Part 4. Mises in his prime Chapter 12. Fresh Start
Austria's situation considerably worsened under the impact of the Treaty of Saint-Germain-en-Leu,
signed on September 10, 1919. The treaty was a diktat rather than a true agreement, designed
to ensure the political weakness of Germans rather than durable peace among the nations.
During the 1920s and 30s many testimonies and analyses appeared in France, Britain and
the United States that condemned the treaty as a prolongation of the hostilities by other
means and thus as a heavy burden on future peace in Europe. It placed all burdens attributable
to the Austrian part of the Austro-Hungarian monarchy on German Austria and in all questions
pertaining to the relations between the successor states of the monarchy, it ruled against German
in Austria and in favour of the other states. This procedure was based on the view that
the Habsburg family had pursued a long-standing policy of German hegemony vis-à-vis the Czech,
Slovenian, Italian, Croatian and Polish peoples, and that therefore the German Austrians now
had to bear all costs related to the military defeat and to the dissolution of the empire.
In accordance with this view, the treaty stipulated that the Republic of Deutsch-Österreich, German-Austria,
changed its name into Republik Österreich, an unusual provision, to say the least, but
the new Republic of Austria had also to endure humiliating demands of a less cosmetic nature.
While the principle of national self-determination had been used to justify the separation of
Czech, Polish and Yugoslav lands from the Austro-Hungarian Empire, the goal of making
the Germans pay trumped principle. In the Czech case, historical law was invoked to
to justify the incorporation of the Sudetenland, which had first been settled by Germans and
still had a vast German majority, and in the case of Italy the establishment of a natural
border at the Brenner Pass brought South Tyrol under Italian dominion. In German Austria's
own case, independence was considered more important than the desire of its inhabitants
to join the German Reich. Three months after the Treaty of Saint-Germain had been signed,
All the Austrian Provincial Parliaments voted resolutions in favour of the establishment
of economic union with the German Reich. The Entente reacted immediately on December 17,
1919, insisting that Austria's political and economic independence not be relinquished.
German Austria lost almost 40,000 square miles, more than a third of its soil territories
is that for centuries had been inhabited and cultivated by Germans. Most of the other stipulations
of the treaty further humiliated German Austria and poisoned relations with its neighbours.
The most pressing problems were of a financial nature. The Allies were holding German Austria
alone responsible for the debts of the former Austro-Hungarian Empire. Because war bonds
and other war-related debts were denominated in Cronin, they could be handled through the
and the printing of more banknotes, but two other financial liabilities proved permanent
and pernicious – the salaries of the civil servants and the massive deficits being run
up by government-owned industry.
Civil servants in Austria-Hungary had been predominantly German and a great number of
them lived in Vienna. After the dissolution of the empire, German-Austrians found themselves
in the awkward position of having five million citizens supporting a civil service developed
for 50 million. Various means would try to reduce the number of civil servants, but in
1922 one out of ten men still received a salary from the public treasury. While the excessive
number of civil servants was an inheritance from the old empire, public firms running
huge losses were the achievement of the social democrats who had socialised the coal mines
and other industries. Under these circumstances it was out of the question for German Austria
were to pay damages to anyone. Its citizens were hardly able to feed themselves, especially
in Vienna. The traditional trade channels with the eastern provinces no longer existed, trade
with its Czech, Yugoslav, Hungarian and Polish neighbours, who were even more nationalist
and protectionist than the Austrians themselves, had fallen to a minimum. Far from being able
to pay reparations, German Austria depended for survival on the financial support of its
Hayek and the Bureau for Claims Settlements According to Article 248 of the Treaty, the
new Austria had to pay damages to foreign governments and their citizens. These foreign
beneficiaries were not limited to the Entente powers, but included the non-German territories
of the old Austria, which, according to the stipulations of the Treaty, were counted
as States Associated with the Entente. Article 248 had largely been copied from
an analogous provision of the Treaty of Versailles, which concerned the much less complicated
case of Germany. It was completely unclear how it should be put into practice in the
Austrian case. Once again, it was the public administration experts from the Vienna Comma
who had to find a way out. During the war, Mises's friend, Emil Peels,
founded an office for the protection of Austrian assets abroad, the purpose of which was to
protect the private claims of the citizens of Austria-Hungary and to establish records
of existing claims of these citizens on those of enemy countries. After the ratification
of the Treaty of Saint-Germain in the fall of 1920, the Austrian government transformed
this organisation into the Abrechnungsamt, a governmental bureau for claim settlements.
Peers remained the chief executive and several other men were also appointed to its board,
Mises among them. The two commerce secretaries shared a predilection for efficient organisation
and kept the new bureau for claim settlements as small as possible.
While its German equivalent in Berlin had more than 1,000 employees by 1922, the Vienna
Organization, which had to deal with far more complicated cases, had a headcount of 150.
In June of 1922, Peels left the Bureau for a more prestigious appointment, and Mises
succeeded him. Two and a half years later, Mises quit the position too, ostensibly because
his new position as Vice Director of the Commer and his research agenda did not leave him
enough time to shoulder the responsibilities of the office. His former employees praised
him for using his contacts in industrial and banking circles for the successful floating
of a bureau bond, uprechnungs-schuldverschreibung, to finance the payments resulting from the
settlement process, but the newspapers reported on conflicts between Mises and the finance
ministry concerning payments of pre-war debts, which the ministry had delayed. In short,
the problem was that Mises had persuaded certain people to finance his government, and now
Now the government refused to pay them back. Mises wanted no part of such an organisation.
For Mises himself, the time he spent at the Bureau for Claim Settlements was especially
memorable because it brought him in touch with the young student who would eventually
become his most important intellectual ally and a friend for many years.
By December 1921, Friedrich August von Hayek, 1899-1992, had received his first doctorate
in law when he applied for a position at the Bureau. Mises himself conducted the interview.
Hayek presented a letter of recommendation from Friedrich von Wiese, who praised him
as a promising young economist. Mises smiled and said he had never seen Hayek in his lectures,
But given Mises' letter, it would be rude to reject the young man, so he hired him on
the spot. Mises assigned him to research money and banking theory. Hayek quickly showed himself
a useful assistant, alerting Mises to the case for free banking. More than any of his
fellow students, Hayek was an adventurer. His peers, Habeler and Virglin, were anxious
not to leave the well-trodden career out. They eventually left Vienna to study in the
in the United States when prestigious Rockefeller stipends became available for Austrian students
in 1924. The Laura Spellman Rockefeller Fund had followed a 1922 suggestion by Beardsley
Rommel to move into the field of the social sciences. In 1923 the fund started investing
in social research with an explicit long-term scientistic orientation. In the same year
The Social Science Research Council was established, also on the initiative of Rommel, but Hayek
was curious enough to travel to New York on his own, with no money and only his capacity
and readiness for intellectual hard work. Mises encouraged and supported the project.
Upon receiving his second doctorate in economics, Hayek left for New York City in March of 1923
and stayed until May 1924.
On the boat to New York he started translating Pierson's article on the value problem in
socialist societies.
The translation was probably ready in August and Hayek submitted it to Weiss, who at the
time was the editor of the Zeitschrift.
He found employment as a translator for economics Professor Jeremiah W. Jencks, whom he had
met in Vienna in the spring of 1922.
Later he also worked for Professor Wesley Mitchell at the National Bureau for Economic
Research collecting data for his book on business cycles.
Mitchell was a great admirer of Mises and Hayek provided him with background information
that Mitchell used in his preface for the American edition of Mises textbook. Hayek
also talked to him about Mises. To Mitchell's mild astonishment, Hayek put Mises in the
The same class as Voltaire, Montesquieu, Tocqueville and John Stuart Mill.
When Hayek returned to Vienna, he was thoroughly acquainted with American methods of business
cycle research, knowledge that would prove to be highly useful two years later.
When Mises established an Austrian Institute for Business Cycle Research, mainly to provide
Hayek with a suitable position, Hayek's teacher Wieser had been the main contact of
of the Rockefeller Foundation among the academic economists in Vienna.
He made sure that Hayek was granted the first Rockefeller Fellowship while he was still
in Manhattan, but the notification reached the young man only after he had already returned
to Vienna. By then he was unwilling to accept the fellowship.
Mises then tried to hire Hayek for the Commer Library, but it was Habeler who eventually
fighting inflation There was a reason Mises encouraged Hayek
and all students, he mentored, to study the problems of currency and banking.
Austrian public finance was in terrible shape, and the government paid for substantial parts
of its expenditures by printing more money.
Time controls on foreign exchange were still in place to encourage the belief among the
citizens that the government was fighting rather than creating inflation.
Mises successfully mobilised the Commer apparatus to oppose foreign exchange control. In the
Commer General Assembly he quoted from letters in which affiliated entrepreneurs described
how the current monetary regime made it virtually impossible for them to serve geographically
Closely Close Customers who used a very different currency. Mises also had a more direct impact
on monetary policy. Owing to his position in the Bureau for Claim Settlements and in
the first Renner government, he was one of a handful of senior advisors to the Austro-Hungarian
Bank, the central bank of the old monarchy which survived several years into the Republic.
The governor of the bank, Alexander Spitzmiller, was determined not only to stop the fall of
of the Corona, but to increase its exchange rate in a manner similar to what Churchill
was about to do in Britain. See, for example, the documents concerning a May 24, 1921 meeting
on the premises of the Bank to discuss exchange rate policies. Among the participants were
Spitzmüller, Wieser, Schumpeter, Svetlant, Schiff and Mises. Mises certainly opposed
Spitzmüller's plan and disagreed with his view that a stabilisation of the Corona act
its present low value would amount to a bankruptcy of the state. Mises's position can be inferred
from his writings including the following passage in a 1923 essay. It is quite wrong
to consider devaluation to be a case of state bankruptcy. Stabilisation of the present low
value of money even if considered only with respect to its effect on existing debts is
is something very different. It is both more and less than state bankruptcy. It is more
than state bankruptcy to the extent that it affects not only public debts but also all
private debts. It is less than state bankruptcy on the one hand to the extent that it also
affects the government's assets denominated in paper money, on the other hand to the extent
that it does not affect its obligations denominated in hard money or foreign currency.
The general economic effects, and in particular the trade-political effects of any money-induced
change of the purchasing power of money, hence also the effects of a rising purchasing power
of money, weigh in against any attempt to raise the value of money before stabilising
it. The present level of the value of money should be stabilised.
Mises pointed out that it was not possible to compensate the owners of claims denominated
in Marx for losses they have suffered from 1914 to 1923, because the present owners of
the claims are not always identical with those who have suffered a loss. The bulk of their
fungible claims, and the considerable part of all other claims, have changed hands over
the years. His argument ultimately won the day and provided the basis for the currency
reforms of the fall of 1922, but only after fierce resistance from Spitzmiller, who remained
Spitzmüller had taken measures that in my eyes were inadequate. I have publicly spoken
against these measures, for example against foreign exchange controls, and I have frequently
explained my standpoint in discussions with Excellency Spitzmüller. I have not succeeded
in convincing him of the pertinence of my views.
Spitzmiller remained faithful to his line even many years after the event. In March of 1929
he gave two lectures on the policy of the Austrian Central Bank. He attacked the stance
taken by the bank and by the industry, and in his second lecture also dealt several times
Times with Mises, whom he criticised for an alleged lack of consistency.
