Mises on the Human and Financial Disaster that Was World War I

By Claudio Restani

Ludwig von Mises had several experiences throughout his life, counted among them when he was drafted and served as an Austro-Hungarian officer in the First World War. Initially, he served as an artillery officer on the Eastern Front, then, for a short time, he was called to Vienna to work in Department 13 (relating to military economy) of the Ministry of War of the Empire of Austria and Hungary.

In Notes and Recollections, in the chapter devoted to the 1914-1918 conflict, Mises mentions a course organized by the Army Supreme Command in the summer of 1918 where officers were invited to give a lecture to their subordinates. He participated with this short writing entitled Über Kriegskostendeckung und Kriegsanleihen (which can be translated as War costs and war loans) where he addresses the economic stability of the empire, attacks the inflationary tendencies of printing money, and seeks a sustainable way to deal economically with the conflict.

Über Kriegskostendeckung und Kriegsanleihen was immediately published in Vienna. Despite this, it is a rare document, never published in English, but which I managed to find in the form of page scans from an original text published online by mises.de. (This is the link for those interested in the original German version). Here I want to present an analysis with parts of the original text translated by me.

The paper begins with several general considerations on the war—how it is being carried out, the conditions of the army, and the theme of how the war is financed. Mises writes: 

There are three ways available to the State Treasury to procure the means to pay the expenses of the war.

The first way is to confiscate the requested goods without compensation… The second way is to introduce new taxes and increase the amount of taxes already in force…

The third way presented is the one of war bonds, on which Mises develops a long digression where he states that those are preferable because they require individuals who freely chose to buy bonds and avoid war expenses being remedied by inflationary methods. The explanation concludes by stating that the real problem is inflation. Here Mises attacks the system of printing money to repay the debt and exposes the consequences:

In the course of the war, all the leading states were forced to cover part of the costs of the war by taking out loans with the central bank. Taking out such loans is a very questionable instrument of credit policy. Because the central bank can only obtain the sums it needs by printing banknotes. The increase in the number of banknotes in circulation, however, reduces the purchasing power of the monetary unit. Prices are rising. The devaluation of money leads to very significant changes in income and wealth. It is not a rare task to have to deal with these problems.

Inflation is something tragic that harms all citizens, especially the poorest. Mises is correct in the statement below, in which he compares the damage of inflation to the defeat in war, which will inevitably affect all citizens. At this point, there is only one option left if we want to avoid the carnage of printing money in order to finance the war: citizens must—freely and without coercion—buy war bonds to save the country and themselves from military defeat and inflationary defeat at the same time:

Who subscribes to war bonds fight the increase in banknotes and therefore also the devaluation of the currency; and by fighting it he secures not only his patrimony, in so far as they are invested in war bonds and other government bonds, but at the same time also those parts of his patrimony which are invested in other debt instruments.

Here Mises also does an important historical-economic work: he emphasizes how the tendency of the Austro-Hungarian government not to go too far with the printing of money and to not raise taxes—instead promoting war bonds—saved the country from collapse. He pointed out how the opposite behavior was the main cause of the collapse of Russia (which had just become Soviet) during the Great War:

Not only was the collapse avoided, but thanks to a system that was more respectful of freedom—avoiding taxes, expropriations, and money printing—in the summer of 1918 Austria-Hungary had managed to obtain a relatively positive economic balance for a country at war. Austria-Hungary was certainly better than the one of countries such as Russia that had had an opposite economic attitude.

In the light of this analysis of Über Kriegskostendeckung und Kriegsanleihen we can see how the then-Lieutenant Ludwig von Mises emphasized the tragedy of the war and sought a cost-effective solution to manage the war economy. Once again, the most advantageous path is the one that follows freedom, even if limited by the constraints that conflicts entail.

This paper is undoubtedly unique because it is devoted exclusively to military economics, and I think that this peculiar aspect of Mises’s brilliant intellectual work deserves also to be highlighted.

Source: https://mises.org/mises-wire/mises-human-and-financial-disaster-was-world-war-i

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