thus anonymously.
This means Bitcoin could be used, as is a frequent charge against it already, for illegal transactions involving drugs and guns. But people do not have to be drug or arms dealers, or even ordinary tax cheats, to appreciate a certain degree of financial privacy. As bank secrecy laws disappear everywhere and as almost all governments are waging a ‘war on cash’, by which any transaction that involves more than just petty cash is to be moved to electronic systems within the state’s fiat money network, so that ‘the authorities’ achieve full ‘transparency’ as to what the citizenry is up to at any moment, there could well be a widespread demand for ‘outside’ electronic payment systems offering privacy. For example, a range of ‘activities’ exist engaging in which may not be, or not yet be, illegal but considered a major potential embarrassment to the parties involved if made public (gambling, pornography, escort services), so that many people would not want to have payment for them on their permanent records. This potential development is not lacking in irony: our modern information society with its trends towards the ‘transparent citizen’ and unlimited data storage holds many threats to a free society, privacy and individual liberty. It would be fitting if countermoves to these trends emanated from the same technology.
An additional boost to Bitcoin may come straight from the crumbling state paper money infrastructure itself. The cases of Iceland and in particular Cyprus have driven home the point that ‘money in the bank’ is far from safe, and even if your deposits have survived the bank collapse and the ‘bail-in’, you may not get them out of the country any time soon as capital controls are likely be imposed. As the overstretched paper money economy staggers towards its inevitable demise, more of these instances will occur providing an additional opening for Bitcoin. To the best of my knowledge, Bitcoins cannot be confiscated and Bitcoin accounts cannot be frozen Additionally, you store Bitcoin yourself rather than put them into a fractional-reserve bank that would conveniently use them as ‘reserves’ for its own ‘money derivative’ production.
What are Bitcoins worth?
I agree with Jon Matonis that nobody can give a reasonable answer but that the outcome is probably binary: Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more. Those who buy Bitcoin as a speculative investment should consider it an option on the future success of the crypto-currency. At time of writing, Bitcoins are trading at $127 and £83 at Bitcoin-exchange Mt. Gox.
On a personal note, my biggest ‘liquid’ asset continues to be physical gold. As I explained on numerous occasions, I consider gold to be the essential self-defense asset in the ongoing paper money crisis. Gold is not being used presently by the wider public as a medium of exchange either but its two-thousand-plus year history as global money means that it retains monetary asset status and that its historic function as a liquid and lasting store of value – a function that fiat money cannot fulfil – remains unrivalled. By comparison, the brand-new crypto-currency Bitcoin has to first earn its stripes as a monetary asset by proving itself as a ‘common’ medium of exchange. That is why I view Bitcoin very differently from gold, although the attraction of both has its origin in the demise of entirely elastic, politicized state fiat money. I will certainly continue to follow the Bitcoin revolution with interest and sympathy.
In the meantime, the debasement of paper money continues.
This article was previously published at DetlevSchlichter.com.
The following is a transcript of the “Adam Smith Lecture” I gave at a private gathering in London on 19 February.
For a long time governments have been redistributing peoples’ income and wealth in the name of fairness. They provide for the unemployed, the sick, and the elderly. The state provides. You can depend on the state. The result is nearly everyone in all advanced countries now depends on the state.
Unfortunately citizens are running out of accessible wealth. Having run out of our money, Governments are now themselves insolvent. They started printing money in a misguided attempt to manage our affairs for us and now have to print it just to survive. The final and inevitable outcome will be all major paper currencies will become worthless.
To appreciate the scale of these problems, we must understand the errors in economic and monetary policies. I shall start with economics.
Modern economists retreat into two comfort zones: empirical evidence and mathematics. They claim that because something has happened before, it will happen again. The weakness in this approach is to substitute precedence for the vagaries of human nature. We can never be sure of cause and effect. Human action is after all subjective and therefore inherently unpredictable.
