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NOTE 12. Winds of War

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Part 4. Mises in his prime Chapter 12. Fresh Start

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Austria's situation considerably worsened under the impact of the Treaty of Saint-Germain-en-Leu,

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signed on September 10, 1919. The treaty was a diktat rather than a true agreement, designed

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to ensure the political weakness of Germans rather than durable peace among the nations.

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During the 1920s and 30s many testimonies and analyses appeared in France, Britain and

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the United States that condemned the treaty as a prolongation of the hostilities by other

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means and thus as a heavy burden on future peace in Europe. It placed all burdens attributable

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to the Austrian part of the Austro-Hungarian monarchy on German Austria and in all questions

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pertaining to the relations between the successor states of the monarchy, it ruled against German

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in Austria and in favour of the other states. This procedure was based on the view that

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the Habsburg family had pursued a long-standing policy of German hegemony vis-à-vis the Czech,

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Slovenian, Italian, Croatian and Polish peoples, and that therefore the German Austrians now

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had to bear all costs related to the military defeat and to the dissolution of the empire.

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In accordance with this view, the treaty stipulated that the Republic of Deutsch-Österreich, German-Austria,

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changed its name into Republik Österreich, an unusual provision, to say the least, but

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the new Republic of Austria had also to endure humiliating demands of a less cosmetic nature.

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While the principle of national self-determination had been used to justify the separation of

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Czech, Polish and Yugoslav lands from the Austro-Hungarian Empire, the goal of making

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the Germans pay trumped principle. In the Czech case, historical law was invoked to

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to justify the incorporation of the Sudetenland, which had first been settled by Germans and

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still had a vast German majority, and in the case of Italy the establishment of a natural

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border at the Brenner Pass brought South Tyrol under Italian dominion. In German Austria's

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own case, independence was considered more important than the desire of its inhabitants

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to join the German Reich. Three months after the Treaty of Saint-Germain had been signed,

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All the Austrian Provincial Parliaments voted resolutions in favour of the establishment

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of economic union with the German Reich. The Entente reacted immediately on December 17,

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1919, insisting that Austria's political and economic independence not be relinquished.

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German Austria lost almost 40,000 square miles, more than a third of its soil territories

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is that for centuries had been inhabited and cultivated by Germans. Most of the other stipulations

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of the treaty further humiliated German Austria and poisoned relations with its neighbours.

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The most pressing problems were of a financial nature. The Allies were holding German Austria

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alone responsible for the debts of the former Austro-Hungarian Empire. Because war bonds

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and other war-related debts were denominated in Cronin, they could be handled through the

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and the printing of more banknotes, but two other financial liabilities proved permanent

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and pernicious – the salaries of the civil servants and the massive deficits being run

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up by government-owned industry.

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Civil servants in Austria-Hungary had been predominantly German and a great number of

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them lived in Vienna. After the dissolution of the empire, German-Austrians found themselves

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in the awkward position of having five million citizens supporting a civil service developed

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for 50 million. Various means would try to reduce the number of civil servants, but in

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1922 one out of ten men still received a salary from the public treasury. While the excessive

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number of civil servants was an inheritance from the old empire, public firms running

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huge losses were the achievement of the social democrats who had socialised the coal mines

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and other industries. Under these circumstances it was out of the question for German Austria

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were to pay damages to anyone. Its citizens were hardly able to feed themselves, especially

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in Vienna. The traditional trade channels with the eastern provinces no longer existed, trade

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with its Czech, Yugoslav, Hungarian and Polish neighbours, who were even more nationalist

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and protectionist than the Austrians themselves, had fallen to a minimum. Far from being able

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to pay reparations, German Austria depended for survival on the financial support of its

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Hayek and the Bureau for Claims Settlements According to Article 248 of the Treaty, the

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new Austria had to pay damages to foreign governments and their citizens. These foreign

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beneficiaries were not limited to the Entente powers, but included the non-German territories

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of the old Austria, which, according to the stipulations of the Treaty, were counted

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as States Associated with the Entente. Article 248 had largely been copied from

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an analogous provision of the Treaty of Versailles, which concerned the much less complicated

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case of Germany. It was completely unclear how it should be put into practice in the

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Austrian case. Once again, it was the public administration experts from the Vienna Comma

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who had to find a way out. During the war, Mises's friend, Emil Peels,

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founded an office for the protection of Austrian assets abroad, the purpose of which was to

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protect the private claims of the citizens of Austria-Hungary and to establish records

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of existing claims of these citizens on those of enemy countries. After the ratification

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of the Treaty of Saint-Germain in the fall of 1920, the Austrian government transformed

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this organisation into the Abrechnungsamt, a governmental bureau for claim settlements.

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Peers remained the chief executive and several other men were also appointed to its board,

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Mises among them. The two commerce secretaries shared a predilection for efficient organisation

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and kept the new bureau for claim settlements as small as possible.

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While its German equivalent in Berlin had more than 1,000 employees by 1922, the Vienna

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Organization, which had to deal with far more complicated cases, had a headcount of 150.

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In June of 1922, Peels left the Bureau for a more prestigious appointment, and Mises

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succeeded him. Two and a half years later, Mises quit the position too, ostensibly because

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his new position as Vice Director of the Commer and his research agenda did not leave him

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enough time to shoulder the responsibilities of the office. His former employees praised

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him for using his contacts in industrial and banking circles for the successful floating

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of a bureau bond, uprechnungs-schuldverschreibung, to finance the payments resulting from the

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settlement process, but the newspapers reported on conflicts between Mises and the finance

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ministry concerning payments of pre-war debts, which the ministry had delayed. In short,

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the problem was that Mises had persuaded certain people to finance his government, and now

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Now the government refused to pay them back. Mises wanted no part of such an organisation.

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For Mises himself, the time he spent at the Bureau for Claim Settlements was especially

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memorable because it brought him in touch with the young student who would eventually

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become his most important intellectual ally and a friend for many years.

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By December 1921, Friedrich August von Hayek, 1899-1992, had received his first doctorate

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in law when he applied for a position at the Bureau. Mises himself conducted the interview.

