Mises the Man and His Monetary Policy Ideas Based on His “Lost Papers”

First Published: 2018-04-01

by Richard Ebeling

One day in 1927 Austrian economist, Ludwig von Mises, stood at the window of his office at the Vienna Chamber of Commerce, and looked out over the Ringstrasse (the main grand boulevard that encircles the center of Vienna). He said to his young friend and former student, Fritz Machlup, “Maybe grass will grow there, because our civilization will end.” He also wondered what would become of many of the Austrian School economists in Austria. He suggested to Machlup that, clearly, they would have to immigrate, perhaps, to Argentina, where they might find work in a Buenos Aires nightclub. Friedrich A. Hayek could be employed as the headwaiter, Mises said, while Machlup, no doubt, would be the nightclub’s resident gigolo. But what about Mises? He would have to look for work as the doorman, for what else, Mises asked, would he be qualified to do?

It is worth recalling that in the mid-1920s, Mises had warned of the rise of “national socialism” in Germany, with many Germans, he said, “setting their hopes on the coming of the ‘strong man’ – the tyrant who will think for them and care for them.” He also predicted that if a national socialist regime did come to power in Germany and was determined to reassert German dominance over Europe, it would likely have only one important ally with whom to initially conspire in this new struggle – Soviet Russia. Thus, years before Adolph Hitler came to power, Mises anticipated the Nazi-Soviet Pact to divide up Eastern Europe that set in motion the start of the Second World War in 1939.

Ten years after Mises’s playful 1927 prediction to Fritz Machlup, reality was not that far from what he said. By 1938, many of the Austrian economists had, indeed, emigrated and left their native country. To name just a few, Paul Rosenstein-Rodan, who had written a comprehensive exposition of the theory of marginal utility in 1927, moved to Great Britain in 1930. In the autumn of 1931, Hayek, who was the director of the Austrian Institute for Business Cycle Research, took up a visiting position at the London School of Economics, which became a permanent one after 1933.

Gottfried Haberler, who also worked at the Chamber of Commerce, accepted a two-year research position at the League of Nations in Geneva, Switzerland in early 1934, and then immigrated to the United States in 1936 with a professorship at Harvard University. Fritz Machlup, who ran a family-owned corrugated box business in Austria, went to the United States in 1934 on a research tour of American universities and stayed in the U.S. after landing a teaching position at the University of Buffalo.

Oskar Morgenstern, who replaced Hayek as director of the business cycle institute in 1931, found himself exiled in America while on a lecture tour at the time of the German invasion of Austria in March 1938, and stayed on at Princeton University. And the noted Austrian School-trained sociologist, Alfred Schutz, who was employed as a lawyer in Vienna, made his way to Paris in 1938, followed by a move to America in 1939 and a part-time teaching position at the New School for Social Research in New York City.

Ludwig von Mises and the End of the Austrian School

What of Ludwig von Mises? He had graduated from the University of Vienna with a doctoral degree in 1906. However, university positions in Austria were few and far between, both before and after the First World War. And Mises had to earn a living. So, beginning in 1909, he was employed with the Vienna Chamber of Commerce, Crafts and Industry, and served as a senior policy analyst with the Chamber in the years between the two World Wars.

His close friends, like Hayek, were amazed by his intellectual energy and prolific output of both theoretical and economic policy writings, which won him international recognition and renown, while also performing his time consuming duties and responsibilities at the Chamber of Commerce in the 1920s and early 1930s, duties concerning regulatory and fiscal matters constantly coming before the Austrian Parliament and the bureaucratic agencies of the government. Hayek and the others wondered how long Mises could keep up this pace, seeming to be burning the candle at both ends.

After all, these were the years during which he wrote Nation, State, and Economy (1919), Socialism: An Economic and Sociological Analysis (1922), a revised edition of his 1912 treatise, The Theory of Money and Credit (1924), his summary restatement of the case for classical Liberalism (1927), a monograph on Monetary Stabilization and Cyclical Policy (1928), and his collection of essays devoted to a Critique of Interventionism (1929). This was followed in 1933 with a volume of his methodological writings on the Epistemological Problems of Economics.