The mathematicians like to think that economics is a physical science and is not a slippery social science. Economics is a branch of human psychology. It is plainly nonsensical to apply maths to human psychology.
The result is that much of the good work done by the classical economists like Adam Smith has been destroyed by modern economics. The classical economists explained the benefits of doing away with tariffs and the guilds. This revelation was instrumental to the industrial revolution. Then along came Marx who persuaded people that economics was a class interest, that free market economists were promoting the interests of the bourgeois businessman to the disadvantage of the worker. That became the justification for communism and socialism. Keynes and those that followed him never properly challenged Marxian fallacies. They were never involved in what became known as the socialist calculation debate.
It is not generally appreciated that Keynes was strongly socialistic. In the concluding remarks to his General Theory, Keynes looks forward to the euthanasia of the rentier (or saver) and that the State will eventually supply the resources for capital investment. He wanted the state to control profits.
Keynes was primarily a mathematician. Keynes was no more an economist than Karl Marx, whose beliefs led to the economic destruction of Russia and China; or John Law, who bankrupted France, with similar fallacies to those of Keynes.
The misconceptions of Keynesianism are so many that the great Austrian economist von Mises said that the only true statement to come out of the neo-British Cambridge school was “in the long run we are all dead”.
Let me define economics for you at the simplest level. We divide our labour. Each one of us is a consumer; an entrepreneur whether for wages or profit; and a saver for the future. We invest savings to improve production. Each of us discharges these three functions in the proportions we choose as individuals, we interact with others doing the same thing. We exchange our goods at mutually agreed prices using money to facilitate the exchange. We use money to keep score, and that money has to be sound for our calculations to mean anything. Together we are society itself, each providing things others want and will pay for.
The state has no role in this process. Instead it is a cost to society, because it takes some of our spending and savings to support itself. The more the state takes the greater the burden. It destroys society’s potential wealth. But it has not stopped there. Socialism forces the vast majority of people to give up saving and rely on the state to provide. Governments everywhere are now encumbered with obligations they cannot possibly discharge.
On the money side our mistakes go back to the Bank Charter Act of 1844.
The Bank Charter Act gave the Bank of England a note-issuing monopoly backed by gold and government debt. It failed to stop other banks issuing bank credit. This led to credit-driven business cycles which were socially destabilising, adding fuel to the various brands of communism and socialism that developed in the late nineteenth century.
Gold backing for the Bank of England’s notes was gradually eroded, starting in the late 1890s, with a number of countries, including Britain, abandoning it altogether in the interwar years. A gold-exchange standard was adopted for central banks at Bretton Woods. And finally President Nixon in August 1971 abandoned gold altogether.
Ever since then, the expansion of money supply has been increasing exponentially. Quantitative easing is now required to keep the pace of printing up, lest interest rates begin to rise.
Monetary policy from the 1920s has been used to manage an increasingly unstable global economy. The irony is that this instability has its origins in the expansion of money and credit itself. The growth of money supply and bank credit has as its counterpart debt. Few are the assets not encumbered with this debt. Asset prices need more money and credit to sustain them. It is a finite process that ended with the credit crunch five years ago.
That is the background. Now I shall look at the situation today, five years on from the credit crunch. There are four interlinked problems that cannot be resolved: the economy, the banks, government finances and population demographics.
The advanced economies have been progressively undermined by government intervention and unsound money. They are taxed and regulated to such a degree that laissez-faire hardly exists anymore.
Government spending typically amounts to 50% of GDP in the advanced economies; sometimes more, sometimes less. For productive businesses it is like running a marathon carrying a bureaucrat on your back who tells you how to run.
The misallocation of economic resources which is the result of decades of increasing government intervention cannot go on indefinitely. Businesses have stopped investing, which is why big business’s cash reserves are so high. Money is no longer being invested in production; it is going into asset bubbles. Dot-coms, residential property, and now on the back of zero interest rates government bonds and equities. These booms have hidden the underlying malaise. There can be no economic recovery. Our bureaucrat-carrying marathon runner is finally collapsing under his burden.