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Hayek presented a letter of recommendation from Friedrich von Wiese, who praised him

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as a promising young economist. Mises smiled and said he had never seen Hayek in his lectures,

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But given Mises' letter, it would be rude to reject the young man, so he hired him on

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the spot. Mises assigned him to research money and banking theory. Hayek quickly showed himself

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a useful assistant, alerting Mises to the case for free banking. More than any of his

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fellow students, Hayek was an adventurer. His peers, Habeler and Virglin, were anxious

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not to leave the well-trodden career out. They eventually left Vienna to study in the

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in the United States when prestigious Rockefeller stipends became available for Austrian students

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in 1924. The Laura Spellman Rockefeller Fund had followed a 1922 suggestion by Beardsley

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Rommel to move into the field of the social sciences. In 1923 the fund started investing

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in social research with an explicit long-term scientistic orientation. In the same year

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The Social Science Research Council was established, also on the initiative of Rommel, but Hayek

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was curious enough to travel to New York on his own, with no money and only his capacity

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and readiness for intellectual hard work. Mises encouraged and supported the project.

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Upon receiving his second doctorate in economics, Hayek left for New York City in March of 1923

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and stayed until May 1924.

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On the boat to New York he started translating Pierson's article on the value problem in

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socialist societies.

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The translation was probably ready in August and Hayek submitted it to Weiss, who at the

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time was the editor of the Zeitschrift.

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He found employment as a translator for economics Professor Jeremiah W. Jencks, whom he had

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met in Vienna in the spring of 1922.

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Later he also worked for Professor Wesley Mitchell at the National Bureau for Economic

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Research collecting data for his book on business cycles.

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Mitchell was a great admirer of Mises and Hayek provided him with background information

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that Mitchell used in his preface for the American edition of Mises textbook. Hayek

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also talked to him about Mises. To Mitchell's mild astonishment, Hayek put Mises in the

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The same class as Voltaire, Montesquieu, Tocqueville and John Stuart Mill.

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When Hayek returned to Vienna, he was thoroughly acquainted with American methods of business

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cycle research, knowledge that would prove to be highly useful two years later.

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When Mises established an Austrian Institute for Business Cycle Research, mainly to provide

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Hayek with a suitable position, Hayek's teacher Wieser had been the main contact of

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of the Rockefeller Foundation among the academic economists in Vienna.

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He made sure that Hayek was granted the first Rockefeller Fellowship while he was still

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in Manhattan, but the notification reached the young man only after he had already returned

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to Vienna. By then he was unwilling to accept the fellowship.

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Mises then tried to hire Hayek for the Commer Library, but it was Habeler who eventually

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fighting inflation There was a reason Mises encouraged Hayek

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and all students, he mentored, to study the problems of currency and banking.

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Austrian public finance was in terrible shape, and the government paid for substantial parts

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of its expenditures by printing more money.

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Time controls on foreign exchange were still in place to encourage the belief among the

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citizens that the government was fighting rather than creating inflation.

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Mises successfully mobilised the Commer apparatus to oppose foreign exchange control. In the

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Commer General Assembly he quoted from letters in which affiliated entrepreneurs described

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how the current monetary regime made it virtually impossible for them to serve geographically

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Closely Close Customers who used a very different currency. Mises also had a more direct impact

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on monetary policy. Owing to his position in the Bureau for Claim Settlements and in

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the first Renner government, he was one of a handful of senior advisors to the Austro-Hungarian

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Bank, the central bank of the old monarchy which survived several years into the Republic.

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The governor of the bank, Alexander Spitzmiller, was determined not only to stop the fall of

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of the Corona, but to increase its exchange rate in a manner similar to what Churchill

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was about to do in Britain. See, for example, the documents concerning a May 24, 1921 meeting

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on the premises of the Bank to discuss exchange rate policies. Among the participants were

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Spitzmüller, Wieser, Schumpeter, Svetlant, Schiff and Mises. Mises certainly opposed

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Spitzmüller's plan and disagreed with his view that a stabilisation of the Corona act

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its present low value would amount to a bankruptcy of the state. Mises's position can be inferred

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from his writings including the following passage in a 1923 essay. It is quite wrong

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to consider devaluation to be a case of state bankruptcy. Stabilisation of the present low

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value of money even if considered only with respect to its effect on existing debts is

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is something very different. It is both more and less than state bankruptcy. It is more

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than state bankruptcy to the extent that it affects not only public debts but also all

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private debts. It is less than state bankruptcy on the one hand to the extent that it also

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affects the government's assets denominated in paper money, on the other hand to the extent

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that it does not affect its obligations denominated in hard money or foreign currency.

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The general economic effects, and in particular the trade-political effects of any money-induced

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change of the purchasing power of money, hence also the effects of a rising purchasing power

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of money, weigh in against any attempt to raise the value of money before stabilising

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it. The present level of the value of money should be stabilised.

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Mises pointed out that it was not possible to compensate the owners of claims denominated

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in Marx for losses they have suffered from 1914 to 1923, because the present owners of

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the claims are not always identical with those who have suffered a loss. The bulk of their

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fungible claims, and the considerable part of all other claims, have changed hands over

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the years. His argument ultimately won the day and provided the basis for the currency

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reforms of the fall of 1922, but only after fierce resistance from Spitzmiller, who remained

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Spitzmüller had taken measures that in my eyes were inadequate. I have publicly spoken

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against these measures, for example against foreign exchange controls, and I have frequently

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explained my standpoint in discussions with Excellency Spitzmüller. I have not succeeded

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in convincing him of the pertinence of my views.

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Spitzmiller remained faithful to his line even many years after the event. In March of 1929

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he gave two lectures on the policy of the Austrian Central Bank. He attacked the stance

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taken by the bank and by the industry, and in his second lecture also dealt several times

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Times with Mises, whom he criticised for an alleged lack of consistency.