Then in March 1934, William E. Rappard, the co-founder and director of the Graduate Institute of International Studies in Geneva, Switzerland offered Mises a visiting position in International Economic Relations, a position that Mises readily accepted and which he took up in the autumn of 1934, while still formally retaining his ties with the Vienna Chamber of Commerce on a partial leave-of-absence. But, as it turned out, Mises’s position at the Graduate Institute was annually renewed and he remained in Geneva until July 1940, when he and his wife, Margit, immigrated to the United States in the shadow of the German occupation of neighboring France.

Mises had jumped at the chance to escape the tiring and mind-numbing responsibilities at the Chamber of Commerce that concerned the daily twists and turns of Austrian government policy on every economic issue under the sun. As Mises expressed it in his Memories: “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 [at the Graduate Institute in Geneva], I could devote myself completely and almost exclusively to scientific problems.”

In the first edition of Human Action, Mises explained, “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,” his 1940 German-language treatise, Nationalökonomie, which was the forerunner of Human Action.

It is not an exaggeration to say that with the German invasion of Austria in March of 1938 and the country’s formal annexation into Nazi Germany shortly after that, the Austrian School of Economics, for all intents and purposes, died in the country of its birth. Mises’s prevision of the fate of his native Austria and the need for most of the Austrian economists to scatter themselves to the four winds virtually came true. In the rubble and ruins of war-ravaged Vienna in 1945, grass did seem to grow, with the city’s earlier fame for a unique and civilized culture of art, music, science, literature and learning a thing of the past. And most of the Austrian economists, especially those in Mises’s circle during the interwar years, had departed their homeland in the face of the darkening clouds of Nazi barbarism over Central Europe, never to permanently return.

The Nazi Plundering of Mises’s “Lost Papers”

Fortunately, for the future of the Austrian School of Economics, Mises was not in Vienna when the German Army invaded Austria on March 12, 1938. He was safe in Geneva. On March 15th, Adolph Hitler triumphantly entered the Austrian capital, and in the center of Vienna proclaimed before a cheering crowd of an estimated two hundred thousand Viennese that their country was being united with the German fatherland.

Within days, tens of thousands of people were arrested for being actual or suspected enemies of the Nazi regime. Austrian Jews, in particular, were harassed, humiliated and brutally beaten up or murdered on the streets of Vienna. Within months, as well, the “Aryanization” of Austrian businesses and enterprises was rapidly being accomplished, with especially Jewish properties vandalized and confiscated.

No doubt, if Mises had been in Vienna eighty years ago this month, at the time of the arrival of the Nazi and Gestapo thugs, he would have been among those arrested, tortured and killed, either from beatings or with a bullet to the back of the head; or if not then, then in the gas chambers later used by the Nazis in their drive for a “Jew free,” German-dominated Europe. Among his persecutors and tormentors most assuredly would have been some of his own colleagues at the Vienna Chamber of Commerce. Mises’s former assistant at the Chamber, Therese Wolf-Thieberger, later reported that the day after Hitler arrived in the city, employees at the Chamber were greeting each other with “Heil Hitler,” and with several of them turning out already to be Nazi Party members.

But if the Nazis could not get their hands on Ludwig von Mises, they could at least deprive him of that which was among the things most precious to him: his books and his personal and professional papers and correspondence. Shortly after the German invasion the Gestapo went to the Vienna apartment in which Mises had lived since 1911 with his mother before his departure for Geneva in 1934 and her death in 1937. After his mother’s passing he had returned the apartment to the landlord and sublet what been his room from the new tenants.

The Gestapo agents broke into the room, hauled away the portion of his library he had not taken to Geneva with him, and boxed up his personal and family papers and documents, his correspondence with family, colleagues and friends, the copies of his scholarly and popular articles on economic theory and policy, and the memoranda and position papers and speeches he prepared for internal use at the Vienna Chamber of Commerce during his quarter of a century of working at that institution. Also among his looted papers were materials relating to his part-time teaching at the University of Vienna, and his famous private seminar that he ran on a regular basis for many years in his Chamber of Commerce offices with a selected group of Viennese scholars and invited guests from around the world.