The burden of government is now too great to be sustained.
Banks are geared 25 to 30 times, which is fine if you can grow your way out of problems. That is no longer the case. They are vulnerable to existing but unrecognised bad debts, and now a fall in government bond prices. All that’s needed to trigger a collapse in the banks is absence of economic recovery. If we have a downturn it will be quicker. All that’s needed is a rise in interest rates, to reduce collateral values. All that’s needed is a fall in asset prices.
Then there is the shadow banking system, which the Bank for International Settlements reckoned amounts to over $60 trillion, of which $9 trillion is in the UK. If an investment bank goes under, the shadow banking system could make it virtually impossible to ring-fence the others.
Another area of risk is cross-border exposure. Cross border loans in Europe amount to EUR3.5tr. France is 1.2tr. Italy 700bn. Spain 500bn. These are only the obvious risks. Much of this is cross-border within the eurozone, meaning a default in any of those three is certain to wipe out the European banking system, and then everyone else’s.
For this not to happen requires the central banks to make available unlimited funds in the form of credit and raw money. As Mario Draghi said, whatever it takes. His solution is to print enough fiat currency to save the system.
From the time of the banking crisis, government finances have deteriorated sharply, and their debts rocketed. No country, except some in the Eurozone has managed to cut government spending, and only those which did, did so under extreme financial pressure and because they couldn’t print money. The fact is that everywhere government spending is increasingly mandated into pensions, social services and healthcare, which makes spending cuts extremely difficult.
Until recently it was assumed that economic recovery would generate the taxes to balance the books. That has not happened, nor can it happen. In the Eurozone governments are now taking on average over half of every working man’s income and deploying it unproductively. Take France. Government is 57% of GDP. The population is 66m, of which the employed working population is about 25m, 17m in the productive private sector. The taxes collected on 17m pay for the welfare of 66m. The taxes on 17m pay all government’s finances. The private sector is simply over-burdened and is being strangled.
The interest rates at which governments borrow are entirely artificial, made artificial by their own intervention in the debt markets. They are financing themselves by printing money to buy their own debt. The moment this ends, and it will, money will flow out of bonds, equities and even property priced on the back of low interest rates. The pressure for interest rates to rise will have to be met with yet more money printing, because governments cannot afford to pay higher interest rates, nor can they afford to see private sector asset values fall. Price inflation will create a real crisis, perhaps later this year.
Populations in the US, the UK, Japan and Europe are growing older. This is bad news for government finances. When someone retires, he stops paying income taxes and becomes a cost. High unemployment is also costly, because the unemployed are not funding future liabilities. Professor Kotlikoff of Boston University has calculated that in fiscal 2012 the net present value of the US Government’s future liabilities increased $11 trillion to $212tr. The whole US economy is only $15 trillion. Europe is worse, far worse: Europe has more pensioners as a proportion of the working population, high rates of unemployment and a large government relative to the private sector, which funds it all. The UK, taking these factors into account, is slightly worse off than the US. Japan has worse birth rates and longevity. They sell more nappies for the incontinent than they do for new-borns. The solution already is to issue increasing amounts of unsound currency.
The world’s economic problems have been building for a long time. Economic fallacies have been pursued first by Marx and then by Keynes in the 20th century, and monetary policy first took a wrong turn with the Bank Charter Act of 1844. The progressive replacement of sound money by fiat currency has destroyed economic calculation, and has destroyed private sector wealth. These policies were deliberate. We have now run out of accessible wealth to transfer from private individuals to governments. That is our true condition.
Governments will still seek to save themselves at the continuing expense of their citizens, and in the process destroy what wealth is left.
There can only be one outcome: the bankruptcy of governments. This means that their fiat currencies will inevitably lose all their purchasing power.