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Spitzmiller later honoured Mises as the most important Austrian monetary politician. Mises

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reacted to a statement to this effect of Spitzmiller's in a comment made at the 1924 meeting of the

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Verein für Sozialpolitik. However, Mises always stressed that his influence was entirely

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through Writing and Public Lectures The monetary stabilisation of 1922 was the

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only time official policy met with his approval. On October 21, 1921, Mises lectured before

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the Österreichische Politische Gesellschaft, Austrian Political Society, on the present

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state of Austria's public finance. He argued that the government budget could only be balanced

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by eliminating food subsidies and selling public enterprises.

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Every other proposal fundamentally failed to come to grips with the question of how

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to balance the budget. The Schalber government still preferred the printing press. The ever-increasing

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production of corona notes was soon followed by a decrease in real purchasing power. The

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more banknotes the Austro-Hungarian bank issued, the weaker they became. This development became

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In Germany, where the same phenomenon could be observed, the most eminent monetary expert,

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Reichsbank-President Rudolf Havnstein and Finance Minister Karl Helfrich, believed there

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was no causal connection between these events. The decline of the purchasing power of the

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The mark resulted, among other things, from the deficit of Germany's balance of payments,

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and the Reichsbank's increase of the nominal mark supply was necessary to prevent a further

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decline of the mark supply in real terms. These views impressed the Austrian public

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and influential circles within government, but Mises was unconvinced. The purchasing

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power of money declined faster than the new banknotes were printed, but that was because

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Because of the present expectations of moneyholders concerning the future purchasing power of

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their money. If the future prospects for a money are considered poor, its value in speculation,

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which anticipates its future purchasing power, will be lower than the actual demand and supply

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situation at the moment would indicate. Prices will be asked and paid, which more nearly

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correspond to anticipated future conditions than to the present demand for and quantity

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of Money in Circulation. The monetary units available at the moment are not sufficient

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to pay the prices which correspond to the anticipated future demands for and quantity

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of monetary units, so trade suffers from a shortage of notes. There are not enough monetary

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units on hand to complete the business transactions agreed upon. This phenomenon could be clearly

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seen in Austria in the late fall of 1921. Thus there was in fact a causal relationship

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between the increased production of money and the over-proportional decline of the purchasing

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power of money. The decline of Austria's money could not be stopped or even reversed

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through the printing press. On the contrary, more inflation would aggravate this situation

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even further. The problem was that Spitzmiller's Austro-Hungarian bank was still a stronghold

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of the party of inflation, this concern to particularly the Austrian directors, who were

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The Hungarian directors were generally advocates of the gold standard. Mises made this point

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in a 1924 Verein für Sozialpolitik debate with Spitzmüller. The bank followed the Helferich-Havenstein

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line in a desperate attempt to catch up with the shrinking kroner by printing yet more

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of them. Mises tried to steer counter as much as possible, placing two articles in

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in the Neue Freie Presse in March 1922, Inflation and the Shortage of Money against the Continued

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Use of the Printing Press, and The Austrian Monetary Problem 30 Years Ago and Today a

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Commentary.

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The editor of the Neue Freie Presse, Moritz Dulp, thanked Mises especially for the latter

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piece in which he had quoted from a speech by Carl Menger, who was himself a former editor

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of the NFP. He especially sought to raise the public's awareness of the destruction

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that the inflation wrought on the economy. Austria had become a poor country and already

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had to pay for at least a part of its imports by decreasing its capital base, but inflation

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would destroy it altogether. As he explained to Moritz Dube, I think that in evaluating

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our situation one has to strictly distinguish between two things. There is on the one hand

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the inflation, which leads to increasing prices for all commodities and for foreign currency.

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On the other hand, there is the fact that our population lives today from capital consumption

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and pays for imported commodities through the export of capital assets, such as fungible

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claims and other ownership titles. Between these two facts, there is, however, something

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of a close connection to the extent that the falsification that the inflation has induced

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in the calculation of business profits represents the psychological basis for the unrestrained

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consumption of the accumulated capital of the national economy. The devaluation of money

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leads to illusory profits that the people have long held to be true profits. Moritz

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Dube was the economics editor of the Neue Freie Presse and author of several popular

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books on economic problems. In the post-war period he published two works on the catastrophic

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boom induced by inflation of the money supply. Seminars

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If Mises was waging a campaign against the dangers of economic ignorance, the classroom

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remained campaign headquarters. The winter semester of 1920 to 1921 concentrated on business

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cycle theory, featuring sessions on the problem of economic crises, on what are normal or

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or good or bad economic conditions, on the historical crises of 1900-1902, 1907, 1873,

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and on the permanent effects of the business cycle.

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In the winter semester of 1921-1922, his university seminar focused on some larger issues of monetary

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theory. It was a memorable semester because for the first time the participants included

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several who would become his star students, Hayek, Habeler, Machloub and Schutz.

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While the pedagogical effort made in the seminars on theoretical economics was related to the

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pressing issues of Austria's monetary policy, the subjects discussed in Mises's private

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seminar were less directly connected to current political events. In the next few years the

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private seminar continued the discussion of basic conceptual problems of economics but

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Hayek sometimes found these debates gruelling and felt relieved when he left Vienna to spend

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a year in New York. On the whole I felt somewhat tired of the subjects which had chiefly occupied

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me in Vienna during the preceding year or so, such as the theory of subjective value

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or the problem of economic calculation under socialism, and comparing the way things were

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were discussed in the United States with what he knew from home he praised the greater focus

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of the American way. In so far as theoretical discussions take place here at all, they have

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one great advantage. There is a certain stock of generally recognised doctrine which corresponds

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essentially to that of the Marshallian School and which is unquestionably accepted to the

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point that, when a problem is discussed, the discussion concerns only this problem and

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not the entire foundations of economics.

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By the time Hayek returned to Vienna in May 1924, the seminar had an eminently interdisciplinary

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character. Fewer than a third of the members, Striegel, Habler, Hayek, Machlup, Morgenstern,

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Liese and Braun, were trained economists. Thus, the discussions must have been more philosophical

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than typical present-day debates.