About a year after the Nazis had carted away all of these and other family items, Mises sent out a letter of “Information” to friends and associates in Europe telling them what the Gestapo had done. He also explained that people in Vienna who interceded on his behalf with the Nazi authorities in an attempt to get his property back were told that the Gestapo had no idea what had happened to it all.

In 1977, I had the good fortune to meet Margit von Mises through Murray and Joey Rothbard. I had written a review of Margit’s book, My Years with Ludwig von Mises, which Murray had published his old publication, Libertarian Forum. Margit liked my review and asked the Rothbard’s to introduce her to me. We met at Murray and Joey’s Manhattan apartment, and I still remember that Joey prepared a delightful quiche for lunch.

For next seven years, while I was living in New York City most of the time, Margit would invite me over once or twice a month for tea and tasty little sandwiches that she would prepare at the apartment at 777 West End Avenue where she and Ludwig had lived since shortly after their arrival in America during the war.

Mises’s “Lost Papers” in Soviet Hands, And Their Rediscovery

Anyone interested in Mises and the Austrian School had heard some version of the story about how the Gestapo had plundered Mises’s papers. Margit told me that for the rest of his life, Mises believed that either the Nazis had destroyed it all or that they were perhaps lost in the destruction of the war.

In fact, however, Mises’s “lost papers” had survived the war. They had been transported to a small town in the Czech region of Bohemia and stored with all the many other looted collections of personal and official papers and documents seized by the Nazis as the German Army conquered one country after another during the war.

It all fell into the hands of the Soviet Army as the war was drawing to a close in May of 1945. After the Soviet secret police did a cursory examination of the literally millions of pages of documents that the Nazis had plundered from one end of Europe to another, they informed Stalin what had landed into their hands. The Soviet dictator ordered everything to be brought back to the Soviet Union, and a secret archival building was constructed in Moscow under Stalin’s orders to house all this booty. There it remained, and among it all were those papers of Ludwig von Mises. During the postwar decades until the end of the Soviet Union in 1991, only employees of the KGB and the Soviet foreign ministry had access to anything in this vast collection.

In a separate story all its own, how in 1996, my wife, Anna, and I found out the about the location of these “lost papers” of Ludwig von Mises in Moscow. We travelled to Russia in October of 1996 and spent ten days in that formerly secret archive carefully looking through and arranging for the photocopying of almost everything out of the nearly 10,000 pages of material from Mises’s papers. I must emphasize that all this would have been impossible at the time if not for my wife, Anna, and her friends in Moscow, who helped arrange our visa invitations for us to go to Russia, and for their intercession on our behalf to facilitate our access to and use of that archive.

Shortly after our return to Hillsdale College, where I was then teaching as the Ludwig von Mises Professor of Economics, Liberty Fund of Indianapolis heard of our find, and asked me to serve as the editor and translation coordinator of a large selection of these papers to be published by them. Over the next several years, three volumes appeared under the general title, Selected Writings of Ludwig von Mises. Combined, the three printed volumes offer 1,000 additional pages of essays, articles and policy memoranda written by Mises from before the First World War to the 1940s. A huge addition, if I may say, to our understanding and appreciation of Ludwig von Mises as both economic and social theorist, and as an active policy analyst and proponent on a wide variety of economic issues, especially during those historically momentous years between the two World Wars.

Mises’s Principled Consistency on Economics and Public Policy

What can be learned about “Mises the Man” from these “lost papers”? What do they tell us about how he thought, the policy perspective from which he confronted the economic issues facing the Austria of his time, and how he saw the application of Austrian Economics to public policy, to which he, himself, contributed so much during those same years that he had to work as a policy analyst at the Vienna Chamber of Commerce?

What especially stands out is what a consistent a worldview he had formed in his mind from a relatively young age. Mises tells us in his Memories that it was around Christmas time in 1903, when he was 22 years old, that he read Carl Menger’s Principles of Economics for the first time and that this made him a economist. This is not surprising, since all of the core concepts that have marked off the Austrian School from other schools of economic thought were all clearly outlined in Menger’s work: methodological individualism, methodological subjectivism, the inescapability of time and uncertainty in all human action, the market has a coordinating process of prices and human plans, and the spontaneous order of social institutions such as the emergence and evolution of money.