How soon? I’m afraid sooner than most people think. Japan is already entering the black hole, with her currency beginning its collapse. The UK is on the precipice and cannot afford further falls in sterling without triggering the rise in inflation that will force a rise in interest rates and a spiral into insolvency. Europe could go at any time. The US is probably the best of a very bad bunch, but even her economy is looking bad.
I do not make these statements because I am gloomy. I make them because I approach economics without emotion and without political bias. I make them because I have considered our true economic and monetary position using as far as I am able sound aprioristic theory applied to our current position.
This transcript was previously published at GoldMoney.com.
On Friday, I spoke against monetary activism once again, complaining about the use of expectation management and new monetary instruments in an attempt to defibrillate the economy. It’s a mistake, not least because a failure to contain inflationary expectations could be catastrophic, as I set out last year. Mark Carney understands the argument that monetary activism will cause a damaging “intertemporal misallocation of capital” but he chooses to believe wise intervention elsewhere can compensate. I am sure this is wrong.
This morning, I rediscovered Mises’ short 1951 essay Inflation Must End in a Slump. The essential characteristics of the real world have not changed since but currency debasement subsequently became much worse. Here’s the article:
This country [the USA], and with it most of the Western world, is presently going through a period of inflation and credit expansion. As the quantity of money in circulation and deposits subject to check increases, there prevails a general tendency for the prices of commodities and services to rise. Business is booming.
Yet such a boom, artificially engineered by monetary and credit expansion, cannot last forever. It must come to an end sooner or later. For paper money and bank deposits are not a proper substitute for non-existing capital goods.
Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.
If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks.
This is, of course, a very difficult task. Governments are in this regard very obstinate. They long for the popularity that booming business conditions seldom fail to win for the party in power. The Unavoidable crash, they think, will appear only later; then the other party will be in power and will have to account to the voters for the evils which their predecessors have sown.
Thus there is no doubt that we shall one day have to face again an economic recession, although it is impossible to determine the date of its outbreak and the degree of its severity. It will be bad indeed. But worse than the crisis itself could prove the psychological and ideological consequences of an erroneous interpretation of its causes.
For the spokesmen of the artificial expansionist policy are busy denying that economic crises are the inevitable effect of the preceding expansionist policy. They are anxious to exonerate the governments. As they see it, inherent shortcomings of the capitalist mode of production cause the periodical recurrence of bad business. There is no other means, they conclude, to avoid a crisis than to put the economic system under the full tutelage of a central planning board.
This is essentially the doctrine of Karl Marx. Those supporting it, those passionately attacking the insight that it is the policy of inflation and credit expansion which produces economic depressions are – sometimes unwittingly – serving the cause of the Communists. When the slump comes, people indoctrinated by their teachings will argue precisely as Stalin expects them to. They will think: The efforts to preserve capitalism have proved vain; capitalism necessarily results in the recurrence of economic catastrophes; if we want stability, we must turn toward Communism.
In the antagonism between the doctrine of the economists who ascribe the emergence of economic crises to the policy of credit expansion and the official doctrine that ascribes them to alleged inherent defects of capitalism there is much more at stake than a merely doctrinal quarrel. The way in which people will react to the – unfortunately hardly avoidable – letdown of business that will follow the end of the present armament boom may decide the fate of our civilization.
People must learn in time what the inevitable consequences are of the monetary and credit policies adopted by the present administration. They must realize that what the collapse of the artificial boom will establish will not be any insufficiency of capitalism, private enterprise, and the market economy, but the failure of the methods of financing public expenditure as practiced by the New Deal and the Fair Deal.
A comprehension of the nature of the boom will also make people more cautious in their business dealings. They will not fall victim to the deception that the boom will go on forever.
This article was previously published at SteveBaker.info.
“Politics, as hopeful men practice it in the world, consists mainly of the delusion that a change in form is a change in substance,” as the incomparable H.L. Mencken observed more than 80 years ago. His observation applies to the United States of today in two ways. On one level, and the level Mencken intended, it reminds us of the fact that any form of government, whether democratic- republican or monarchical, is ultimately oppressive at heart. Every state is, qua state, a central depository of legalized violence, and thus stands in direct and unending opposition to individual freedom. Or, in the words of Ludwig von Mises: Government is essentially the negation of liberty.