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The meetings took place on Friday nights on a fourth-nightly basis. The twenty-some participants

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assembled in Mises' office at the Commer around 7pm. One member gave a short introductory

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talk which was followed by a long discussion until 10.30, at which point the official part

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of the evening ended and the assembly moved to a restaurant, usually an Italian restaurant

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called Ancora Verde, where the unofficial debate continued.

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The most ardent debaters, Mises usually among them, finally went on to the Café Künstler

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and stayed until two or three a.m. Mises later insisted that in this circle he was not

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a teacher and director, but only the first among equals. All who belonged to the circle

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came voluntarily, only imbued by the drive to gain more knowledge. They came as disciples,

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but in the course of the years they turned into friends. Later some people of my own

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at a young age joined the circle too. Scholars from abroad who paid a visit to Vienna were

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welcome guests and took part in the meetings. The private seminar was and always remained

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the circle of my much younger friends. Outsiders knew nothing of our meetings. They only saw

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the works published by individual members. We formed no school, no community and no sect.

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We supported one another more through dissent than through assent. We were agreed and united

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only in one thing, in striving to build up the sciences of human action. Each one went

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the way that his own law pointed out to him. We have never organised or undertaken anything

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else that would have resembled the abject doing research of the scientists of imperial

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and post-imperial Germany. We have never pondered the thought of publishing a journal or a collective

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of Volume – each one has worked by himself as it befits the thinker, but each single

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one of us has contributed to the circle and looked for no other compensation than the

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recognition, not the applause, of his friends. There was greatness in this unpretentious

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exchange of ideas. We all found happiness and satisfaction in it.

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Mises' Long Shadow The seminars Mises held in Vienna in the 1920s,

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The sessions were formative for these young men, even though Mises's personal impact

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was not as considerable as one might expect, especially in the case of Hayek, Habler, Striegel

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and Machloub, who worked with him, albeit with interruptions for more than ten years.

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For these men, Mises was more role model than teacher. In the discussions of the private

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seminar he displayed his ability to dissect all kinds of problems in social analysis just

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as he had learned from Boehm-Bawerk. Yet he did not raise a school of disciples advocating

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his doctrines. It is of course the hope of every scholar that others will find his approach

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interesting and important enough to continue the work where he has left off, but Mises

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made no efforts to stimulate discipleship and, in fact, have no disciples during his

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Vienna year. To no small extent this was due to the ideal of individualism. Steeped in

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the idealism of Schiller, Herder, W. V. Humboldt and other classical German authors, Mises

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considered the free development of the individual to be the supreme goal of human achievement.

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It was more important than any particular creed in religion, politics or aesthetics.

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He certainly did not lack firm convictions in politics and science, but in his interactions

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with students and other people, these convictions took only second place to the reverence he

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paid through the ideal of individualism. After 1926, when he succeeded Mises as the main

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contact of the Rockefeller Foundation in Vienna, Mises had the opportunity to provide or withhold

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material benefits, but he did not use this power to raise epigons. Noble as this attitude

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was, it gave a competitive edge to some of his rivals who did not have the same scruples.

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But the most important factor responsible for the virtual absence of a school of Misesians

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in the 1920s was that Mises's professional standing was not paramount. When Hayek, Habela,

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Machloub and Schütz first took part in one of his seminars, Mises was a respected expert

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on monetary economics and the author of a controversial book on contemporary political

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of Problems, Socialism, Hans Kelsen, Karl Grünberg, and Ottmar Spann.

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Kelsen was the celebrated creator of the Austrian Republican Constitution and pioneer of the

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pure theory of law.

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Grünberg, a chief Vienna intellectual of the social democratic movement, and Spann,

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The author of the most successful social science textbook ever published in the German language.

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In 1919, Spahn had obtained Filipovich's position, which had been vacant for two years.

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Among the professors of economics, he attracted by far the greatest number of students. His

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theory of universalism was a sophisticated development of the older organic theories of

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society, which were widespread and deep-rooted in Catholic countries such as Austria. In

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In the crisis-torn years after the war, universalism was not only more accessible for most people,

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it also accommodated a deep longing for security and authority.

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Whereas Mises dealt with relatively narrow economic subjects and the technicalities of

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the Austrian School's marginal value analysis, Spahn confronted the students with a broad

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picture of social life. His lectures and seminars attracted students whose emotional life was

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was steeped in Catholicism, Romanticism, Idealism and Nationalism. Spann's best-known student

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was the later Austrian Chancellor Engelbert Dolfuss, but he also impressed young scholars

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of the Austrian schools such as Hayek and Morgenstern. He had far less success with

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his colleagues at the University of Vienna. Initially he was invited to the sessions of

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the Nationalökonomische Gesellschaft, but it soon became obvious that a productive debate

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with members of the Austrian School, Wieser, Mises, Mayer, Weiss and Striegel was impossible.

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This was not primarily a question of different political orientations. Spahn's anti-Semitism

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was notorious. His full professorship in 1919 signalled a somewhat broader anti-Semitic

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movement that began infecting university life in the early years of the Republic, turning

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the University of Vienna into a battlefield for Mises and other liberal Jews. Kelsen proved

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The problem was that Spahn's intuitive approach was diametrically opposed to the analytical approach of the other members.

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He believed the task of social theory was to grasp the meaning of totalities, whereas the others thought that such undertakings were unscientific.

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Mises later made clear that this rejection of Spun's approach had nothing to do with

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a dogmatic insistence on the virtues of methodological individualism. The point was, rather, that

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it was the very nature of science to deal with parts rather than whole. The economic

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theorist had to identify the relevant parts of social reality and study their interrelations.

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The students who did not share Spun's aesthetic, epistemological and political orientations

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A minority found a ready alternative in the courses of Friedrich von Wiese. In the years

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after the First World War and up to his death in 1926, he was the unquestioned authority

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in general economic theory in Vienna. With the winter semester of 1922, Wiese's devout

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disciple Hans Mayer succeeded his master, while Wiese himself continued to lecture as

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Honorary Professor on the Sociology of Power. Because of Mayer's presence and the successful

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second edition of Mises' textbook Theorie der gesellschaftlichen Wirtschaft, Social

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Economics in 1924, the Viserian paradigm remained dominant in Vienna long after Mises'

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death.