The other great influence on Mises while he was in his 20s were the writings and the personality of Eugen von Böhm-Bawerk, who returned to teaching at the University of Vienna in 1905 after serving as finance minister of the Austro-Hungarian Empire. From his Memories and his 1924 commemorative essay, marking ten years since Böhm-Bawerk’s death, it is clear to see the impact Böhm-Bawerk left on Mises, both as a scholar and as a human being. Böhm-Bawerk’s principled stance on fiscal matters during his years as finance minister, including his disagreeing with Emperor Franz-Joseph in cabinet meetings over government spending, and his stepping down from that high office rather than look the other way at corruption in the military budget, must have left a strong impression on Mises. This was, no doubt, reinforced by the generous and serious attention that Böhm-Bawerk gave in his university seminar to Mises’s Theory of Money and Credit shortly after it appeared in 1912.

Again, Mises tells us in his Memories that it was his student researches and investigations into the housing policies of the Austrian government, especially the socially undesirable effects of public housing and the impact of tax disincentives on the building of private-sector housing, that began to make him aware of the negative consequences arising from various forms of government intervention. This, combined with his obvious intense reading of the classical economists and their critique of government controls and regulations over both domestic and international trade, was leading him to the laissez-faire policy views of which he became, no doubt, the most consistent and well-known proponent in the Europe of between the World Wars.

But Mises also had come to understand that historical or contemporary “facts” were of no use by themselves to determine the why or the how of the workings of markets or the failures of government intervention. Economic understanding could only successfully emerge and assist in making informed analyses and decisions based on a properly grounded foundation in economic theory, an economic theory, as Carl Menger had enlightened him, started with the logic of individual human action and then was extended to the social arena of many individuals interacting in various institutional settings.

Mises’s Memories, written shortly after arriving in the United States in 1940, often convey a tone of despair and despondency about an Austria that he clearly loved and deeply cared about that now seemed to be gone. Looking back over his more than a quarter of a century of policy work at the Vienna Chamber of Commerce, at one point he said:

Occasionally I entertained the hope that my writings would bear practical fruit and show the way for policy . . . I have to come 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.

But Mises also insisted that as far has he was concerned, he had no regrets in fighting for freedom-oriented economic policies during all those years. “I could not act otherwise,” he said. “I fought because I could do no other.”

Mises’s Three Horizons of Economic Policy Analysis

I would like to suggest that when having to deal with the various issues with which he was confronted at the Vienna Chamber of Commerce, Ludwig von Mises seemed to have thought in the context of three policy horizons. He nowhere articulates it in this fashion, but I believe that interpretively his writings can be understood in this way.

The first, and the more distant, horizon concerned the most optimal institutional and policy arrangements in society for fostering the classical liberal ideal of freedom and free market prosperity, on the basis of the knowledge that he thought sound economic theory provided. These are found in the books and monographs that he wrote outside of his duties at the Chamber of Commerce; if you will, as the independent, free agent who could offer his most professional views as an economist and as a proponent of classical liberalism. This is reflected in the fact that in all such articles and on the title pages on his books, if an affiliation is given it is as a professor at the University of Vienna, not his status as a policy analyst at the Chamber.

The second horizon was closer to the actual circumstances of the present, but focused on the intermediate goals that could lead in the direction of that more distant, optimal horizon, for example, the need for ending paper money inflation and reestablishing a gold-based monetary system for general economic stability, without which the market order and economic calculation cannot properly function; or the need to shift Austrian fiscal policy in a direction that would reduce the burden and incidence of the tax structure to end the danger of capital consumption, and instead foster private-sector investment and capital formation for general economic betterment for all in society.

And the third horizon in the context of which Mises analyzed and proposed economic policies, was the actual current situation and the immediate future. In other words, how you design the concrete bylaws and rules for a central bank to prevent it from following an inflationary monetary policy, including the transition to and implementation of specie (i.e., gold) redemption; and what policy tools it should then use to maintain the foreign exchange rate and currency convertibility.