But Mencken happened to use the words ‘hopeful’ and ‘change’ in this sentence, and the choice of words brings us quickly to the administration of Barack Obama and his promise – proclaimed particularly noisily for his first term – that his policies would mark a distinct change from the policies of his predecessor, George W. Bush. Assessing the situation now at the start of his second term, there is no escaping the fact that whatever change Obama brought was predominantly in appearances rather than in fundamentals, and that the most worrisome and offensive trend that characterized the Bush administration not only continued under President Obama, it even accelerated.
This trend is the rise of the American leviathan, the rapid expansion of state power and the ubiquitous curtailment of individual rights, whether they are rights to fair and open trial, property rights, or rights to privacy. The trend, everywhere in U.S politics, has been and still is towards big and interventionist government. While the media keep droning on about the apparently insurmountable divisions in US politics, the fact remains that a substantial de-facto consensus exists in Washington when it comes to giving the state more power. The increasingly expansive and expensive warfare-welfare state has been growing under Republican and Democrat presidents alike and is the one project that enjoys vast support across ‘the aisle’. The idea of limited government under the rule of law, historically a defining feature of America’s image of itself, lies dying, critically wounded by Baby Bush and now finished off by Obama. What Americans are destined for is an increasingly unconstrained government largely accountable to nobody but itself.
After 9/11, the Bush-Cheney White House considerably expanded the powers of the executive branch, mainly via the Patriot Act, arguing that the nation was now at war and that specific war-powers had to be granted, among them detention without trial and surveillance without warrants. These enlargements of state authority coupled with the hyper-interventionist economic policy that began after the financial crisis hit in 2007, have fundamentally changed the relationship of the American state with its citizenry.
Under Bush, Americans witnessed the weakening, if not outright suspension, of habeas corpus, the legal requirement that a prisoner be brought in front of a court or judge. This essential safeguard against unlawful detention without evidence has been a cornerstone of English common law for 800 years and of American law since the birth of the nation. Furthermore, Americans saw their country engage in new overseas wars, saw the launch of a new major federal agency, the unapologetically-Orwellian ‘Department of Homeland Security’ which now has a staff of 240,000 and an annual budget of $60 billion. They witnessed the arrival of the $1 trillion dollar federal deficit, the ongoing expansion of the federal payroll, massive bank-bailouts and the nationalization of car companies and home finance, the injection of taxpayer funds into Wall Street, in some cases by force. They witnessed the arrival of zero interest rates and large-scale debt-monetization by the US central bank.
This vast accumulation of state power came with a slogan, the belligerent ‘We will do whatever it takes’. Hardly any proclamation could be more at odds with the American tradition of a strictly limited state, of individual freedom and free markets. Besides, all the grave problems facing America today are the result of politics, of previous policy errors committed by the very same Washington elites that are now robustly demanding more power from the American people ‘to fix this,’ and that want us to believe that ‘the ends justify the means’.
Any hope that Obama would take a different road, or any notion that, as his numerous supporters keep telling themselves, he simply needs more time to fix the mess that Bush left behind, now lies in tatters, destroyed by four years of actions that tell a different story: In the case of habeas corpus, the Obama administration has generously granted itself the wide interpretation of powers that Bush-Cheney had probably implicitly assumed but never spelled out. Since Obama signed the National Defence Authorization Act of 2012, it should be clear to every American that the U.S. military has indeed the right to indefinite detention — or detention until the end of hostilities, but as the War on Terror is as open-ended as ‘quantitative easing’ or the War on Drugs – or, as Doug Casey calls it more accurately, The War on Some Drugs – this means for all practical purposes indefinite detention without trial. Americans must also realize that this includes detention of American citizens on American soil. Additionally, the Obama administration has granted itself extensive freedoms for the surveillance of U.S. citizens. Thus, dear reader, 11 years after 9/11 and with Osama bin Laden dead, the US government keeps giving itself more powers to spy on its citizens, to detain them and interrogate them.