Spitzmiller later honoured Mises as the most important Austrian monetary politician. Mises
reacted to a statement to this effect of Spitzmiller's in a comment made at the 1924 meeting of the
Verein für Sozialpolitik. However, Mises always stressed that his influence was entirely
through Writing and Public Lectures The monetary stabilisation of 1922 was the
only time official policy met with his approval. On October 21, 1921, Mises lectured before
the Österreichische Politische Gesellschaft, Austrian Political Society, on the present
state of Austria's public finance. He argued that the government budget could only be balanced
by eliminating food subsidies and selling public enterprises.
Every other proposal fundamentally failed to come to grips with the question of how
to balance the budget. The Schalber government still preferred the printing press. The ever-increasing
production of corona notes was soon followed by a decrease in real purchasing power. The
more banknotes the Austro-Hungarian bank issued, the weaker they became. This development became
In Germany, where the same phenomenon could be observed, the most eminent monetary expert,
Reichsbank-President Rudolf Havnstein and Finance Minister Karl Helfrich, believed there
was no causal connection between these events. The decline of the purchasing power of the
The mark resulted, among other things, from the deficit of Germany's balance of payments,
and the Reichsbank's increase of the nominal mark supply was necessary to prevent a further
decline of the mark supply in real terms. These views impressed the Austrian public
and influential circles within government, but Mises was unconvinced. The purchasing
power of money declined faster than the new banknotes were printed, but that was because
Because of the present expectations of moneyholders concerning the future purchasing power of
their money. If the future prospects for a money are considered poor, its value in speculation,
which anticipates its future purchasing power, will be lower than the actual demand and supply
situation at the moment would indicate. Prices will be asked and paid, which more nearly
correspond to anticipated future conditions than to the present demand for and quantity
of Money in Circulation. The monetary units available at the moment are not sufficient
to pay the prices which correspond to the anticipated future demands for and quantity
of monetary units, so trade suffers from a shortage of notes. There are not enough monetary
units on hand to complete the business transactions agreed upon. This phenomenon could be clearly
seen in Austria in the late fall of 1921. Thus there was in fact a causal relationship
between the increased production of money and the over-proportional decline of the purchasing
power of money. The decline of Austria's money could not be stopped or even reversed
through the printing press. On the contrary, more inflation would aggravate this situation
even further. The problem was that Spitzmiller's Austro-Hungarian bank was still a stronghold
of the party of inflation, this concern to particularly the Austrian directors, who were
The Hungarian directors were generally advocates of the gold standard. Mises made this point
in a 1924 Verein für Sozialpolitik debate with Spitzmüller. The bank followed the Helferich-Havenstein
line in a desperate attempt to catch up with the shrinking kroner by printing yet more
of them. Mises tried to steer counter as much as possible, placing two articles in
in the Neue Freie Presse in March 1922, Inflation and the Shortage of Money against the Continued
Use of the Printing Press, and The Austrian Monetary Problem 30 Years Ago and Today a
Commentary.
The editor of the Neue Freie Presse, Moritz Dulp, thanked Mises especially for the latter
piece in which he had quoted from a speech by Carl Menger, who was himself a former editor
of the NFP. He especially sought to raise the public's awareness of the destruction
that the inflation wrought on the economy. Austria had become a poor country and already
had to pay for at least a part of its imports by decreasing its capital base, but inflation
would destroy it altogether. As he explained to Moritz Dube, I think that in evaluating
our situation one has to strictly distinguish between two things. There is on the one hand
the inflation, which leads to increasing prices for all commodities and for foreign currency.
On the other hand, there is the fact that our population lives today from capital consumption
and pays for imported commodities through the export of capital assets, such as fungible
claims and other ownership titles. Between these two facts, there is, however, something
of a close connection to the extent that the falsification that the inflation has induced
in the calculation of business profits represents the psychological basis for the unrestrained
consumption of the accumulated capital of the national economy. The devaluation of money
leads to illusory profits that the people have long held to be true profits. Moritz
Dube was the economics editor of the Neue Freie Presse and author of several popular
books on economic problems. In the post-war period he published two works on the catastrophic
boom induced by inflation of the money supply. Seminars
If Mises was waging a campaign against the dangers of economic ignorance, the classroom
remained campaign headquarters. The winter semester of 1920 to 1921 concentrated on business
cycle theory, featuring sessions on the problem of economic crises, on what are normal or
or good or bad economic conditions, on the historical crises of 1900-1902, 1907, 1873,
and on the permanent effects of the business cycle.
In the winter semester of 1921-1922, his university seminar focused on some larger issues of monetary
theory. It was a memorable semester because for the first time the participants included
several who would become his star students, Hayek, Habeler, Machloub and Schutz.
While the pedagogical effort made in the seminars on theoretical economics was related to the
pressing issues of Austria's monetary policy, the subjects discussed in Mises's private
seminar were less directly connected to current political events. In the next few years the
private seminar continued the discussion of basic conceptual problems of economics but
Hayek sometimes found these debates gruelling and felt relieved when he left Vienna to spend
a year in New York. On the whole I felt somewhat tired of the subjects which had chiefly occupied
me in Vienna during the preceding year or so, such as the theory of subjective value
or the problem of economic calculation under socialism, and comparing the way things were
were discussed in the United States with what he knew from home he praised the greater focus
of the American way. In so far as theoretical discussions take place here at all, they have
one great advantage. There is a certain stock of generally recognised doctrine which corresponds
essentially to that of the Marshallian School and which is unquestionably accepted to the
point that, when a problem is discussed, the discussion concerns only this problem and
not the entire foundations of economics.
By the time Hayek returned to Vienna in May 1924, the seminar had an eminently interdisciplinary
character. Fewer than a third of the members, Striegel, Habler, Hayek, Machlup, Morgenstern,
Liese and Braun, were trained economists. Thus, the discussions must have been more philosophical
than typical present-day debates.
The meetings took place on Friday nights on a fourth-nightly basis. The twenty-some participants
assembled in Mises' office at the Commer around 7pm. One member gave a short introductory
talk which was followed by a long discussion until 10.30, at which point the official part
of the evening ended and the assembly moved to a restaurant, usually an Italian restaurant
called Ancora Verde, where the unofficial debate continued.
The most ardent debaters, Mises usually among them, finally went on to the Café Künstler
and stayed until two or three a.m. Mises later insisted that in this circle he was not
a teacher and director, but only the first among equals. All who belonged to the circle
came voluntarily, only imbued by the drive to gain more knowledge. They came as disciples,
but in the course of the years they turned into friends. Later some people of my own
at a young age joined the circle too. Scholars from abroad who paid a visit to Vienna were
welcome guests and took part in the meetings. The private seminar was and always remained
the circle of my much younger friends. Outsiders knew nothing of our meetings. They only saw
the works published by individual members. We formed no school, no community and no sect.
We supported one another more through dissent than through assent. We were agreed and united
only in one thing, in striving to build up the sciences of human action. Each one went
the way that his own law pointed out to him. We have never organised or undertaken anything
else that would have resembled the abject doing research of the scientists of imperial
and post-imperial Germany. We have never pondered the thought of publishing a journal or a collective
of Volume – each one has worked by himself as it befits the thinker, but each single
one of us has contributed to the circle and looked for no other compensation than the
recognition, not the applause, of his friends. There was greatness in this unpretentious
exchange of ideas. We all found happiness and satisfaction in it.
Mises' Long Shadow The seminars Mises held in Vienna in the 1920s,
The sessions were formative for these young men, even though Mises's personal impact
was not as considerable as one might expect, especially in the case of Hayek, Habler, Striegel
and Machloub, who worked with him, albeit with interruptions for more than ten years.
For these men, Mises was more role model than teacher. In the discussions of the private
seminar he displayed his ability to dissect all kinds of problems in social analysis just
as he had learned from Boehm-Bawerk. Yet he did not raise a school of disciples advocating
his doctrines. It is of course the hope of every scholar that others will find his approach
interesting and important enough to continue the work where he has left off, but Mises
made no efforts to stimulate discipleship and, in fact, have no disciples during his
Vienna year. To no small extent this was due to the ideal of individualism. Steeped in
the idealism of Schiller, Herder, W. V. Humboldt and other classical German authors, Mises
considered the free development of the individual to be the supreme goal of human achievement.
It was more important than any particular creed in religion, politics or aesthetics.
He certainly did not lack firm convictions in politics and science, but in his interactions
with students and other people, these convictions took only second place to the reverence he
paid through the ideal of individualism. After 1926, when he succeeded Mises as the main
contact of the Rockefeller Foundation in Vienna, Mises had the opportunity to provide or withhold
material benefits, but he did not use this power to raise epigons. Noble as this attitude
was, it gave a competitive edge to some of his rivals who did not have the same scruples.
But the most important factor responsible for the virtual absence of a school of Misesians
in the 1920s was that Mises's professional standing was not paramount. When Hayek, Habela,
Machloub and Schütz first took part in one of his seminars, Mises was a respected expert
on monetary economics and the author of a controversial book on contemporary political
of Problems, Socialism, Hans Kelsen, Karl Grünberg, and Ottmar Spann.
Kelsen was the celebrated creator of the Austrian Republican Constitution and pioneer of the
pure theory of law.
Grünberg, a chief Vienna intellectual of the social democratic movement, and Spann,
The author of the most successful social science textbook ever published in the German language.
In 1919, Spahn had obtained Filipovich's position, which had been vacant for two years.
Among the professors of economics, he attracted by far the greatest number of students. His
theory of universalism was a sophisticated development of the older organic theories of
society, which were widespread and deep-rooted in Catholic countries such as Austria. In
In the crisis-torn years after the war, universalism was not only more accessible for most people,
it also accommodated a deep longing for security and authority.
Whereas Mises dealt with relatively narrow economic subjects and the technicalities of
the Austrian School's marginal value analysis, Spahn confronted the students with a broad
picture of social life. His lectures and seminars attracted students whose emotional life was
was steeped in Catholicism, Romanticism, Idealism and Nationalism. Spann's best-known student
was the later Austrian Chancellor Engelbert Dolfuss, but he also impressed young scholars
of the Austrian schools such as Hayek and Morgenstern. He had far less success with
his colleagues at the University of Vienna. Initially he was invited to the sessions of
the Nationalökonomische Gesellschaft, but it soon became obvious that a productive debate
with members of the Austrian School, Wieser, Mises, Mayer, Weiss and Striegel was impossible.
This was not primarily a question of different political orientations. Spahn's anti-Semitism
was notorious. His full professorship in 1919 signalled a somewhat broader anti-Semitic
movement that began infecting university life in the early years of the Republic, turning
the University of Vienna into a battlefield for Mises and other liberal Jews. Kelsen proved
The problem was that Spahn's intuitive approach was diametrically opposed to the analytical approach of the other members.
He believed the task of social theory was to grasp the meaning of totalities, whereas the others thought that such undertakings were unscientific.
Mises later made clear that this rejection of Spun's approach had nothing to do with
a dogmatic insistence on the virtues of methodological individualism. The point was, rather, that
it was the very nature of science to deal with parts rather than whole. The economic
theorist had to identify the relevant parts of social reality and study their interrelations.
The students who did not share Spun's aesthetic, epistemological and political orientations
A minority found a ready alternative in the courses of Friedrich von Wiese. In the years
after the First World War and up to his death in 1926, he was the unquestioned authority
in general economic theory in Vienna. With the winter semester of 1922, Wiese's devout
disciple Hans Mayer succeeded his master, while Wiese himself continued to lecture as
Honorary Professor on the Sociology of Power. Because of Mayer's presence and the successful
second edition of Mises' textbook Theorie der gesellschaftlichen Wirtschaft, Social
Economics in 1924, the Viserian paradigm remained dominant in Vienna long after Mises'
death.