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The book appeared again in the prestigious series Grundres der sozialökonomik, Outline

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of Social Economics. The series was published in 12 volumes from 1914 to 1930, especially

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the first volumes, some of which have appeared in two editions, pre-war and post-war, and

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which deal with the history of economic science and with general economic theory, still have

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lasting value. Especially noteworthy is the first volume, Wirtschaft und Wirtschaftswissenschaft

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1914, 1924, Karl Bücher, Volkswirtschaftliche Entwicklungsstufen, Joseph Schumpeter, Epochen

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der Dogmen und Methodengeschichte, Eugen von Filippowits, Entwicklungsgang der Wirtschafts-

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und sozialpolitischen Systeme und Ideale, Die Entwicklung bis zum Kriege, Edward Heymann,

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Entwicklungsgang der Wirtschafts- und sozialpolitischen Systeme und Ideale, Die jüngste Entwicklung,

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Equally remarkable is Volume 3, which contains Friedrich von Mises' Theorie der gesellschaftlichen

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Wirtschaft 1914-1924, and Volume 4, which features Max Weber's famous Wirtschaft und Gesellschaft

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from 1922. The fact that Hans Meyer, a second-rate scholar by any standard, obtained Mises'

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chair, speaks volumes about the influence of his predecessor. Mises must have hoped

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to obtain the position himself. After all, he had already published three books, two

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The Theory of Money and Credit

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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.

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He had become a celebrity in the German orbit through his Wesen und Hauptinhalt der theoretischen

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Nationalökonomie 1908 and had found international fame with his Theory of Economic Development

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1911. Both works were published before Mises's first book appeared. Two years younger than

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Mises, Schumpeter had become Austria's youngest economics professor in 1909 with the active

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Schumpeter now held a position at the University of Bonn. He was the only major theoretician

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from Austria ever to obtain a chair at the University of the German Reich. His time in

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Bonn turned out to be very successful. Under his leadership, the Department of Economics

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Mathematics became a major center of economic theory with great emphasis on mathematical

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economics and one of his students, Erich Schneider, became the leading German neoclassical economist

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after the Second World War. But even Schumpeter was not in the eyes of

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the profession the number one theorist in interwar Germany. That rank belonged to Gustav

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Kassel, 1866-1945, from Sweden, a mathematician turned economist. His core mission was to

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promote Balrussian mathematical economics. His Theoretische Sozialökonomik, Social

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Economics, quickly became the most widely used interwar textbook on economic theory

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and its success became international through translations into virtually all languages

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of the civilised world. Kassel was famous for his rejection of value

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Theory and Utility Theory as a Foundation of Price Theory. Mises, Schumpeter and Kassel

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were verbal Walrassians. Schumpeter and Kassel are self-declared Walrassians. Their books

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championed the ideas of Walrassian economics without going into mathematical detail. Single-handedly

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they not only kept the Walrassian paradigm alive at a critical juncture of its history,

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and also managed, in what amounted to a revolution, to make it the dominant approach in economic

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theory within the Reich. Within only a decade they turned a large number of the younger

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German economists away from the historical school and converted them to the Lausanne

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School of Mathematical Economics, and through translations of their major books this influence

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radiated far beyond the German-speaking world. The Austrian tradition of Menger had been

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have been kept alive through the scattered disciples of Boehm-Bawerk, most notably through

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Mises, but these followers lacked the paid university positions that would have enabled

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them to dedicate themselves full-time to the development of the Austrian paradigm and to

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produce students and future professors. At the crucial time when the collapse of the

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German Reich brought widespread disillusionment with the tenets of the historical school,

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Wieser's towering status as the only surviving founder of modern German economic theory provided

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the verbal Walrassians with a position of supreme authority. Their works introduced an entire

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generation to mathematical economics, and their style of exposition deluded these uninitiated

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readers into assuming that there were no significant differences between their works and those

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of the Mangerian theorists. The confusion was compounded by the fact that Wieser was

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was an economist from Austria. Even in the narrower fields of the theory of money, banking

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and business cycles and of the theory of socialism, Mises was not the very highest authority.

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The great authority in monetary theory was again Friedrich von Wiese, who had pioneered

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the Austrian theory of the value of money and would write the entry on money for the

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standard German language dictionary, Handwerterbuch der Staatswissenschaften. The Handwerterbuch

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also revealed the pecking order in business cycle theory. Here the lengthy entry came

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from the pen of Arthur Spiethoff, a schmullerite, to the core who opposed all monetary theories

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of the trade cycle. Mises' endorsement of banking school principles and of the assignment

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theory of money was reinforced through the writings of Schumpeter, the other surviving

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pre-war authority on theoretical economics. Although Mises' views on money and business

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Mises' cycles found ever more advocates in the course of the 1920s, especially among

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the younger economists. He lacked the power and influence of the top academic economists.

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In his contribution to the Festschrift that celebrated Mises' 75th birthday in 1926,

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Mises picked the subject of the role of money in the realm of economic goods. Here he attacked

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the dominant Vizierian income theory of money, arguing that money in general, and gold in

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in particular was an economic good, not mere tokens for other real goods, and that marginal

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value theory could therefore be applied directly to money rather than merely indirectly through

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the value of some underlying real goods. The piece was published only six years later.

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Friedrich von Mises had died in 1926, and the editor of the Festschrift, Hans Meyer,

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then chose to publish a comprehensive overview of contemporary economic science in four volumes.

410
00:40:19.060 --> 00:40:35.060
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.

411
00:40:35.060 --> 00:40:43.060
Those who sought to make a career as professional economists were well advised to immerse themselves in the thought of Wiese and Schumpeter.

412
00:40:43.060 --> 00:41:01.060
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.

413
00:41:01.060 --> 00:41:11.060
Today, Hayek is often considered Mises's most famous student. In fact, however, his Miserian intellectual heritage is striking.