Obama has, of course, continued the overseas wars and maintained the Guantanamo Bay detention and interrogation camp. He ordered the killing of at least one American citizen without trial.
In the field of economic policy we also see nothing but a continuation of the policies of hyper-active interventionism. Zero interest rates and debt-monetization by the US central bank have, of course, continued, and not only have they continued they are now officially declared ‘open-ended’. Continued, too, has the mad Keynesian ‘stimulus’ policy of deficit-spending with Democrat hack, Paul Krugman, formerly known as a Nobel-prize winning economist, shouting, ‘more, more, more’ from the sidelines. Naturally, the $1 trillion budget deficits have also continued|. Indeed, Obama implemented even bigger ‘stimulus’ packages than Bush.
Of course, none of this has ended America’s depression, although short-term statistical growth spurts of barely 2 percent that persistent 8-10-percent deficits may help generate from time to time have allowed bean-counting economic statisticians to proclaim that a recovery was indeed in place. Only a handful of die-hard Keynesians, such as Krugman and Richard Koo, and a few financial writers believe in this absurd policy. Most business people know better, which is why they keep hunkering down. These policies are as likely to end America’s economic malaise as the War on Terror is likely to end terrorism, or the War on Drugs to end drug taking and thus the creation and distribution of drugs.
However, I suspect that the ends are no longer what matters. The means have become ends in themselves. Vast federal bureaucracies obtain resources, power and influence through the pursuit of these policies. These policies will not end because the people who are in charge of them do not want them to end. Their income, their power, their prestige, their careers depend on them.
I do not want to advance conspiracy theories here but if you just imagine, simply as a mental exercise, the existence of a Big-Government-War-Party that operates in the background, you would have to agree that, if such a party existed, it would be the party that had been calling the shots in the United States for the past 11 years and the party still in ascendancy today. Furthermore, it seems that such a party does better in many ways when fronted by a well-spoken cool African-American lawyer from Chicago than a rich, white and angry born-again Christian from Texas, or a white, rich Mormon ex-Wall Streeter. After all, there are many people to whom appearances seem to matter more than substance, not least among them the ‘liberal’ Hollywood crowd.
About 8 or 9 years ago, I was invited to the Baftas awards ceremony in London. For those of you who are not into movies, the Baftas is an awards ceremony as close to the Oscars as Britain got. Filmmakers and actors from Europe and plenty of movie royalty from Hollywood were in attendance, and as the Iraq war had just started, it was fashionable among the glitterati to demonstrate their sorrow, concern and disapproval at every opportunity. Pedro Almodovar treated us to a rendition of his most beloved Spanish poem. I think you get the idea. But all of this self-important indignation has now stopped. Since the Obamassiah has landed and has taken over the war effort, Hollywood has made peace with American militarism. George Clooney is a fan, so is Sarah Jessica Parker. Obama enjoys the support of Jay-Z and Beyonce. In 2010, at a time when Obama had already received the Nobel Peace prize for not being George W. Bush, the Washington Post reported that “Obama has ordered a dramatic increase in the pace of CIA drone-launched missile strikes into Pakistan in an effort to kill al-Qaeda and Taliban members in the ungoverned tribal areas along the Afghan border. There were more such strikes in the first year of Obama’s administration than in the last three years under President George W. Bush, […].” But let us not quibble over such details. For Hollywood, Obama is still our ‘Lord and Savior’, as actor Jamie Foxx proclaimed only last week.