The book appeared again in the prestigious series Grundres der sozialökonomik, Outline
of Social Economics. The series was published in 12 volumes from 1914 to 1930, especially
the first volumes, some of which have appeared in two editions, pre-war and post-war, and
which deal with the history of economic science and with general economic theory, still have
lasting value. Especially noteworthy is the first volume, Wirtschaft und Wirtschaftswissenschaft
1914, 1924, Karl Bücher, Volkswirtschaftliche Entwicklungsstufen, Joseph Schumpeter, Epochen
der Dogmen und Methodengeschichte, Eugen von Filippowits, Entwicklungsgang der Wirtschafts-
und sozialpolitischen Systeme und Ideale, Die Entwicklung bis zum Kriege, Edward Heymann,
Entwicklungsgang der Wirtschafts- und sozialpolitischen Systeme und Ideale, Die jüngste Entwicklung,
Equally remarkable is Volume 3, which contains Friedrich von Mises' Theorie der gesellschaftlichen
Wirtschaft 1914-1924, and Volume 4, which features Max Weber's famous Wirtschaft und Gesellschaft
from 1922. The fact that Hans Meyer, a second-rate scholar by any standard, obtained Mises'
chair, speaks volumes about the influence of his predecessor. Mises must have hoped
to obtain the position himself. After all, he had already published three books, two
The Theory of Money and Credit
A man like Mayer obtained Mises' chair. It was not quite as disgraceful as it might seem in retrospect that Mises did not. A more likely candidate was Joseph Rumpeter, who enjoyed great prestige, especially among younger students.
He had become a celebrity in the German orbit through his Wesen und Hauptinhalt der theoretischen
Nationalökonomie 1908 and had found international fame with his Theory of Economic Development
1911. Both works were published before Mises's first book appeared. Two years younger than
Mises, Schumpeter had become Austria's youngest economics professor in 1909 with the active
Schumpeter now held a position at the University of Bonn. He was the only major theoretician
from Austria ever to obtain a chair at the University of the German Reich. His time in
Bonn turned out to be very successful. Under his leadership, the Department of Economics
Mathematics became a major center of economic theory with great emphasis on mathematical
economics and one of his students, Erich Schneider, became the leading German neoclassical economist
after the Second World War. But even Schumpeter was not in the eyes of
the profession the number one theorist in interwar Germany. That rank belonged to Gustav
Kassel, 1866-1945, from Sweden, a mathematician turned economist. His core mission was to
promote Balrussian mathematical economics. His Theoretische Sozialökonomik, Social
Economics, quickly became the most widely used interwar textbook on economic theory
and its success became international through translations into virtually all languages
of the civilised world. Kassel was famous for his rejection of value
Theory and Utility Theory as a Foundation of Price Theory. Mises, Schumpeter and Kassel
were verbal Walrassians. Schumpeter and Kassel are self-declared Walrassians. Their books
championed the ideas of Walrassian economics without going into mathematical detail. Single-handedly
they not only kept the Walrassian paradigm alive at a critical juncture of its history,
and also managed, in what amounted to a revolution, to make it the dominant approach in economic
theory within the Reich. Within only a decade they turned a large number of the younger
German economists away from the historical school and converted them to the Lausanne
School of Mathematical Economics, and through translations of their major books this influence
radiated far beyond the German-speaking world. The Austrian tradition of Menger had been
have been kept alive through the scattered disciples of Boehm-Bawerk, most notably through
Mises, but these followers lacked the paid university positions that would have enabled
them to dedicate themselves full-time to the development of the Austrian paradigm and to
produce students and future professors. At the crucial time when the collapse of the
German Reich brought widespread disillusionment with the tenets of the historical school,
Wieser's towering status as the only surviving founder of modern German economic theory provided
the verbal Walrassians with a position of supreme authority. Their works introduced an entire
generation to mathematical economics, and their style of exposition deluded these uninitiated
readers into assuming that there were no significant differences between their works and those
of the Mangerian theorists. The confusion was compounded by the fact that Wieser was
was an economist from Austria. Even in the narrower fields of the theory of money, banking
and business cycles and of the theory of socialism, Mises was not the very highest authority.
The great authority in monetary theory was again Friedrich von Wiese, who had pioneered
the Austrian theory of the value of money and would write the entry on money for the
standard German language dictionary, Handwerterbuch der Staatswissenschaften. The Handwerterbuch
also revealed the pecking order in business cycle theory. Here the lengthy entry came
from the pen of Arthur Spiethoff, a schmullerite, to the core who opposed all monetary theories
of the trade cycle. Mises' endorsement of banking school principles and of the assignment
theory of money was reinforced through the writings of Schumpeter, the other surviving
pre-war authority on theoretical economics. Although Mises' views on money and business
Mises' cycles found ever more advocates in the course of the 1920s, especially among
the younger economists. He lacked the power and influence of the top academic economists.
In his contribution to the Festschrift that celebrated Mises' 75th birthday in 1926,
Mises picked the subject of the role of money in the realm of economic goods. Here he attacked
the dominant Vizierian income theory of money, arguing that money in general, and gold in
in particular was an economic good, not mere tokens for other real goods, and that marginal
value theory could therefore be applied directly to money rather than merely indirectly through
the value of some underlying real goods. The piece was published only six years later.
Friedrich von Mises had died in 1926, and the editor of the Festschrift, Hans Meyer,
then chose to publish a comprehensive overview of contemporary economic science in four volumes.
Mises' contribution appeared as die Stellung des Geldes im Kreise der wirtschaftlichen Güter, translated as the role of money in the realm of economic goods, money, method and the market process, essays by Ludwig von Mises, Richard Ebling and others.
Those who sought to make a career as professional economists were well advised to immerse themselves in the thought of Wiese and Schumpeter.
This was exactly what the younger economists did. The fourth generation of the Austrian School was introduced to Austrian economics primarily through the works of Mises, and this formative experience shaped their own approach to economic analysis long after the master's death.
Today, Hayek is often considered Mises's most famous student. In fact, however, his Miserian intellectual heritage is striking.
In 1922-23, under the direction of Hans Kelsen and Ottmar Spann, Hayek had written his doctoral
dissertation in economics on the theory of imputation. The work was based on the Viserian
approach to problems of value and price theory, which was incompatible with Mises's socialist
calculation argument. The Viserian approach had found its way into Spann's thought. Similarly,
The idea of imputation was familiar to legal theorists. Hans Kelsen had pioneered the pure
theory of law which imputed every single norm back to a fundamental norm. When he updated
his thesis three years later for an article in Konraths Jahrbücher, he knew the calculation
theory but had not changed his mind on the question of imputation. This is what Hayek
wrote on the topic without mentioning Mises by name. Of course, in so far as one believes
that a completely satisfactory solution to the problem of imputation has not yet been
found. We cannot exclude the possibility from the very outset that the determinants of the
prices of the factors of production are to be found in the exchange economy alone, and
therefore that an imputation of value is not applicable, a view held by several younger
authors. Nevertheless, if this view were regarded as valid, the result would be that we would
Hayek went on to explain and develop Viserian imputation theory, which in his view was still
today the fundamental and most detailed treatment of the problem.
He explicitly rejected Mises' argument because it contradicted the Viserian assumption that
and all social phenomena are explicable on the basis of value theory alone.
This fact is crucial to understanding the later stages of the debate on economic calculation
under socialism. Although Hayek entered the debate ostensibly on Mises's side, there
was a profound disagreement between the two allies. Mises rejected socialism because factors
of production could only be appraised in a market economy. Hayek did not endorse this
Hayek's main criticism of Boehm-Bawerk's imputation theory was that he treated the value
of future consumers' goods as ultimate givens, where in fact they depended on present choices
Only a general equilibrium model could account for these multifarious interdependencies and
solve the intricacies of the imputation problem. Hayek concluded his essay mentioning that the
Walrassian School of Mathematical Economics had already successfully tackled problems
of a similar nature, but he cautioned against practical problems of applying mathematical
Imputation Theories. Although they could possibly demonstrate by means of a simplified case
that the subjective theory of value is in principle applicable, the complexity of the
problem may make it impossible in practice to apply imputation to any large economic
system. This is exactly the line of argument that Hayek later stressed in his critique
of socialism. As a Vizerian value theorist, Hayek could not endorse Mises's argument
that a rational socialist economy was impossible because there was no such thing as value imputation.
What then were the real reasons for the empirically far better performance of market economies?
The solution that Hayek eventually presented in the late 1930s and the 1940s was based
on an argument prominent with some economists of the 18th and 19th centuries. These writers
had argued that prices contain information about market conditions, shortages, surpluses,
and that they steer production in a market economy. When trade is perfectly free, the
quantity and the need are apparent in all the markets. Then goods put themselves at
their true price and plenty spread equally everywhere. But when one has once taken all
freedom from trade, it is no longer possible to judge, either if there is really an imbalance
Transmissions between the quantity and the need, or what it is. Hayek embedded this argument
within a general theory of knowledge, explaining the role of information in human action and
economic theory, and argued that market prices have crucial importance in transmitting information
between the market participants. Hence, the factual superiority of market economies over
centrally planned economies resulted from their communicative superiority. Market prices
These were a better means for the transmission of information.
The seeds of these later theories were sown in the early 1920s. Hayek's liberalism came
from Mises, but the analytical framework of his economic thought was nurtured through
the books and classes of Wieser. It was no accident that Hayek became the editor of a
posthumous collection of Wieser's most important papers, and that he published his first book
Hayek with Hulda Pichra Tempske, which had published all of Mises' pioneering studies.
All of his life Hayek perceived himself quite consciously as a member of the Viserion branch
of the Austrian School. In 1978, a few years after Mises had died, Hayek regretted that
this branch had been almost entirely displaced by what he called the Mises School. In today's
world, Mises and his disciples are, with some just as regarded as representatives of the
The Austrian School albeit he represents only one of the branches into which Menger's teachings
had split already among his disciples, the close personal friends and relatives Eugen
von Boehm-Bawerk and Friedrich von Mises. I admit this only with some hesitation because
I expected much to come from Mises' tradition, which his successor Hans Meyer tried to develop.
But these expectations have so far not been fulfilled, even though that tradition may
may yet prove to be more fruitful than it has been hitherto the case.
The Austrian school that today is active almost exclusively in the United States is basically
a Mises school that goes back to Boehm-Bawerk's approach. By contrast, the man on whom Wieser
put such great hopes and who had taken over his chair has never made good on the promises.
The Meyer Line ended with his student Wilhelm Weber, who became the first important teacher
of Keynesianism in Austria, says Werner Neudeck in Der Einfluss von Ludwig von Mises auf die
österreichische akademische Tradition gestern und heute. Neudeck asserts that Mises was the
last economist who managed to establish an internationally recognized school in Austria.
But a year after Mises' death, Hayek received the Nobel Prize, attracting new interest to
his work and giving the Vizierian paradigm a second lease on life. The student on whom
One of the two Mises apparently had the most profound impact in the early 1920s was Fritz
Machlup-Wolff, 1902-1983. Of all the latest star members of the private seminar, he alone
had received his doctorate under Mises's direction. Strictly speaking, only Fritz Machlup
was originally a disciple of Mises.