Mises’s Proposal for Privately Supplied Money vs. Hyperinflation

There are several economic policy contexts from Mises’s time working at the Chamber of Commerce that might be used to illustrate this. But given the time available, let me offer a few examples of how I see Mises’s mind at work in the arena of monetary policy in the years following the First World War. The hope that many had in Austria of negotiated peace that would have enabled some form of a return to political and economic normalcy at the end of the First World War was shattered with the signing of the armistice on November 11, 1918, and which was followed by the political disintegration of the Austro-Hungarian Empire, and an emerging economic chaos in the early months of 1919 in the new, much smaller Republic of German-Austria, was it was at first called.

The Democratic Socialist and the Christian Socialist parties formed a coalition government following the end to the Habsburg Monarchy.  They soon embarked on costly social welfare programs, introducing food subsidies for municipal populations, especially in Vienna, and resorting to the monetary printing press to fund the growing budget deficit to pay for it all. The new Austrian Republic was threatened with revolution, civil war, and an increasingly worse price inflation.

Mises returned to his duties at the Vienna Chamber of Commerce very shortly after the war ended. In May 1919 Mises prepared a confidential memorandum for Austrian businessmen and bankers affiliated with the Chamber, “On the Actions to Be Undertaken in the Face of Progressive Currency Depreciation.”

He said that 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:

It is up to us citizens to try to do on our own what the government is failing to do for us. All we can hope from the government is that it will not stymie the endeavors of its private citizens. In their own interest and in the interest of the community, the banks as well as large industrial and commercial enterprises must take the necessary preparatory steps to avert the catastrophic consequences that will follow from the collapse of the currency.

Mises then outlined 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 us for material survival.

This only would be necessary, Mises went on, 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. Said Mises:

As soon as government interference in the monetary system is eliminated by the collapse of the currency, free market forces will automatically come into play that will supply the economy with the exact amount of money it needs. Sales to other countries will build up at that moment, and will attract the requisite money into the country.

The Need to End Disastrous Foreign Exchange Controls

He also told a meeting of Vienna Chamber members a few months later that the monetary and business circumstance was made intolerably worse due to the Austrian government’s implementation of foreign exchange controls that required all foreign currency export earnings by Austrian businesses to be sold at a below-market rate of exchange to the central bank. Every Austrian importer of foreign manufacturing inputs and consumer goods then had to apply for special permissions to receive an allocation of foreign currency to pay for their required imports.

Mises was adamant that foreign exchange controls had to be ended immediately. “Modern-day commerce cannot be made to function on the basis of every business transaction being dependent on the arbitrarily applicable rules of government agencies. The businessman has to know what he may or may not do . . . Commerce requires a more solid and reliable legal basis; it does not want to depend on the arbitrariness of officialdom.”

As Mises explained at a later occasion, “The agents of the National Bank responsible for forming authoritative judgements about various trade-policy problems appear to be totally incompetent, whether due to their educational background or their lack of prior experience. Yet these people, who most certainly cannot be considered qualified experts, have the discretionary power to decide finally whether particular export firms will be ‘favored’ with permission” to have access to hard currency exchange without which they cannot operate their businesses and pay salaries to their employees.

The only answer was an end to the government controls, Mises insisted in one of the leading Viennese newspapers in December 1919. “The foreign exchange agency must be suspended, and a real and proper stock market for futures transactions, as well as cash transactions and transactions in foreign currency and foreign exchange must be reintroduced.”

Price Indexation as a Temporary Bridge to Ending Inflation

Unfortunately, neither the controls nor the inflation were ended. As 1919 became 1920, 1921, 1922 and, then, 1923, the depreciation of the Austrian currency accelerated more and more due to hyperinflation rates of monetary expansion to feed the government’s budget deficits. In 1919, alone, the Austrian currency increased from 831 million to 12.1 billion. At the end of 1920, it had grown to 30.6 billion; at the end of 1921 this had expanded to 174. Billion. By December 1922 it stood at 4 trillion, and at the end of 1923 it had ballooned to over 7 trillion. At the beginning of 1919 one U.S. dollar bought 16.1 Austrian crowns; in 1923, that same American dollar traded for 70,800 crowns. Measured by a cost of living index, a basket of goods that could be purchased in Vienna for a little over 28 Austrian crowns in January of 1919, cost almost 12,000 crowns in 1923.