Of course, none of these policies would have changed – in essence – if Romney had won. His supporters may tell themselves that a Romney vote was a vote for liberty and capitalism, as Romney wanted to cut taxes and attack the budget deficit. Yet, Romney promised to not cut military spending (of course not), and also to adopt a hard line on Iran, a potential next step to yet another war. By the same token, Obama supporters might believe that they voted for tolerance and freedom by rejecting Romney’s social conservatism. But I fear that political tribalism prevents most voters from seeing the big-government forest for all the gay-rights and abortion-rights trees.
If you are of a neo-con persuasion, you might want to argue that the militarism of presidents of all political stripes is only proof of the severity of the terrorist menace, that whatever their previous notions and beliefs, once they get into the White House and receive their first CIA briefing they realize how grave the threat really is, that all of us lesser mortals “can’t handle the truth”, and that it is therefore up to the president and his Col. Nathan R. Jessups to do what is needed, and by the way, sod those civil liberties.
Maybe. Maybe not.
One thing is certain: that the executive branch would ever have such vast powers was never part of the original idea of American government, the concept of a limited state, and of the American people living under the rule of laws and not the rule of men. If you want to argue along the lines that the reality of today’s world requires extensive government privileges, you have to argue that America’s political principles and founding ideas are now outdated and that they should be openly discarded. I am not convinced that this is necessary but this is certainly what is happening.
But then ask yourself, if you really believe that everlasting peace requires everlasting war, and that prosperity comes from printing money and accumulating debt, and that individual freedom has to be curtailed to be protected.
But maybe there is another explanation:
The military-industrial complex
When I grew up in Germany and became politically aware in the late 70s, I always thought that the term ‘military-industrial complex’ was an invention of the Left, mainly used to tar capitalist enterprise with the brush of warmongering and war-profiteering. I was surprised to learn that the phrase had been coined and most effectively used by an American president, Dwight D. Eisenhower, who was a Republican, a West Point graduate and a general. Eisenhower was no Lefty and he wasn’t a small-state libertarian conservative either, having opposed the isolationism of Taft and then, as president, expanding social security and the interstate highway system. Yet, when he left office, he warned his fellow Americans in a televised farewell address of the rise of what he termed the military-industrial complex, the sizable military infrastructure that the wars of the 20th century had bestowed on American society, consisting of the military itself and the sprawling defence industry. You can see excerpts of his speech on YouTube. Here is one quote:
“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”
The recent 18-month, $6 billion mega-version of American Idol, also known as the U.S. presidential election, had to do without a general, as it pitched the Community-Organizer-in-Chief against the slick ex-private-equity millionaire. Yet, notably, the military didn’t have to fear anything from either candidate. At this stage, the US military is all but untouchable, and I suspect that a majority of Americans are in sympathy with this. One can easily envision that as America continues to decline economically, the US public will embrace the military even more, as one last glorious reminder of the nation’s former vitality and global superiority. There is a ready analogy in Britain: Although nothing provides better short-hand for the type of hopelessly statist policies that killed British industry in the decades after the Second World War than the country’s socialist National Health Service, born in 1948 out of the then widespread belief that anything can be solved by the victorious British state organizing it centrally, the NHS is to this day the one institution that stirs national pride in the hearts of Britons, even those belonging to a younger generation. It has become an unmovable part of the British political landscape, and any reform-minded Prime Minister will attack it at his peril. The US military and the NHS are not just symptoms of their respective country’s maladies, they are among the causes, yet have moved beyond the reproach of serious political debate.
Speaking of socialist health services, the beginning nationalization of health care in America under Obama fits rather seamlessly into the overall picture of an increasingly assertive, hyperactive federal government that gets involved in every part of its citizens’ lives. It is simply another addition to the welfare-warfare-big-state project and not the ‘progressive’ policy outlier and symbol of a more caring and empathic government that Obamacare supporters want to see in it. This is naïve but maybe not as naïve as the hope that this project will make health care cheaper for the public. Nothing ever got cheaper by having the federal bureaucracy take control of it.