414
00:41:11.060 --> 00:41:18.380
In 1922-23, under the direction of Hans Kelsen and Ottmar Spann, Hayek had written his doctoral

415
00:41:18.380 --> 00:41:24.140
dissertation in economics on the theory of imputation. The work was based on the Viserian

416
00:41:24.140 --> 00:41:29.980
approach to problems of value and price theory, which was incompatible with Mises's socialist

417
00:41:29.980 --> 00:41:36.680
calculation argument. The Viserian approach had found its way into Spann's thought. Similarly,

418
00:41:36.680 --> 00:41:42.360
The idea of imputation was familiar to legal theorists. Hans Kelsen had pioneered the pure

419
00:41:42.360 --> 00:41:48.120
theory of law which imputed every single norm back to a fundamental norm. When he updated

420
00:41:48.120 --> 00:41:53.360
his thesis three years later for an article in Konraths Jahrbücher, he knew the calculation

421
00:41:53.360 --> 00:41:59.120
theory but had not changed his mind on the question of imputation. This is what Hayek

422
00:41:59.120 --> 00:42:04.920
wrote on the topic without mentioning Mises by name. Of course, in so far as one believes

423
00:42:04.920 --> 00:42:09.160
that a completely satisfactory solution to the problem of imputation has not yet been

424
00:42:09.160 --> 00:42:15.080
found. We cannot exclude the possibility from the very outset that the determinants of the

425
00:42:15.080 --> 00:42:20.280
prices of the factors of production are to be found in the exchange economy alone, and

426
00:42:20.280 --> 00:42:26.040
therefore that an imputation of value is not applicable, a view held by several younger

427
00:42:26.040 --> 00:42:32.120
authors. Nevertheless, if this view were regarded as valid, the result would be that we would

428
00:42:32.120 --> 00:42:49.880
Hayek went on to explain and develop Viserian imputation theory, which in his view was still

429
00:42:49.880 --> 00:42:54.120
today the fundamental and most detailed treatment of the problem.

430
00:42:54.120 --> 00:42:59.160
He explicitly rejected Mises' argument because it contradicted the Viserian assumption that

431
00:42:59.160 --> 00:43:05.220
and all social phenomena are explicable on the basis of value theory alone.

432
00:43:05.220 --> 00:43:10.460
This fact is crucial to understanding the later stages of the debate on economic calculation

433
00:43:10.460 --> 00:43:15.860
under socialism. Although Hayek entered the debate ostensibly on Mises's side, there

434
00:43:15.860 --> 00:43:20.980
was a profound disagreement between the two allies. Mises rejected socialism because factors

435
00:43:20.980 --> 00:43:26.080
of production could only be appraised in a market economy. Hayek did not endorse this

436
00:43:26.080 --> 00:43:45.160
Hayek's main criticism of Boehm-Bawerk's imputation theory was that he treated the value

437
00:43:45.160 --> 00:43:51.000
of future consumers' goods as ultimate givens, where in fact they depended on present choices

438
00:43:51.000 --> 00:44:03.160
Only a general equilibrium model could account for these multifarious interdependencies and

439
00:44:03.160 --> 00:44:08.760
solve the intricacies of the imputation problem. Hayek concluded his essay mentioning that the

440
00:44:08.760 --> 00:44:13.180
Walrassian School of Mathematical Economics had already successfully tackled problems

441
00:44:13.180 --> 00:44:18.380
of a similar nature, but he cautioned against practical problems of applying mathematical

442
00:44:18.380 --> 00:44:24.020
Imputation Theories. Although they could possibly demonstrate by means of a simplified case

443
00:44:24.020 --> 00:44:28.700
that the subjective theory of value is in principle applicable, the complexity of the

444
00:44:28.700 --> 00:44:33.500
problem may make it impossible in practice to apply imputation to any large economic

445
00:44:33.500 --> 00:44:38.620
system. This is exactly the line of argument that Hayek later stressed in his critique

446
00:44:38.620 --> 00:44:44.260
of socialism. As a Vizerian value theorist, Hayek could not endorse Mises's argument

447
00:44:44.260 --> 00:44:50.840
that a rational socialist economy was impossible because there was no such thing as value imputation.

448
00:44:50.840 --> 00:44:56.680
What then were the real reasons for the empirically far better performance of market economies?

449
00:44:56.680 --> 00:45:02.760
The solution that Hayek eventually presented in the late 1930s and the 1940s was based

450
00:45:02.760 --> 00:45:08.720
on an argument prominent with some economists of the 18th and 19th centuries. These writers

451
00:45:08.720 --> 00:45:15.120
had argued that prices contain information about market conditions, shortages, surpluses,

452
00:45:15.120 --> 00:45:20.960
and that they steer production in a market economy. When trade is perfectly free, the

453
00:45:20.960 --> 00:45:26.080
quantity and the need are apparent in all the markets. Then goods put themselves at

454
00:45:26.080 --> 00:45:31.600
their true price and plenty spread equally everywhere. But when one has once taken all

455
00:45:31.600 --> 00:45:37.520
freedom from trade, it is no longer possible to judge, either if there is really an imbalance

456
00:45:37.520 --> 00:45:42.360
Transmissions between the quantity and the need, or what it is. Hayek embedded this argument

457
00:45:42.360 --> 00:45:47.200
within a general theory of knowledge, explaining the role of information in human action and

458
00:45:47.200 --> 00:45:52.820
economic theory, and argued that market prices have crucial importance in transmitting information

459
00:45:52.820 --> 00:45:58.280
between the market participants. Hence, the factual superiority of market economies over

460
00:45:58.280 --> 00:46:03.540
centrally planned economies resulted from their communicative superiority. Market prices

461
00:46:03.540 --> 00:46:07.580
These were a better means for the transmission of information.