Machlup came from a family of entrepreneurs. His father was a cardboard manufacturer, and
young Fritz helped him in the management of the firm while he studied economics at the
University of Vienna. In 1923 he was involved in setting up a factory for the family business
in Hungary, even while he was working on a doctoral dissertation under Mises. At the
end of the year the factory was running and Machloupp had his doctorate. He was admitted
to the private seminar and his relationship with Mises became less formal. Like his mentor,
Machloupp was an enthusiastic skier and fincer, and they probably spent many hours together
in the gym and in the mountains. Their common Jewish heritage was certainly an important
had a major factor in their unusually cordial rapport in the 1930s Mises wrote to Mahlup
in the tone of true friendship, while in his correspondence with other intellectual associates
Hayek for example, there always remained a hint of formality. Being Jewish was also the
most important factor hampering both academic careers. Starting around 1922, German nationalists
and Catholic groups led a campaign to reduce the Jewish presence at the universities. The
The main organisational vehicle in the campaign was the katholisch-deutsche Akademiker Ausruf.
Mises had been appointed adjunct professor under the Ancien Régime. In the New Republic
he made no further advances. Neither did his disciple. Machloupp received his doctorate
and that was it. This situation must have created a mutual sympathy between the two
men. Bad as it was, it could not prevent the dynamic Machloupp from a successful career
A few years later he became a member of the Austrian Cardboard Cartel and was also appointed
Secretary of the Verein Österreichischer Volkswirte, Association of Austrian Political Economists.
Machloub was a man of great ambition and talents. The drive of the successful entrepreneur never
left him even in later years when he moved to the United States and focused entirely
on scholarly pursuits. A poem that Kenneth Boulding composed many years later in his
Oh, happy is the man who sits beside or at the feet of fritz, whose thoughts, as charming as profound, travel beyond the speeds of sound, all passing as he speeds them up, Mach 1, Mach 2, Mach 3, Mach La. With what astonishment one sees a supersonic Viennese, whose wit and vigour, it appears, are undiminished by the years.
Makhloub wrote his doctoral dissertation on the gold bullion standard. He published the
work as a book in 1925, for the appendix of which he also translated Ricardo's Proposals
for an Economical and Secure Currency, 1816, into German. Six years later he published
a study on the role of bank credit and the stock market in the business cycle. Both books
demonstrated that their author had very well assimilated the Misesian approach to monetary
Theory analysis, and both of them were brilliant contributions extending the work of his teacher.
Mises praised this second book with words he had never used to describe the work of
any other disciple – a masterpiece.
Dr. Machlub-Wolff is an excellent economist. The second book, Börsenkredit, Industriekredit
und Kapitalbildung, is really a masterpiece, said Mises to Kittredge in a letter dated
In March 31, 1933, this was a letter of recommendation for the Rockefeller Foundation. Mises concluded,
There is no doubt that Machloub is in all respects the worthiest man for a Rockefeller
fellowship. This is not merely my opinion, who was his teacher for many years, but everybody's.
Last year he lectured at the London School of Economics and Political Science and had
a great success. But it was shortly after its publication that the friendship between
The LSE connection
The problem of war reparations was the number one issue on the international agenda for
the first few years after the war and remained very prominent until the early 1930s. Initially,
the same French and British politicians who had led their countries during the war dominated
the negotiations. Steeped in wartime rhetoric, their emotional election campaigns had committed
them to hard-line policies against the vanquished. Under such circumstances little progress could
be made in regard to Austrian finance and the reparations question. As a result, the
second Austrian government under Carl Renner lost the election in June 1920 and a new government
under Michael Maier took over without significantly greater success in foreign policy. Things
improved slowly after December 1920 when the leadership at the negotiations was shifted
to economic experts, but these men too were unable to reach a workable compromise because
of Public Pressure in England and especially in France. No lasting results were achieved
at conferences in Brussels, Paris, London, Cannes, Genoa, Paris again and London again.
It is likely that Mises took part in at least some of these conferences. He was after all
an executive of the Bureau for Claim Settlements and his position with the Commer made him
an unofficial spokesman for Austrian Business and Banking. He was an eloquent expert on
on Financial and Monetary Matters and his sober voice carried weight with the moneymen
abroad. In those years Mises was asked to co-author two entries for the new 12th edition
of the Encyclopedia Britannica. This edition was in fact a two-volume supplement to the
11th edition. It was probably here that Mises first met some of the eminent economists from
Western Europe with whom he would cooperate closely in the following years. Charles Rist
from Paris, and Theodore Gregory, William Beveridge, later Lord Beveridge, and others
from the London School of Economics, LSE. In November 1922, Mises said he had talked
to an English professor about a translation of his book Die Gemeinwirtschaft into English.
This was probably Gregory, who was the only Englishman among the recipients of a complimentary
copy. Documented contacts to William Beveridge date back to the summer of 1924, when Mises
Mises had him and Gregory sent complimentary copies of the second edition of his Theorie
des Geldes und der Umlaufmittel. In early November 1924, Mises travelled to London and
talked with Robbins about the translation of Gemeinwirtschaft. He then had him send
a complimentary copy of Gemeinwirtschaft, probably as a Christmas gift. By this time
his command of English was fairly good, as evidenced by his comments on the translation
and that Robbins, and later also Schwatz, made of parts of Gemeinwirtschaft. Still in
his meetings with Gregory and Robbins, Mises probably spoke German. Gregory was an excellent
speaker of the language and Robbins could follow a conversation in German even though
he was not himself fluent in it. The LSE connection developed slowly and steadily during the 1920s,
especially through Mises's impact on the young Lionel Robbins, 1898, 1984. Like most
Most young intellectuals of his era, Robbins was a socialist, nurtured by school readings
of Shaw, Wells and Ruskin. He had become a member of the National Guilds League after
World War I, and collaborated in the labour campaign for the nationalisation of the drink
trade. But these experiences with the real-world labour movement disillusioned the young idealist.
He began to read the classical liberal economists, and from 1920 to 1923 studied economics at
LSE, a creation of the leaders of the guild movement, Sidney and Beatrice Webb. Because
Sidney Webb cherished academic freedom, unlike his wife or their friend George Bernard Shaw,
LSE was spared the fate of becoming the academic mouthpiece of the Fabians. During the 1920s,
the school counted a number of excellent economists in its ranks, most notably Edwin Canaan, but
also Theodore Gregory and later Robbins himself.
Gregory had Robbins and his other students read The Great Contemporary Economists in
America and on the continent, many of whom he knew personally. Robbins was therefore familiar
with the works of Gustav Kassel, Erwin Fischer and Frank A. Fetter. Later he turned to the
Austrians and he probably read Socialism in the original German, soon after its publication
in 1922. He later recalled that the book had a decisive impact on him and solidified his
In those days LSE students had to prove their ability to translate from two foreign languages
after their first year of study. To other teachers at LSE, Hugh Dalton and Graham Wallace
reinforced in Robbins the resonance of the utilitarian perspective on political questions
that emanated from Mises's work. Wallace in particular was a great teacher and authority
on the Writings of Jeremy Bentham and the Philosophical Radicals. He constantly emphasised
rationalism as the correct approach in politics, especially when it came to choosing political
means. And like his young peers in Vienna, Robbins deepened his classroom knowledge through
daily discussions with a group of highly gifted friends, such as Jacques Caen, Arnold Plante
and Georg Tugendhat.
Tugendhat was probably the same person who took part in Mises's first private seminar
in the winter semesters of 1919-1920. In this case there was a strong early personal
connection between the circles in London and Vienna. These men would form the core of British
Austrianism in the following years.
Mises probably met Robbins for the first time in the fall of 1924. In October of that year
he wrote to Gustav Fischer that he had received a very serious offer for an English translation
Translation of the second part of Gemeinwirtschaft from a Mr. Robbins, a tutor of economics
in Oxford. Robbins turned out to be Robbins, and he came highly recommended. He had just
accepted a temporary position at Oxford University until 1929. He would alternate between positions
at Oxford and LSE. During the next few years, he worked on a translation of Gemeinwirtschaft
– Socialism, and later initiated a translation of Mises' Theorie des Geldes und der Umlaufsmittel
These projects slowed significantly after 1926 when Robbins was charged with various administrative duties at LSE to the point that he brought in a co-translator, but his interest in Austrian economics, and especially in the work of Mises, grew constantly. At the beginning of the 1930s the contacts between Vienna and London had matured to such an extent that Mises and his students were frequent guest lecturers at LSE. A blossoming of Austrian economics
of Economics in Britain culminated when Fr Hayek eventually became professor of economics
at the London School of Economics in the fall of 1931.
Advent of the Gold Exchange Standard
It did not take quite as long to find the solution to Austria's post-war financial
calamities. The first real breakthrough came at a conference that took place in the fall
Protocol of 1922 in Genoa and led to the signing of a convention in Geneva on October
4, 1922. The so-called Geneva Protocol was the last in a series of negotiations that
had begun at the end of 1921 when Austria was promised loans from the British, French,
Czechs and Italians. The condition was that the Austrian government had to grant institutionalised
to provision inside of Austria, and to pledge some of its income and assets to the foreign
creditors. These conditions were at first unacceptable to the Austrian Chancellor Johann
Schauber, but time was running out. The only alternative to foreign loans was increased
taxation and inflation, and these options were even less acceptable. The Social Democrats
virulently opposed any more taxation of the general population. They were still advocating
Having a special tax on wealth, always a popular proposal, but incapable of balancing
the budget, and more inflation would certainly bring monetary breakdown and ensuing civil
chaos.
A turning point was reached when, at the end of May 1922, Monsignor Injatz-Zeipel assumed
the chancellorship with a firm resolution to lead Austria out of the financial nightmare.
He already had some experience in handling catastrophic situations in Austrian politics,
Zipel was not a man to despair over the unpopularity of the decisions that needed to be made.
Living in a Vienna monastery, he was not as exposed as were his other party comrades to
the many temptations of personal friendship and the spotlight of fame. In Self a Monarchist,
his great achievement was to reconcile Austrian Catholicism with the Republic and thus to
to spare Austria the fate of other countries such as France, Italy and Spain, where after
the establishment of the republic the political right split into conservative monarchists
and republican democrats. He knew that reliance on international loans under the conditions
spelled out by western creditors was a dangerous strategy because it would lead his country
into dependence on foreign powers. But there was no alternative if the goal was to rid
The country of the poison of inflation. Mises and his friend Wilhelm Rosenberg convinced
Seipel of the necessity of this reform. A candid foresight, they stressed that the reform
was bound to produce a crisis. There would be massive unemployment and other interests
would be hurt as well. This crisis would merely bring to light the damage already done by
the previous inflation, but public opinion would blame the reformer. Seipel appreciated
the frankness of his advisors. Mises later recalled,
He adopted fully my ideas about sound money, and I cooperated with him.
Seipel's economic and political views were of course shaped to a large extent by prevailing
Catholic moral views on social organisation, in particular by Pope Leo VIII and cyclical
rerum nuvarum, 1891. He was also known as a sharp critic of radical anti-Semitism. In
In his eyes, the Austrian Jews were a national minority and should enjoy all minority rights.
In the same month, Mises was appointed the president of the Bureau for Claims Settlements.