The Austrian economy was facing disaster and collapse. Rational economic calculation had become albeit impossible due to the rapid and erratic and non-neutral manner in which prices for both inputs and outputs were rising in the early 1920s in Austria. Real wages for many segments of the middle and working classes in the country were falling, lagging far behind the increasing cost of living. Social unrest and street violence were constant threats. Viennese man and women would trek out to the neighboring Vienna Woods to cut down the famed trees to have fuel to heat their homes in the city. Hundreds of sickly and starving children were seen everyday in the doorways of leading Vienna hotels begging for food and money. The Austrian provinces were in open rebellion against the central government in Vienna, and set up provincial border controls to prevent the export of scarce food from their own regions to Vienna and other cities in the country.

As the situation worsened, Mises put together a proposal on behalf of the Vienna Chamber of Commerce in August 1922 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 government’s budget 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 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.”

Mises Economic Program for Austrian Prosperity

In February 1921, at the request of an Austrian politician, Mises published 15-point comprehensive, “Economics Policy Program for Austria.” The first order of business, he said, 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. “I scarcely believe that there is a party in the country today that would be inclined to carry out this program. Nevertheless, I hope that that which is sensible and necessary will prevail.

What brought Austria back from the precipice was the appointment of Monsignor Ignaz Seipel as Chancellor of Austria in May 1922. In his Memories, Mises described his interactions with “this noble priest whose worldview and conception of life remained alien to me,” but whom Mises considered “a great personality.” Seipel’s “ignorance in economic affairs was that which only a cleric could have,” Mises said. “He saw inflation as an evil, but otherwise was rather unacquainted with financial policy.” Mises explained to the Monsignor that following the end of the inflation there would come an unavoidable “stabilization crisis” that no doubt would be blamed on Seipel’s Christian Socialist Party, with the inevitable short-run negative effects for his party. The Chancellor replied that a policy that was necessary had to be undertaken even if it injured his party’s standing. “There were not many politicians in Austria who thought that way,” Mises declared.

Seipel did bear severe criticism, both from outside and inside his Christian Socialist Party, for following this economic policy. The Social Democrats ridiculed his “conversion” to “Manchester liberalism,” with an underlying anti-Semitic tone by suggesting a Jewish element at work behind him – in other words, advisors such as Ludwig von Mises. His own Christian Socialists accused him of moving from a socialist course to “a consciously and deliberately capitalistic” one. In reply, Seipel said, “A people does not just perish, however, desperate its economic situation.” “Spend less and save more” was the remedy for Austria’s economic ills, Seipel told the citizens of the country.

Mises’s Warnings of Capital Consumption from Tax Burdens on Business

Thus, ended Austria’s immediate postwar monetary and fiscal madness. Under supervision of the League of Nations in Geneva, Austria’s finances were gotten back in order. Government spending was slashed, with an end to the government’s costly and disastrous food subsidies and with over 70,000 government employees let go. The Austrian central bank was reconstituted with a gold-exchange standard, and with new bylaws (partly written by Ludwig von Mises) that attempted to restrain any future monetary madness by the central bank authorities.

Of course, this respite from monetary and fiscal irresponsibility was short lived. Once the League of Nations’ supervisorial role was ended in the mid-1920s, budget deficits returned due to the losses suffered in government-mismanaged sectors of Austrian economy, whose expenses had to be covered out of general tax revenues. Business and other taxes were raised in an attempt to cover these losses.

But as Mises showed in a study he co-authored in 1930, rising labor costs and increasing tax burdens had resulted in actual capital consumption in some private manufacturing sectors of the Austrian economy. And, then, these economic problems were all exacerbated by the arrival of the Great Depression of the 1930s.

But as we saw, in the second half of 1934, Mises was able to escape from having to fight unending rearguard actions against economic policies leading Austria to economic disaster, which finally culminated in an outside force – Hitler’s invasion and annexation of Austria – determining the country’s fate in a wholly different way.