As part of Obamacare the state now boldly assumes the power to force citizens into commercial transactions, the purchases of health insurance, under a rather generous interpretation of the constitution that was recently approved by the Supreme Court. And while the government forces Americans to enter some contracts it also appropriates to itself the power to arbitrarily rip up others. When Obama bailed out Chrysler he simply tossed aside the legal rights of a group of bondholders that – entirely legally and perfectly justifiably – wanted to enact bankruptcy proceedings to protect their investments. Rather than protecting private property and securing legally binding contracts, as is one of the acknowledged primary tasks of any civil government, Obama chose to break contracts and to take money from bondholders to give it to the auto workers union. Political expediency and the wishes of the executive branch of government now trump the sanctity of private contracts in America.
What is coming
Wars, extensive surveillance, bailouts, ‘stimulus’, nationalized health care – all of this costs money, and the American state increasingly sees its citizenry as cash cows. The signs are everywhere. The US is the only country I know that has worldwide taxation for all its citizens. As long as you are a US citizen you have to file a US tax return, even if you live abroad and have not set foot in the country for years or decades. It remains your obligation to keep abreast of all changes to the tax code and those changes are numerous. As of recently, Americans have to report all foreign bank accounts – even if they are not income-generating – to the Internal Revenue Service, the powerful US tax authority. But it doesn’t stop there. As of next year, the infamous Foreign Account Tax Compliance Act (FATCA) will come into effect, which requires any bank anywhere in the world that invests in US securities or conducts business in the US to collect data on American customers overseas and pass this on to the IRS.
Doug Casey made an excellent observation: If you want to get an idea of what our future society will look like you can easily do so by visiting your nearest airport. The modern airport is the model-village of our society, the Orwellian theme park that gives you a glimpse into what will take shape in society at large in coming years, not only in the US, of course, but also in the EUSSR and elsewhere. It is a controlled environment, pleasingly temperate with lots of opportunities for harmless and pointless consumption but where you are under constant surveillance, where your every move is being monitored and recorded forever, increasingly with the use of face-recognition technology, where you will occasionally be searched, where you can’t smoke, and where the calming background music is frequently interrupted by loudspeaker messages that remind you to stay alert and to report any suspicious behaviour to the authorities.
So far, the public is happy to go along with this. I am frequently amazed by the sheepish obedience on display at airports where long lines of travellers stand quietly and patiently, taking off their shoes, calmly observing security personnel rummaging through their luggage, carefully making the prescribed moves in the new scanners as if they are about to enter a nuclear plant. If you see movies of the 1970s or 1980s, or even 1990s, with scenes at airports in them, you will find that they give you an impression of almost frivolous free-spiritedness by comparison. These procedures could not have been introduced in one big swoop. The public would have objected. They had to be introduced piecemeal, one new regulation and procedure at a time.
The same procedure applies to tax surveillance and capital controls. The screws will be tightened slowly so that the public gets used to ever tighter monitoring and ever closer controls. And fear remains an important factor. Large sections of the public believe that their prosperity and their economic future are at risk from unregulated bankers and tax-cheating millionaires who do not pay ‘their fair share’, and they believe that their very lives are constantly at risk from terrorist attacks. They see the government as their guardian and as the necessary regulator, and being under the democratic delusion that as voters they ultimately remain in control of the government, they are happy to sign their freedoms away. As Frank Karsten and Karel Beckman astutely observed, voting is the illusion of influence in exchange for the loss of freedom.
Maybe this statist nightmare will end at some point. Maybe Americans will rediscover their tradition of independence, self-reliance and personal freedom, and of suspicion of any form of state authority. Germany does not have a great sense of personal freedom in its national DNA. Britain has, and America even more so. Maybe recent developments will one day look in retrospect as strange as the prohibition era or the confiscation of private gold in 1933 and the suppression of gold ownership until 1974 do today: blots on the CV of a nation that sees itself as the land of the free. Maybe. But for the foreseeable future I remain pessimistic. For our generation the American Dream may be dead.
This article was previously published at DetlevSchlichter.com.