The former director, Mises' friend, Emil Perls, moved on to another position. He was
appointed director of the Kreditinstitut für öffentliche Arbeiten, Credit Institute
for Public Works. In one of his first actions, after his initial orientation, Seypert dealt
a heavy blow to Austria's inflation party, which had its stronghold in the Austro-Hungarian
Bank. Following the stipulations of Article 206 of the Treaty of Saint-Germain, he abolished
the old Central Bank and established a new one under the leadership of Richard Reich,
a former student of Carl Menger's and a civil servant under Boehm-Bawerk in the Ministry
of Finance. At the time of his appointment to the presidency of the new Central Bank,
He had just been appointed a Vice-President under Mises at the Bureau for Claims Settlements.
Seipel's reforms hurt those groups whose incomes had been paid out of the inflation,
in particular the nationalised industries and socialist municipal governments that had
started creating expensive welfare programs immediately after the war, programs that could
only be paid for through the printing press of the Austro-Hungarian Bank. Hurting these
These interests entailed only moderate political costs for the government and might have even
been a welcome side effect of Zyper's reform in that it promised to hurt groups that were
part of the socialist opposition. It turned out, however, that the very success of the
reform extended the survival of these groups. This stable monetary framework attracted a
great volume of foreign credit to Austria, which was then used to finance local welfare
Schemes. The reform did visibly curtail Austrian sovereignty in financial and economic matters.
Seipel's government accepted the establishment of the office of a Commissar General, who
henceforth controlled Austria's public finance. This action effectively surrendered control
over Seipel's budget to the Entente-controlled League of Nations. Dr. Alfred Zimmermann,
a former mayor of Rotterdam, was appointed Commissar General and stayed for three years
With Austria colonised, its government is subject to foreign powers. The socialists
did not hesitate to accuse Seipel of giving up the country's sovereignty. The German
nationalists in Seipel's coalition saw things the same way.
Mises had been one of the driving forces behind the reform. He thought Austria could have
done without the 650 million kronen of credit, but not without the Kommissar. Austrian politicians
Mises needed a foil guy to take responsibility for unpopular policies. He did not exactly
have a high opinion of Zimmermann himself, but had great respect for Chief Executive
Hans Patzauer, a civil servant from the Ministry of Finance.
Mises was widely perceived as enjoying very good ties to Patzauer. This working relation
turned him into a power broker. For example, the leadership of the University of Vienna
In the 1870s, an international monetary system had emerged that covered the entire Western
world and its colonies, the classical gold standard. The money of this system was gold,
But in most cases the currency, that is the means of payment that actually circulated
in the countries taking part in the system, were the fractional reserve notes of the various
national central banks. In many countries, most notably in Russia, Austria-Hungary and
India, the national currency was backed up not only by physical gold in the vaults of
the central bank, but also by other gold denominated currencies. This practice of holding
Both gold and gold-denominated foreign banknotes became known as the gold exchange standard
when it became standard procedure in the interwar period. Some Austrians then claimed the new
international system had been invented by their finance minister Steinbach in 1897.
In fact, however, the system was devised by David Ricardo in proposals for an economical
and secure currency. During the war most countries had abandoned the classical gold standard
to finance war expenditure through inflation. After the war, many statesmen promoted the
re-establishment of an international gold standard, but the accumulated war debts were
so huge that redemption at pre-war parities would have ruined most governments. On the
other hand, these same governments did not wish to create the correct impression that
they had cheated their creditors and could not fulfil their promises. The natural solution
in this context was the adoption of the gold exchange standard. The advantage of this system
was that a central bank could minimize its non-interest-bearing gold holdings by trusting
other central banks, which held the physical gold needed for redemption. The disadvantages
were not as apparent before the First World War. It made redemption more uncertain than
it had been under the classical fractional reserve gold standard, and because it made
redemption dependent on a prior redemption in some other country, it gave political leverage
to these foreign central banks. The Banque de France acquired a reputation for its ruthlessness
in using this leverage. The first steps to it, the creation of the International Gold
Exchange Standard, were made at the Genuine Conference in the fall of 1922. Here the representatives
of the major central banks agreed to cooperate more closely. The idea was to help out central
banks that were unable to redeem their notes as well as, more generally, to coordinate
Central Bank Policies. A few years later, Mises stated in plain language what coordination
meant – the Coordinated Central Banks would increase their note issues in concert, thus
avoiding the embarrassment of the falling exchange rates that inevitably result from
unilateral inflation. Coordination of national inflation policies in order to suppress one
of the main symptoms of monetary decay has remained the state of the art to this day.
For debtors in a very inflationary currency area, cooperation between the central banks
is a boon. Without foreign assistance, the exchange rate of their currency would constantly
fall, and thus it would be next to impossible to obtain foreign credit. Central bank cooperation
solves this problem. At the expense of creditors, all would be debtors in the more stable countries.
In the 1920s, this mechanism worked to the advantage of the most ruthless debtors – the
Socialist Municipal and Provincial Governments in Austria and Germany
Mises took part in expert meetings at the Finance Ministry discussing the implications
of the Geneva Protocol for Austria. The Western loans had given Seipel's government some
flexibility in the short run, and the inflation was under control starting in September 1922.
The exchange rate stabilised around 70,000 kronen per dollar, but in the longer run economic
Stability and Austrian Political Independence could only be gained if the budget was balanced
without inflation. Large increases of government income were not to be expected because the
economy was still in a slump, and a quick recovery was out of the question given the
prohibitive trade barriers erected by neighbouring countries. The only way out was to cut government
spending. The largest expenses were the heavy food price subsidies and the payments for
For the huge deficits of the railroads and the post office, the government had a tobacco
monopoly and one for salt, but the receipts were meager. But these were sacred cows of
the socialists, and Zeipel did not dare touch them for fear of a violent reaction from the
opposition, especially because unemployment would rise quickly. From the end of August
till the end of December 1922, the number of unemployed receiving government assistance
and the city of Vienna alone rose from 24,000 to 58,000. On February 24, 1923, there were
112,000 unemployed in Vienna and the surrounding districts, of whom 98,000 received government
assistance.
See Mises's undated letter to an unknown recipient. This document summarises Mises's
view on economic conditions in Austria in early 1923. Mises wrote it in reply to an
An unknown Anglo-Saxon friend who had visited Vienna some time earlier.
Throughout 1923 unemployment was at 110,000. It would further increase over the following
years reaching some 200,000 by 1929. He therefore put all his hopes into reducing government
expenditure by dismissing 50,000 civil servants.
Eventually the tension in the Austrian budget was reduced through this process. The stabilisation
of the Kroner and the virtual dependence of Austrian finance on foreign supervision had
reinforced the creditworthiness of Austrian debtors and especially of Austrian local governments.
This tendency was reinforced by those agreements of the Genua Conference that paved the way
for the gold exchange standard, and it was further reinforced by the onset of the great
US inflation of 1920, which came into full swing by early 1923. The United States had
Overcome a minor post-war depression in 1920-1921, Austrian institutions now benefited from a
near limitless inflow of new loans.
This gave a further boost to the ambitious spending plans of the Austrian socialists,
particularly in Red Vienna. American funds financed one of the great experiments of communal
socialism. Within a decade, Vienna was turned into a miniature nanny state designed to provide
for the needs of the working class from cradle to grave.
One mayor of Vienna boasted in Mises' presence, The Viennese is born into social democracy,
he lives in it and dies as he has lived.
To the great dismay of the social bystanders, Mises replied with the Vienna proverb, Some
say that even the owners of four-storey houses are mortal.
The new US loans also supported the violent class struggle of the Vienna trade unions,
which relied on the social infrastructure paid for out of the new public funds. A document
from the time describes the situation from the perspective of Austrian firms. As a consequence
of the terror of the free trade unions, that is, of the social democratic trade unions,
the situation in the factories had become unsupportable. The free trade unions forced
the non-social democratic workers under threats to join their organisations and to contribute
to their various funds. Threatening strikes, they forced the entrepreneurs to recognise
their organisations as the only representatives of the interests of the worker classes. They
prevented the employment of workers with other political orientations, and even demanded
that these persons be fired. Thus, thousands of workers were condemned to unemployment.
The Christian Socialists sought to introduce legislation outlawing the terror of the trade
The credit-fuelled increase of government power also had a profound impact on the traditional
Austrian conflict between industrial and agrarian interests. Austria's conservative landed establishment
came under pressure from two sides. While the imports of agrarian products from Hungary
and other neighbouring countries reduced the price of their products, the Austrian industries
had an ever-higher demand for workers and attracted former peasants through higher wages.
To counter these trends, the landed interests sought to have the government protect them
through tariffs and monopolies, and they sought, unsuccessfully of course, to strike a backroom
deal with big industrialists, pointing out that a stable agrarian sector was the backbone
of the conservative order. The more peasants were drawn into industrial occupations, the
The more they would come under the spell of Marxist organisations and Marxist culture,
it was therefore in the interest of Austria's industrialists, according to the landowners,
not to compete for the agrarian workforce. A very similar, though less dramatic, development
took place in other European countries. The general scheme was always the same – wartime
inflation had been perpetuated after the end of the hostilities to finance the growth of
the welfare state and to cover the deficits of nationalised industries. The governments
of Germany and Russia had pursued this dangerous policy up to the bitter end of hyperinflation
and the collapse of the monetary system. The other governments were less reckless but still
followed the same strategy which they only abandoned once foreign loans, especially from
the United States, became available on a large scale in the framework of the emerging gold
Exchange Standard. At that point they shifted from inflation to debt. With the help of
the United States, Europe's initial problem, a lack of discipline to curtail government
deficits grew worse over the years, reproducing itself, as the Marxists say, on a higher scale.
Mises repeatedly denounced the dispractice in the midst of the roaring twenties in a
lecture on The Therapy of European Public Finance, which he delivered on February 27,
In 1925, to the Hungarian Cobden Association in Budapest, he pointed out that halting the
inflation was not enough. The Major Cobden Sovetschek, Hungarian Cobden Association,
was a group of free market businessmen, economists and journalists in Budapest. Before Mises,
Zombats, Oppenheimer, List and George Paish had spoken at its meetings. They were all
received in the most luxurious conditions, hotel rents, and were probably very well paid
as well. One of Mises's main contacts in Budapest was a certain Felix Schwarz, who
was no academic. Schwarz visited regularly with Mises in Vienna and had contacts with
the Pester Lloyd, a Budapest journal that frequently ran reviews of Mises's books.
It was only the beginning, not the end, of monetary and financial reform. What was needed
was a radical reduction of the expenditure side of the government's budget. It was an
The seemingly unlimited availability of ever more foreign credit
It created the impression that the government had endless resources. The demands for government
support and the confidence in government omnipotence waxed limitless. The roaring twenties set
the stage for the roaring dictators of the thirties.
Hyperinflation, currency competition and monetary reform
Meanwhile the Verein für Sozialpolitik had put the problem of monetary stabilisation
on the agenda for its 1923 meeting. Mises had been invited to write one of the expert
reports to serve as the basis for the discussions, an unexpected sign of attention. Many years
later he wrote, When my money-book appeared in the year 1912, all German reviewers rejected
it with very unfriendly words. It was only due to the monetary collapse, which destroyed
much more than the monetary system that, when the currency catastrophe approached, even
Even the Verein für Sozialpolitik had second thoughts and asked me, rather than Knupp or
Ben Dixon, to write a report on the problems of monetary stabilisation, and that the second
edition of my book in 1924 had a much better reception. He later recalled that his monetary
theories have been studied only when and where inflationist policies faced immediate collapse
such as in the German Reich.