Seeing Mises’s Three Horizons of Economic Policy at Work

How might we see Mises’s three-horizon policy perspective at work in these events that I have suggested was the implicit context in which he seemed to think about and analyze economic problems? His writings on monetary theory both before and after the First World War had led him to consider that only a functioning gold standard under which monetary expansion was restrained by specie redemption by a central bank could assure a general economic and business environment not plagued by inflations that generated the ups and downs of the business cycle, and that did not disrupt the capacity for rational economic calculation.  The wider social institutional setting required respect for property rights, and free and unregulated market-based prices not only for domestic commerce, but also in international trade and in the foreign exchange market.

But more immediate steps to stop the possibility of more imminent threats, we saw, might require using such devices as wage and price indexation to moderate the damaging effects arising from the non-neutrality of money in a worsening inflation. Not that Mises considered such methods of price and wage indexation to be a panacea for solving the problems caused by serious monetary expansions, especially since in other writings in the 1920s he made a point of emphasizing the inherent limits and possible abuses in all attempts to measure changes in “the price level” and the purchasing power of the monetary unit for policy purposes. But extreme circumstances may require the use of imperfect policy tools to reduce some of the more egregious effects of a hyperinflation that was threatening even more serious economic chaos.

The same was reflected in Mises’s proposal to members of the business and financial communities in 1919 that they might be called upon to organize the provision of a substitute currency through their international trading arrangements in the face of a possible monetary collapse due to the government fiscal irresponsibility and hyperinflation.

Such policies and actions might have to be the expedients to prevent a full destruction of the market economy. They were the more immediate means to a more distant end: ending inflation so that institutional reforms could be introduced so such monetary debasement would be more difficult to introduce in the future. Thus, the importance of restricting the monetary discretion of a restructured Austrian Central Bank by requiring the issuance of any bank notes and other forms of media of exchange to be backed by gold and some form of specie payment.

By the time Austria’s postwar episode with monetary mismanagement and hyperinflation had come to an end in 1923-1924, Mises had come to the conclusion that in the longer-run the only real institutional reform that might most effectively prevent the possibilities for paper money inflations and business cycles was the full separation of money from the state. Thus, in the second edition of The Theory of Money and Credit in 1924 and in his 1928 monograph, Monetary Stabilization and Cyclical Policy, Ludwig von Mises offered the argument for private, competitive free banking. That is, the removal of the government’s hand from the handle of the monetary printing presses, and not simply by tying the hands of a central bank by requiring it to follow the “rules of the game” under a central bank-managed gold standard. What was really necessary was to end government monetary policy all together, of any type. Money should be returned to the marketplace of consumer and producer choice and to the competitive forces of supply and demand for gold in determining the available quantities of a medium of exchange and its purchasing power or value in the social arena of market-based transactions.

Looking over and above the battleground terrain of the economic conflicts and cataclysms of those years between the two World War, it is possible to trace out the logic, consistency, determination and principles of one of the giants of classical liberalism, free markets and Austrian economics though during the last hundred years.

Friedrich A. Hayek once pointed, “That they had one of the great thinkers of our own time in their midst, the Viennese have never understood.” Fortunately, for us, 45 years after Mises’s death in 1973 at the age of 92, we have the opportunity to discover and learn from his enduring wisdom and insights. And the leaning of that wisdom and those insights is made that much easier do to the outstanding efforts and activities of the Ludwig von Mises Institute here in Auburn, Alabama.

(This paper is based on a talk delivered as the “Rothbard Lecture” at the Austrian Economics Scholar’s Conference sponsored by the Ludwig von Mises Institute in Auburn, Alabama on March 23, 2018)

Dr. Richard Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

Dr. Ebeling is the author of Austrian Economics and Public Policy: Restoring Freedom and Prosperity  (2016); Monetary Central Planning and the State (2015) as well as the author of Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (2010) and Austrian Economics and the Political Economy of Freedom (2003). And the editor of the three-volume, Selected Writing of Ludwig von Mises, published by Liberty Fund.

He is also the co-editor of When We Are Free (Northwood University Press, 2014), an anthology of essays devoted to the moral, political and economic principles of the free society, and co-author of the seven-volume, In Defense of Capitalism (Northwood University Press, 2010-2016).

Visit Dr. Ebeling’s Archive here…
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