462
00:46:07.580 --> 00:46:13.020
The seeds of these later theories were sown in the early 1920s. Hayek's liberalism came

463
00:46:13.020 --> 00:46:17.700
from Mises, but the analytical framework of his economic thought was nurtured through

464
00:46:17.700 --> 00:46:22.980
the books and classes of Wieser. It was no accident that Hayek became the editor of a

465
00:46:22.980 --> 00:46:27.620
posthumous collection of Wieser's most important papers, and that he published his first book

466
00:46:27.620 --> 00:46:33.380
Hayek with Hulda Pichra Tempske, which had published all of Mises' pioneering studies.

467
00:46:33.380 --> 00:46:37.940
All of his life Hayek perceived himself quite consciously as a member of the Viserion branch

468
00:46:37.940 --> 00:46:44.740
of the Austrian School. In 1978, a few years after Mises had died, Hayek regretted that

469
00:46:44.740 --> 00:46:51.260
this branch had been almost entirely displaced by what he called the Mises School. In today's

470
00:46:51.260 --> 00:46:56.300
world, Mises and his disciples are, with some just as regarded as representatives of the

471
00:46:56.300 --> 00:47:01.620
The Austrian School albeit he represents only one of the branches into which Menger's teachings

472
00:47:01.620 --> 00:47:06.220
had split already among his disciples, the close personal friends and relatives Eugen

473
00:47:06.220 --> 00:47:11.940
von Boehm-Bawerk and Friedrich von Mises. I admit this only with some hesitation because

474
00:47:11.940 --> 00:47:18.440
I expected much to come from Mises' tradition, which his successor Hans Meyer tried to develop.

475
00:47:18.440 --> 00:47:22.900
But these expectations have so far not been fulfilled, even though that tradition may

476
00:47:22.900 --> 00:47:27.540
may yet prove to be more fruitful than it has been hitherto the case.

477
00:47:27.540 --> 00:47:32.520
The Austrian school that today is active almost exclusively in the United States is basically

478
00:47:32.520 --> 00:47:38.100
a Mises school that goes back to Boehm-Bawerk's approach. By contrast, the man on whom Wieser

479
00:47:38.100 --> 00:47:44.620
put such great hopes and who had taken over his chair has never made good on the promises.

480
00:47:44.620 --> 00:47:49.500
The Meyer Line ended with his student Wilhelm Weber, who became the first important teacher

481
00:47:49.500 --> 00:47:55.260
of Keynesianism in Austria, says Werner Neudeck in Der Einfluss von Ludwig von Mises auf die

482
00:47:55.260 --> 00:48:00.700
österreichische akademische Tradition gestern und heute. Neudeck asserts that Mises was the

483
00:48:00.700 --> 00:48:06.140
last economist who managed to establish an internationally recognized school in Austria.

484
00:48:06.140 --> 00:48:10.940
But a year after Mises' death, Hayek received the Nobel Prize, attracting new interest to

485
00:48:10.940 --> 00:48:15.820
his work and giving the Vizierian paradigm a second lease on life. The student on whom

486
00:48:15.820 --> 00:48:20.780
One of the two Mises apparently had the most profound impact in the early 1920s was Fritz

487
00:48:20.780 --> 00:48:28.120
Machlup-Wolff, 1902-1983. Of all the latest star members of the private seminar, he alone

488
00:48:28.120 --> 00:48:33.300
had received his doctorate under Mises's direction. Strictly speaking, only Fritz Machlup

489
00:48:33.300 --> 00:48:35.920
was originally a disciple of Mises.

490
00:48:35.920 --> 00:48:41.500
Machlup came from a family of entrepreneurs. His father was a cardboard manufacturer, and

491
00:48:41.500 --> 00:48:45.320
young Fritz helped him in the management of the firm while he studied economics at the

492
00:48:45.320 --> 00:48:50.320
University of Vienna. In 1923 he was involved in setting up a factory for the family business

493
00:48:50.320 --> 00:48:55.240
in Hungary, even while he was working on a doctoral dissertation under Mises. At the

494
00:48:55.240 --> 00:48:59.360
end of the year the factory was running and Machloupp had his doctorate. He was admitted

495
00:48:59.360 --> 00:49:04.880
to the private seminar and his relationship with Mises became less formal. Like his mentor,

496
00:49:04.880 --> 00:49:10.000
Machloupp was an enthusiastic skier and fincer, and they probably spent many hours together

497
00:49:10.000 --> 00:49:15.040
in the gym and in the mountains. Their common Jewish heritage was certainly an important

498
00:49:15.040 --> 00:49:20.240
had a major factor in their unusually cordial rapport in the 1930s Mises wrote to Mahlup

499
00:49:20.240 --> 00:49:24.720
in the tone of true friendship, while in his correspondence with other intellectual associates

500
00:49:24.720 --> 00:49:30.840
Hayek for example, there always remained a hint of formality. Being Jewish was also the

501
00:49:30.840 --> 00:49:37.200
most important factor hampering both academic careers. Starting around 1922, German nationalists

502
00:49:37.200 --> 00:49:42.840
and Catholic groups led a campaign to reduce the Jewish presence at the universities. The

503
00:49:42.840 --> 00:49:49.240
The main organisational vehicle in the campaign was the katholisch-deutsche Akademiker Ausruf.

504
00:49:49.240 --> 00:49:54.400
Mises had been appointed adjunct professor under the Ancien Régime. In the New Republic

505
00:49:54.400 --> 00:50:00.240
he made no further advances. Neither did his disciple. Machloupp received his doctorate

506
00:50:00.240 --> 00:50:05.640
and that was it. This situation must have created a mutual sympathy between the two

507
00:50:05.640 --> 00:50:10.920
men. Bad as it was, it could not prevent the dynamic Machloupp from a successful career

508
00:50:10.920 --> 00:50:18.120
A few years later he became a member of the Austrian Cardboard Cartel and was also appointed

509
00:50:18.120 --> 00:50:24.640
Secretary of the Verein Österreichischer Volkswirte, Association of Austrian Political Economists.