The most fashionable book on money in the years before 1923 was written by Albert Hahn,
a young economist in Frankfurt, developing Schumpeter's Theory of Capital, in which
capital was abstract purchasing power. Hahn stressed that fiduciary credit expansion had
the beneficial effect of creating forced savings and thus higher growth rates than could be
obtained without inflation. In his book he anticipated virtually all the essential propositions
of Keynes' General Theory, 1936, Albert Hahn, Volkswirtschaftliche Theorie des Bankkredits.
Hahn eventually changed his mind under the impact of the German hyperinflation and of
criticism, most notably from Hayek and other members of the Austrian School. Still later,
he wrote a piece comparing his 1920 statements with the corresponding passages in John Maynard
Keynes' General Theory of Employment, Interest and Money. But in 1923, the German economists
started having second thoughts about the blessings of inflation. They wished to listen again
to the voice of dissent. At the end of February 1923, Mises submitted his manuscript, Die
Geldtheoretische Seite des Stabilisierungsproblems, The Problem of Stabilisation Considered from
the Point of View of Monetary Theory. This title is somewhat misleading. In fact,
the essay combines a sophisticated analysis of what today would be called the dynamics
of Currency Competition with the first concise statement of Mises' ideas on how to prepare
for the transition from an inflationary currency to the gold standard. The essay was one of
Mises' most influential works in the sense that it had an immediate and noticeable impact
on the economic policy of the German Reich. Mises began by pointing out that continued
inflation would necessarily end up in the collapse of the monetary system.
In recent months, the German Reich has provided a rough picture of what must happen once the people come to believe that the course of monetary depreciation is not going to be halted.
If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun.
1. This is the beginning of the demonetization of the notes. The panicky quality inherent
in the operation must speed up the process. It may be possible to calm the excited masses
once, twice, perhaps even three or four times. However, matters must finally come to an end.
Then there is no going back. Once the depreciation makes such rapid strides that sellers are
are fearful of suffering heavy losses, even if they buy again with the greatest possible
speed, there is no longer any chance of rescuing the currency, that the German mark is still
used as money today, January 1923, is due simply to the fact that the belief generally
prevails that its progressive depreciation will soon stop, or perhaps even that its value
per unit will once more improve. The moment that this opinion is recognised as untenable,
The process of ousting paper notes from their position as money will begin. If the process
can still be delayed somewhat, it can only denote another sudden shift of opinion as
to the state of the mark's future value. The phenomena described as frenzied purchases
have given us some advance warning as to how the process will begin. It may be that we
shall see it run its full course. And indeed it did run its full course, at least as far
as Germany was concerned. The process accelerated with exponential growth rates during 1923,
culminating in the virtual collapse of the currency in October. In the fall of 1923,
the Reichsbank operated some 1,700 printing presses 24 hours a day and had used the entire
production of 30 paper factories. Eventually, the paper supply threatened to become a bottleneck.
For some time, Mises had to fear that his essay would not be published in time to influence
policy. In May, he wrote to the publisher expressing his misgivings about the delay.
The delay was caused by the other contributor to the volume, ex-Minister Klein, who was
unable to return his proof pages in the agreed time. Publications of the Verein für Sozialpolitik
were usually meant to have an impact on current policy. In his essay, Mises discussed two
The Description given in his essay fits observations he made during the high post-war inflation
in Vienna.
The practice of making and settling domestic transactions in foreign money or in gold, which has already reached substantial proportions in many branches of business, is being increasingly adopted.
As a result, to the extent that individuals shift more and more of their cash holdings from German marks to foreign money, still more foreign exchange enters the country.
In the country, as a result of the growing demand for foreign money, various kinds of
foreign exchange equivalent to a part of the value of the goods shipped abroad are imported
instead of commodities. Gradually there is accumulated within the country a supply of
foreign monies. This substantially softens the effects of the final breakdown of the
domestic paper standard. Then if foreign exchange is demanded even in small transactions, if,
As a result, even wages must be paid in foreign exchange, at first in part and then in full,
if finally even the government recognizes that it must do the same when levying taxes
and paying its officials. The sums of foreign money needed for these purposes are, for the
most part, already available within the country. The situation which emerges from the collapse
of the government's currency does not necessitate barter. A cumbersome direct exchange of commodities
Mises contrasted this smooth transition with the panic scenario which, as he said, was
more likely in the context of the 1923 German inflation. Things will necessarily be much
worse if the breakdown of the paper money does not take place step by step but comes,
has now seems likely all of a sudden in panic. The supplies within the country of gold and
silver money and of foreign notes are insignificant. The practice pursued so eagerly during the
war of concentrating domestic stocks of gold in the central banks, and the restrictions
for many years placed on trade in foreign monies have operated so that the total supplies
of hoarded good money have long been insufficient to permit a smooth development of monetary
circulation during the early days and weeks after the collapse of the paper note standard.
Some time must elapse before the amount of foreign money needed in domestic trade is
obtained by the sale of stocks and commodities, by raising credit and by withdrawing balances
from abroad. In the meantime, people will have to make out with various kinds of emergency
money tokens.
In the early fall of 1923, several institutions sprang up spontaneously that would lead Germany
on the path to replacing the mark. In October, the Hamburger Bank started issuing notes covered
by foreign exchange, and a similar bank was set up in Kiel. Meanwhile, preparations were
made in the Rhineland to establish a bank on a gold standard. The disintegration of
the German economy into several currency areas was imminent, but history took a different
course.
In early August, Carl Hellfleich had presented the government with a rescue plan. Hellfleich's
Helferich's idea was to create new confidence among the population that the decline of the
mark had reached its limit.
His strategy was based entirely on speculations about the layman's monetary psychology.
Helferich proposed to establish a new bank to be called the Rentenbank, endowed with
a claim to 3,200 million marks backed up by all commercial assets in Germany.
Thus, all German firms, including farmers and banks, were said to have a collective
liability to the Rentenbank. The Rentenbank would then issue Rentenmarks.
In the mind of the average German citizen, the Rentenmark, founded on value-stable soil,
had successfully stopped the further erosion of the mark. But the end of the crisis had
a very different source. On the same day the first Rentenmarks came into circulation, the
Printing of new marks was halted, as Mises had emphasized in his report to the Verein
für Sozialpolitik, the first precondition of any monetary reform is to halt the printing
press. Mises believed it was also necessary to bring about a return to gold, advocating
a 100% marginal gold standard. The expression 100% marginal gold standard is, I believe,
Professor Philippe Natars. These two measures were intimately connected. Together they were
designed to drive the government out of the monetary arena. He explained,
The reason for using commodity money is precisely to prevent political influence from affecting
the value of the monetary unit. Gold is not the standard money merely on account of its
brilliance or other physical and chemical characteristics, but because the increase
or decrease of its quantity is dependent of any orders issued by political powers. The
crucial function of the gold standard is that it makes changes in the quantity of money
subject to the laws determining the profitability of gold production.
Yet which particular type of gold standard did Mises have in mind? Apparently he believed
that a full-blown gold standard which involved the circulation of gold coins was not necessary
or advisable under present circumstances. He also believed that a gold exchange standard
in which the currency consists exclusively of fractional reserve banknotes was acceptable
if bank laws strictly limited the issuance of these banknotes. His pre-war studies had
already alerted him to the likelihood that fractional reserve banknotes would be issued
on a growing scale and that there was no natural limit to this type of inflation if it proceeded
slowly in a step-by-step manner. His 1923 proposal therefore advocated 100% reserves
for all additional note issues. Mises's plan thus took the present existence of fractional
reserve notes as irreversible and focused instead on the prevention of any further issuance
of such notes. All additional issues must be completely covered by gold deposited with
the issuing bank.
The foundation and cornerstone of the provisional new monetary system will be the absolute prohibition
of the issue of any notes not completely covered by gold, the amount of Reichsbank banknotes,
of banknotes, of the Dalian Kassen, of the emergency currency of any kind and of token
money will be legislated to be, after deduction of the stocks of gold and of foreign exchange
held by the Reichsbank and by the private banks of issue, the maximum amount of German
and notes in circulation. Any extension of this maximum must be avoided under any circumstances
except for the facilitation of end-of-quarter payments that we already have mentioned. Any
note issue beyond this limit must be fully covered by a deposit of gold or a foreign
exchange with the Reichsbank. This is obviously the adoption of the main Provision of Peels
Bank Act with all its deficiencies, but for the moment these deficiencies hardly have
The deficiencies alludes to concern the absence of legal limitations on checking accounts
and other money substitutes. To determine the most suitable redemption ratio between
Between gold and the currency, Mises recommended that the monetary authority should proceed
by one, stopping the printing press and then, two, letting the exchange rate between its
currency and gold stabilize on the market. In short, stop inflating and then let the
market determine the gold value of the mark. Mises maintained the same views on the technical
aspects of monetary reform for the rest of his career. In 1953, he made the case for
Mises rejected the idea, which would later be maintained by the influential Gustav Kassel,
that there might not be enough gold available to put all countries in the world on a gold
and the gold standard. Mises argued that the pricing process would always equilibrate demand and supply. Moreover, he observed that the global gold supply had increased since 1914 and that trade had decreased so that there was no great danger of lower than 1914 prices.
Finally, it was not necessary to bring about a full-blown gold circulation. A return to
the gold standard would not necessarily mean a return to the actual use of gold money for
small and medium-sized payments within the country, for even the gold exchange standard
developed by Ricardo in his work Proposals for an Economical and Secure Currency, 1816,
is a true and sound gold standard. The monetary history of the recent decades has clearly
have already shown this. Following Ricardo further, he even suggested legislating that
the Reichsbank only be obliged to redeem gold ingots rather than gold coins. This would
act as an effective deterrent against redemption demands that the bank might not be able to
comply with in its first years of operation under the gold standard. At some later point
it might however be useful to counteract the note-using habits of the population and thus
They turned out that Mises's apprehensions about the remaining inflation dangers in a
gold exchange standard were justified. Writing many years later in Human Action, he regretted
the moderate stance he had taken in his earlier writings because it left too much power in
the hands of the government which, through its monetary authority, still issued the gold
Gold Exchange Currency. He denounced the root error behind the gold exchange standard, which
was in seeing the costs involved in the preservation of a metallic currency as a waste. This had
been the mistake of both Adam Smith and David Ricardo, and thus enjoyed immense credibility
and prestige, yet Mises had come to consider it as one of the most serious shortcomings
of the classical economists. In dealing with the problems of the gold exchange
Standard all economists, including the author of this book, failed to realize that it places
in the hands of governments the power to manipulate their nation's currency easily. Economists
blithely assumed that no government of a civilized nation would use the gold exchange standard
intentionally as an instrument of inflationary policy. Mises's case for the restoration
of the gold standard was obviously based on the premise that an inflation-free monetary
Every order would be a good thing, but what if someone objected to this view on fiscal
grounds? These conditional inflationists, as Mises called them, admitted that inflation
was not necessary to equilibrate the balance of payments, but they held that in some situations
it was suitable and expedient for the government to use inflation as a particular form of taxation.
Mises observed that paper money production was indeed one of three possible resources
of Government Revenue, the other two being taxation and borrowing. In his view, economic
science could not determine which of these techniques should be used, but it had a few
things to say about the social and economic consequences of paper money inflation and
also about its political significance. Mises suggested that inflation was by its very nature
undemocratic. A government always feels compelled to resort to inflationary measures when it
is unable to issue bonds and, when it does not dare to increase taxes because it fears
to lose support for its system of government, if the latter's financial and general economic
consequences become obvious too quickly. Thus, inflation becomes one of the most important
psychological instruments of an economic policy bent on camouflaging its effects. In this
sense it may be called a tool of anti-democratic policy because it makes it possible, through
and the deception of public opinion to perpetuate a system of government which would have no
prospect of public approval if all things were openly explained.
Mises here rediscovers a fact that had been first stressed in the writings of Nicolas
Orem, a 14th century scholastic and author of the very first monetary treatise. Orem pointed
out that the basement, the inflation technique of his age, served to enrich the princes at
At the expense of the community, the prince is thereby turned from kings into tyrants.
I have the opinion that the main and final cause why the prince pretends to the power
of altering the coinage is the profit or gain which he can get from it. The amount of the
prince's profit is necessarily that of the community's loss, but whatever loss the prince
inflicts on the community is injustice and the act of a tyrant and not of a king, as
as Aristotle says, and so the prince would be at length able to draw to himself almost
all the money or riches of his subjects and reduce them to slavery, and this would be
tyrannical, indeed true and absolute tyranny as it is represented by philosophers and in
ancient history. Recalling the intimate relationship between the welfare state and the warfare
Inflationism belongs to imperialism, to militarism, to protectionism, to statism, to socialism,
in the same way as the sound money policy of the champions of the gold standard had
belonged to liberalism, to free trade and to pacifism. And just as the global catastrophe
that has swept over mankind since 1914 is not an elementary fact of nature but the necessary
consequence of the ideas that rule our times, so is the destruction of our monetary system
nothing but the necessary consequence of the dominance of certain ideologies of monetary
Policy
A few months after the stabilization of the mark, the position of the banks and other
private firms that depended on continued inflation in Germany had become untenable and they started
scrambling for cash. Many went under, the most prominent case being the Biedermann Bank,
whose president was Josef Schumpeter. In the interwar period, the large Austrian banks
had consciously sought to win economists of Schumpeter's standing as frontmen to reassure
for their creditors from abroad. They had also asked Mises for support several times,
but he always rejected these proposals because he thought the commercial banks were all bankrupt.
He probably could have increased his revenue several times if it is licit to extrapolate
pre-World War I data. Indeed, before the war, the leading executives of the Kreditanstalt,
Spitzmüller, and of the Bodenkreditanstalt, Sieghart, had a basic annual income of 50,000
Theory of Money and Credit reconsidered. Sometime before March 1923, Mises had talked
to representatives of Dunker and Humblot about a second edition of Theorie des Geldes und
He planned to incorporate several major necessary additions, but intended to make cuts elsewhere
in order to maintain the overall size of the book. He rejected a first offer as insufficient,
both financially and because it stipulated that he cut the book by one sixth. He pointed
out that the contract concerning the first edition, which eventually sold out entirely,
had been unfavourable to him since he did not even recover his expenses. Eventually,
He signed a contract on May 31, 1923 that stipulated a production of 2,000 plus 50 complimentary
copies and 150 for review. Mises had Duncker und Homblat send 14 of the 50 complimentary
copies directly to the recipients. He himself distributed the remaining 36 copies. Although
the message of the first edition was unaltered in its essentials, he felt obliged to take
like account of various recent developments in economic theory as well as changes in his
own views, most notably his new perspective on the economics of socialism. He also wanted
to further develop the theory of interest and business cycle theory about which he now
believed he had previously underestimated the significance of his own contribution.
I have come to the conclusion that the theory which I put forward as an elaboration and
and continuation of the doctrines of the currency school is, in itself, a sufficient explanation
of crises, and not merely a supplement to an explanation in terms of the theory of direct
exchange as I supposed in the first edition. He also added a section on current problems
of banking policy, a chapter dealing with the monetary theory and policy of statism,
and an essay on the classification of theories of money. He deleted long sections dealing
with historical cases of hyperinflation. These passages had been necessary in 1912
at the end of a long phase of monetary stability to illustrate the possibility of inflationary
dangers lurking around the corner if the policies of the day continued. In 1924 this was no
longer necessary. The experiences of recent years afford sufficient illustrations of the
fundamental argument to allow these discussions now to be dispensed with. Indeed, Germany's
Mises' hyperinflation was a striking illustration of Mises' argument, especially impressive
were his predictions of inflation's social consequences, that is, the redistributive
effects. All inflations entail redistribution to the benefit of those who received the new
currency first, but the German inflation entailed redistribution on such a massive, visible
scale that few could fail to notice it. While the personal savings of most people had become
Mises' anger about these events was not directed against those with political connections,
but to those who made such connections relevant to amassing such fortunes. A passage from
an unpublished draft of his introduction to the second edition reveals his state of mind
at the end of 1923. Reckoning with the leaders of the campaign of lies against his book,
Between the first and second edition of this book, the European governments waged a war
against economic science that was as tenacious as it was unsuccessful. It was the pitiable
collapse of their politics that showed those empowered the limits of their might. The statist
theories have collapsed with the politics of statism, and economic science, long disdained,
has reclaimed its place of honour. It was inevitable that the first edition of this
His book, although it only sought to serve the truth, was passionately, bitterly and
perfidiously attacked by the champions of the theories that prepared the way for monetary
debacle. He had planned to give the new introduction the title, The Place of the Theory of Money
and Fiduciera Media, within the system of theoretical economics, but also abandoned
this idea. At the end of March 1924, the last part of the manuscript was in the hands of
of the Publisher and Dunkle und Humblatt worked feverishly toward completion of the printing
in the summer semester. The first paperback copies were finally ready in the second week
of July and the bookbindery delivered the hardcover copies on July 18th.
From the start, the book sold exceedingly well for a theoretical treatise, especially
one that opposed mainstream views on its subject. In 1932, Dunkle und Humblatt already talked
about a third edition of the book, and in light of the sales, it is certain that this
edition would have been forthcoming. The rise of National Socialism in Germany prevented
this project. The success was not entirely surprising, given Mises' new prominence as
a member of Austria's first post-war government and author of Gemeinwirtschaft. The German
hyperinflation and the enormous inflation in German Austria had seriously damaged the
and the credibility of the established authorities. Professional economists and other social scientists
were looking for other approaches. In this context Weber's remark in his posthumous
Wirtschaft und Gesellschaft, that of all monetary theories Mises's was the most acceptable,
had directed the attention of a broader learned readership to the work of this Austrian economist.
German Economists Return to Classical Liberalism
The second edition of Theories des Geldes unter Umlaufsmitteln arrived just in time
for the annual meeting of the Verein für Sozialpolitik, which took place in late September
1924 in Stuttgart. It provided a welcome antidote to the German edition of John Maynard Keynes's
tract on monetary reform, which Dunkler & Humlatt had published some months before Mises's
book. In his book, Keynes had adopted the position of Irving Fischer and Gustav Kassel,
According to which, monetary policy should strive to stabilize the purchasing power of
money.
Meanwhile, Germany's situation had improved considerably.
In May, the revanchiste Pointe-Carré government had lost the general elections in France,
and the new leadership under Ariel Pernedé and Brion immediately set out to bring about
an end to the politics of seizure in the rule.
As a consequence, the German government was finally able to come to a financial agreement
with its former enemies, and obtained even better conditions than Austria had in the
Geneva Protocols two years earlier. Germany obtained Western credit for 800 million gold
marks to bolster the reserves of the Reichspank and thus enable it to operate on a gold exchange
standard. In contrast to Vienna, the Berlin government did not have to make any of the
far-reaching concessions that would have diminished its political sovereignty. The agreement that
A level of optimism finally returned to the population.
This apparently helped the German economists face up to the crisis of social policy that
Weber and Mises had caused with their recent writings.
The assembly in Stuttgart broke new ground in the history of the Verein für Sozialpolitik
Then, on the last two days of the meeting, the great majority of the speakers endorsed,
with some qualifications, the case for free trade. This ended the more than 50-year-old
tradition of monolithic advocacy of the welfare state, inflation and protectionism.
Two years before, at the 50th anniversary convention in Eisenach, Mises's friend Georg
Hahn had unsuccessfully agitated for the transformation of the Veyrein into a pure research association.
Two motivations seem to be at work in this attempt. On the one hand, Max Weber's ideal
of a value-free social science had won many followers among the younger generation. On
the other hand, the Socialist November Revolutions of 1918 had produced a political radicalisation
of its members and of the larger society. This radicalisation diminished the status
of the middle-of-the-road mainstream, which in the past had been the main agent of political
for Compromise within the Verein and of its application in government policy.
The debate had been put on the schedule at the very last minute. Two considerations came
into play. First, in January 1925, the German government was going to recover its sovereignty
in matters of foreign trade. It had been denied this freedom by the Treaty of Versailles.
Second, the Doors plan had finally created a reliable basis for policy-making. True to
To its mission, the Vereins sought to give intellectual guidance to the forthcoming parliamentary
debates, though it was impossible to commission any research papers before the Stuttgart meeting.
Herckner's choice of the invited speakers was therefore bound to set the tone for the
entire debate.
He chose four well-established economists, who he knew to be open to free trade – Max
Ehring, Christian Eckert, Bernhard Harms and Georg Gotthein.
At the meeting, these men did indeed call on the German government to pioneer the re-establishment
of global free trade, but Gotthein and Ziering argued that some tariffs should be kept in
place, not as a protection for certain industries, but as the basis of future international negotiations
to enhance further the freedom of trade.
These statements were so well received that 107 participants went on to sign a proclamation
Mises' friend Georg Jahn expressed the significance of the event in a 1927 essay on the free trade
movement in Germany.
The new free trade initiatives have found expression in a proclamation that was agreed upon in
Stuttgart 1924 in the wake of a meeting of the Verein für Sozialpolitik dealing with
the reform of trade policy, and which was signed by a great number of academic economists.
The Proclamation says, Germany's new economic structure, the implications of the London Agreement
and important changes in the forces cooperating on the world market have confronted Germany
with an entirely new trade political situation. The undersigned representatives of the economic
and social sciences, among them many who before the war had advocated the basic principles
of then protectionist German trade policy, emphasize that under current conditions Germany
Industry is forced to make the advantages of world trade its own, most notably in order
to rationalise its agriculture and its industry. Hence they can concur with industrial and
agrarian tariffs, only to the extent that these are necessary and adequate means to
make international trade more liberal.
Jan went on, What these academic economists demand is nothing less than restoration of
trade policy to the free trade ideas of the nineteenth century. Major parts of agriculture
and Industry might continue to be in need of protection, but the greater interest of
the State is in free trade and not in the conservation of a system of protective tariffs
which increases rather than diminishes the problems. It was probably the most joyful
experience that Mises ever had at averein meeting even though he did not fully concur
with all provisions of the proclamation. By the end of October 1924 he had not signed
The events most certainly took him by surprise. Returning from his summer vacation in Bad
Gastein, Mises had spent only a couple of days in Vienna and then travelled to Stuttgart.
He did not plan to take part in the discussions, but eventually gave in to the demands of the
other participants who rightly saw in him one of the main driving forces behind the
apparent new orientation. Mises spoke from notes consisting of key words. He later developed
protectionist ideas had lost much if not all of their old attractiveness for this group,
And it is not different in the field of monetary theory. All advocates of the state theory
of money have disappeared, and some who not long ago advocated abolishing the gold standard
now advocate calculation in gold and the gold standard.
He also took a shot at those who, like Alfred Schmidt Essen, in those days an influential
writer on monetary questions, claimed that the gold standard is a monetary order in the
exclusive interests of the United States and England. Turning this argument on its head,
Mises said, It was not a foreign commodity that depreciated our currency but a foreign
doctrine, the fight against and the rejection of the quantity theory that we accepted with
a banking theory.
Then he recollected the story of how, on an evening three years earlier, he walked with
a German visitor through the streets of Vienna.
While most factories stood silent or had significantly reduced their operations, only the printing
presses of the Austro-Hungarian bank were busy.
Mises had definitely improved. The inflation had been stopped, and the party of inflation
and its theories, most notably the banking theory of money, had lost much of their authority.
At the Verrhein meeting, Mises's views did not encounter any serious resistance. Melchior
Parry merely objected that his criticism of the banking theory had gone too far. The only
view that Mises himself opposed was Frederic Sommarney's contention that monetary reform
was a matter of constitutional amendment. Anticipating a tenant of the late 20th century
school of constitutional economics, Zummery claimed that monetary stability was essentially
a legal issue that could be solved through a suitable monetary constitution that limited
the powers of the central bank management. Mises objected that this approach does not
get to the root of the problem, namely the inflationist mindset. Ultimately, central
Bank policies are determined by ideas, not by legal codes.
Criticising the effectiveness of monetary policy, Mises also seemed to advance an early
version of the rational expectations argument. He stressed that he did not want to argue
that future inflation would be prevented by more enlightened monetary authorities. His
point was rather that economic enlightenment of the general public would deny inflationary
Silver Linings on the Horizon
The successful second edition of the Theorie des Geldes and the reorientation of the Verein
für Sozialpolitik were symptoms of a changed intellectual and political climate that came
came into full swing after 1923, the year of the crisis of social policy and of the
stabilisation of the mark. Central to both events were Mises's writings. This fact
did not reach the attention of the larger public but was obvious to all leading circles
in academia and in monetary policy. His impact in those years was limited primarily by his
deficiencies as a communicator. He was not an orator and lacked the charismatic personality
to win over an audience. He had a fine and dry wit, but was often too subtle for those
outside Europe's highest society, and when he gave talks in foreign languages his wit
abandoned him. He certainly was not at ease in French or English. His accent was strong
when speaking English, and his French, although significantly better, was far from perfect.
Who knows what turn the history of the 1920s might have taken had Mises enjoyed the communicative
of Gifts, a Maynard Keynes, an Erwin Fischer, a Werner Sombart or an Ottmar Spahn.
Still Mises did have a significant impact. After 1924 he became a sought-after speaker
and also after 1925 the official representative of the Austrian Chambers of Commerce at the
International Chamber of Commerce. These meetings and the connections he was building at the
London School of Economics provided Mises with the opportunity to disseminate his views
throughout Europe.
Next week I will travel to Brussels, to the Chamber of Commerce Convention, and then to
London where I will again look up my English friends.
I have great expectations for the visit, even if I can only stay in London for a short time.
He was a vocal champion of a return to a gold standard.
His efforts were crowned with the introduction of a gold exchange standard in Austria.
It was only a gold exchange standard, a fractional reserve system with a lower reserve ratio
show than its predecessor the classical gold standard, but at least notionally gold was
once again the money of the country. A new gold-based currency, the shilling, replaced
the corona on January 1st 1925. The conversion rate was 10,000 kronen for one shilling. The
corona had been introduced in 1892 in substitution for the golden banknotes, which however circulated
during the next few years. The substitution process was ended by January 1st, 1900. Little
Austria thus spearheaded a movement that came into full swing when Great Britain returned
to gold a few months later, on April 25th. In many ways this reform paralleled the 1892
reform that had first introduced the kroner itself a gold-based currency. Both reforms
enjoyed the decisive support of Austrian economists. Just as the original kroner could be called
The brainchild of Carl Menger, so the original shilling was the fruit of Mises's labour.
In the preceding year, Mises had been given a prominent forum to explain and justify the
necessity of the reform. He did so in a widely publicised lecture that he delivered to the
annual plenary meeting of an association of German industrialists in the new Czechoslovakian
republic. Mises made the case that the return to the gold standard was the most pressing
Problem of Present-day Monetary Policy
The name of the association was Deutsche Hauptverband der Industrie. The meeting took place at
the association's headquarters in Teplitz on March 15, 1924. Mises might have given
a similar talk to the Association of Merchants and Industrialists in Berlin, der Rhein-Berliner
Kaufleute und Industrieller. A local newspaper had been given a long abstract of his manuscript
The circumstances of this appearance are interesting in that they give a taste of the conditions
under which Mises had to operate in those days. The secretary of the association, a
and Dr. Janowsky had approached Mises to give a talk on present-day problems of public finance
and monetary policy. When Mises chose the title Return to the Gold Standard, the main
problem of present-day monetary policy, Janowsky feared this speech would seem irrelevant to
people interested in practical affairs. He also feared that Mises' remarks would be
too controversial. The meetings of the association did attract considerable attention among political
Social circles in Czechoslovakia and neighbouring countries and statements from the keynote
speakers were commonly interpreted as reflecting the official position of the association.
According to Yanovsky, the association had not yet come to a firm opinion on the question
of Czechoslovakian monetary policy. Yanovsky mentioned, however, that the last resolution
the association passed on monetary questions had endorsed the policies advocated by John
and Maynard Keynes, who opposed the return to pre-war parities for all strongly depreciated
currencies. He did not mention that he himself was an advocate of banking theory-style economic
policies and had engaged in in-fights with local admirers of Mises, such as Fritz Wolfram.
Yanovsky later became a Misesian, see his February 3, 1932 letter to Mises in which
In which he criticizes the currency proposal of a certain Jelinek as not conducive to
the aims he has set himself. In the fall of 1932, Janowski gave a speech before the Gesellschaft
Österreichischer Volkswirte. Mises was instrumental in arranging this talk. Mises criticized the
reform proposals of Keynes, Josiah Stamp and Fisher as overrating the usefulness of price
indices to measure the value of money. He stressed that the great advantage of the gold
The gold standard was not any sort of value stability, but rather its independence from
the political process. The pre-war decline in the purchasing power of gold had not resulted
from the production of this metal, but from the production of fiduciary media. Whatever
its deficiencies, the gold standard was superior to government-managed money.
For Mises, 1925 also brought a significant breakthrough on an entirely different level.
He finally met the woman who would become his wife. Margit Sereni had been one of six
guests at a dinner party held by Fritz Kaufmann, a young lawyer and member of Mises' private
seminar. It is almost a miracle that Mises won the heart of the lady sitting next to
him, for he spent most of the meal discussing economics. On the other hand, his preoccupation
and gave her the opportunity to observe him. This is how she perceived him.
What impressed me were his beautiful clear blue eyes, always concentrated on the person
to whom he talked, never shifting away. His dark hair, already a little greyish at the
sides, was parted, not one hair out of place. I liked his hands, his long slim fingers,
which clearly showed that he did not use them for manual work. He was dressed with quiet
elegance, a dark custom-made suit, a fitting silk necktie, his posture indicated that he
must have been a former army officer.
This book is, as the author correctly points out, the only available testimony on Mises,
the man from a first-hand source, but its statements are not fully reliable as two examples
So, first, the author lied about her age, claiming to be six years younger than she
really was. Even on her gravestone, the birth year is incorrectly given as 1896. Her correct
birth year is stated in her marriage certificate as well as in US immigration paperwork as
1890. Second, Margit states that she was the only woman he wanted to marry from the first
moment he met her. While this statement might be true, the following sentence in which she
He claims that Ludwig never changed his feelings or his mind about this decision is demonstrably
wrong as we will see in a later chapter. These examples show that Margit von Mises' biographical
recollections must be read with caution. The present work uses his statements only where
other evidence does not contradict them. He talked to her after dinner and they went to
a dance club. Apparently Mises was a poor dancer, at least by Margit's standard, and so they
When they spent most of the night talking, actually she did most of the talking and he
listened attentively. Margit was an attractive woman of five foot four with brown hair and
grey-blue eyes. Now as they talked he discovered she was also a witty and warm person. He must
have fallen in love with her that evening. The next day he sent her red roses and asked
her out for dinner. It was the first of many such dinners over the next two years.
Margit Zereny was an actress from a bourgeois background in Hamburg. During the war she had
performed on one of the leading stages in Vienna, the Deutsches Volkstheater. When Mises
met her she was 35 years old and a very attractive widow with two children, Guido and Gitta.
Shortly after her arrival in Vienna in early 1917 she had married Ferdinand Zereny, a Hungarian
An aristocrat who died in 1923 bequeathing to her assets that had lost most of their
value during the inflation. Characteristically, Mises was cautious even when his feelings
might have threatened to overwhelm him. Could he trust an actress? As Margit later pointed
out, most people in polite society considered actresses to be high-class call girls. Ludwig
Friedrich seems to have shared this prejudice. At any rate, he took precautions, as he later
confessed to his wife he had checked some of her statements about her professional development
by consulting the records in the archives of the Neue Freie Presse. He probably also
talked to his cousin Rudolf Streisauer, who had been Ferdinand Zerlini's physician. These
investigations confirmed Margit's version of things. But there were more fundamental
Ludwig's mother Adele had great reservations about Margit.
Actually none of his girlfriends had ever met with her approval.
She must have imagined a different sort of wife for her beloved son, and her opinion
had a great weight for Ludwig, especially since he held certain philosophical views
that would have deterred him from marriage anyway.
As a social institution, marriage is an adjustment of the individual to the social order by which
a certain field of activity, with all its tasks and requirements, is assigned to him.
Exceptional natures, whose abilities lift them far above the average, cannot support
The Coercion, which such an adjustment to the way of life of the masses must involve.
The man who feels within himself the urge to devise and achieve great things, who is
prepared to sacrifice his life rather than be false to his mission, will not stifle his
urge for the sake of a wife and children. In the life of a genius, however loving the
woman and whatever goes with her occupy a small place. We do not speak here of those
as well as great men in whom sex was completely sublimated and turned into other channels,
cunt for example, or of those whose fiery spirit insatiable in the pursuit of love could
not acquiesce in the inevitable disappointments of married life and hurried with restless
urge from one passion to another, even the man of genius whose married life seems to
take a normal course, whose attitude to sex does not differ from that of other people,
can not in the long run feel himself bound by marriage without violating his own self.
Genius does not allow itself to be hindered by any consideration for the comfort of its
fellows, even of those closest to it. The ties of marriage become intolerable bonds
which the genius tries to cast off, or at least to loosen so as to be able to move freely.
The married couple must walk side by side amid the rank and file of humanity. Whoever
wishes to go his own way must break away from it. Rarely, indeed, is he granted the happiness
of finding a woman willing and able to go with him on his solitary path.
Mises's treatment of the genius was anticipated by George Bernard Shaw in his Earning a Living
and Creative Work. Mises did not know this passage from Shaw at the time. Twenty-five
Five years later a German correspondent pointed out the parallel. This passage survived all
editions of the book. Ludwig was slow to allow Margit on to his hitherto solitary path, but
on the other hand he was longing for the love of a true companion. Margit later surmised
that a deep-seated dissatisfaction with his entirely public life was the true cause of
of his infamous temper, the most terrible outbursts he reserved for the woman he loved.
His temper was as astonishing as it was frightening. Occasionally he showed terrible outbursts of
tantrums. I do not really know what else to call them. Suddenly his temper would flare
up, mostly about a small unimportant happening. He would lose control of himself, start to
After a few years of married life, however, he became much more reasonable and less easy
to Anger.