510
00:50:24.640 --> 00:50:29.700
Machloub was a man of great ambition and talents. The drive of the successful entrepreneur never

511
00:50:29.700 --> 00:50:34.240
left him even in later years when he moved to the United States and focused entirely

512
00:50:34.240 --> 00:50:39.480
on scholarly pursuits. A poem that Kenneth Boulding composed many years later in his

513
00:50:39.480 --> 00:51:08.480
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.

514
00:51:08.480 --> 00:51:14.240
Makhloub wrote his doctoral dissertation on the gold bullion standard. He published the

515
00:51:14.240 --> 00:51:19.920
work as a book in 1925, for the appendix of which he also translated Ricardo's Proposals

516
00:51:19.920 --> 00:51:25.480
for an Economical and Secure Currency, 1816, into German. Six years later he published

517
00:51:25.480 --> 00:51:30.560
a study on the role of bank credit and the stock market in the business cycle. Both books

518
00:51:30.560 --> 00:51:35.640
demonstrated that their author had very well assimilated the Misesian approach to monetary

519
00:51:35.640 --> 00:51:41.480
Theory analysis, and both of them were brilliant contributions extending the work of his teacher.

520
00:51:41.480 --> 00:51:46.080
Mises praised this second book with words he had never used to describe the work of

521
00:51:46.080 --> 00:51:48.400
any other disciple – a masterpiece.

522
00:51:48.400 --> 00:51:55.080
Dr. Machlub-Wolff is an excellent economist. The second book, Börsenkredit, Industriekredit

523
00:51:55.080 --> 00:52:00.860
und Kapitalbildung, is really a masterpiece, said Mises to Kittredge in a letter dated

524
00:52:00.860 --> 00:52:07.620
In March 31, 1933, this was a letter of recommendation for the Rockefeller Foundation. Mises concluded,

525
00:52:07.620 --> 00:52:12.420
There is no doubt that Machloub is in all respects the worthiest man for a Rockefeller

526
00:52:12.420 --> 00:52:18.180
fellowship. This is not merely my opinion, who was his teacher for many years, but everybody's.

527
00:52:18.180 --> 00:52:22.340
Last year he lectured at the London School of Economics and Political Science and had

528
00:52:22.340 --> 00:52:27.100
a great success. But it was shortly after its publication that the friendship between

529
00:52:27.100 --> 00:52:54.960
The LSE connection

530
00:52:54.960 --> 00:52:59.120
The problem of war reparations was the number one issue on the international agenda for

531
00:52:59.120 --> 00:53:05.640
the first few years after the war and remained very prominent until the early 1930s. Initially,

532
00:53:05.640 --> 00:53:10.040
the same French and British politicians who had led their countries during the war dominated

533
00:53:10.040 --> 00:53:15.920
the negotiations. Steeped in wartime rhetoric, their emotional election campaigns had committed

534
00:53:15.920 --> 00:53:21.320
them to hard-line policies against the vanquished. Under such circumstances little progress could

535
00:53:21.320 --> 00:53:26.400
be made in regard to Austrian finance and the reparations question. As a result, the

536
00:53:26.400 --> 00:53:32.440
second Austrian government under Carl Renner lost the election in June 1920 and a new government

537
00:53:32.440 --> 00:53:38.560
under Michael Maier took over without significantly greater success in foreign policy. Things

538
00:53:38.560 --> 00:53:43.880
improved slowly after December 1920 when the leadership at the negotiations was shifted

539
00:53:43.880 --> 00:53:49.360
to economic experts, but these men too were unable to reach a workable compromise because

540
00:53:49.360 --> 00:53:54.880
of Public Pressure in England and especially in France. No lasting results were achieved

541
00:53:54.880 --> 00:54:01.840
at conferences in Brussels, Paris, London, Cannes, Genoa, Paris again and London again.

542
00:54:01.840 --> 00:54:06.360
It is likely that Mises took part in at least some of these conferences. He was after all

543
00:54:06.360 --> 00:54:11.460
an executive of the Bureau for Claim Settlements and his position with the Commer made him

544
00:54:11.460 --> 00:54:16.900
an unofficial spokesman for Austrian Business and Banking. He was an eloquent expert on

545
00:54:16.900 --> 00:54:21.220
on Financial and Monetary Matters and his sober voice carried weight with the moneymen

546
00:54:21.220 --> 00:54:26.900
abroad. In those years Mises was asked to co-author two entries for the new 12th edition

547
00:54:26.900 --> 00:54:31.780
of the Encyclopedia Britannica. This edition was in fact a two-volume supplement to the

548
00:54:31.780 --> 00:54:37.940
11th edition. It was probably here that Mises first met some of the eminent economists from

549
00:54:37.940 --> 00:54:42.860
Western Europe with whom he would cooperate closely in the following years. Charles Rist

550
00:54:42.860 --> 00:54:48.980
from Paris, and Theodore Gregory, William Beveridge, later Lord Beveridge, and others

551
00:54:48.980 --> 00:54:55.460
from the London School of Economics, LSE. In November 1922, Mises said he had talked

552
00:54:55.460 --> 00:55:00.580
to an English professor about a translation of his book Die Gemeinwirtschaft into English.

553
00:55:00.580 --> 00:55:05.540
This was probably Gregory, who was the only Englishman among the recipients of a complimentary

554
00:55:05.540 --> 00:55:11.280
copy. Documented contacts to William Beveridge date back to the summer of 1924, when Mises

555
00:55:11.280 --> 00:55:15.680
Mises had him and Gregory sent complimentary copies of the second edition of his Theorie

556
00:55:15.680 --> 00:55:21.520
des Geldes und der Umlaufmittel. In early November 1924, Mises travelled to London and

557
00:55:21.520 --> 00:55:26.520
talked with Robbins about the translation of Gemeinwirtschaft. He then had him send

558
00:55:26.520 --> 00:55:31.720
a complimentary copy of Gemeinwirtschaft, probably as a Christmas gift. By this time

559
00:55:31.720 --> 00:55:36.160
his command of English was fairly good, as evidenced by his comments on the translation

560
00:55:36.160 --> 00:55:41.120
and that Robbins, and later also Schwatz, made of parts of Gemeinwirtschaft. Still in

561
00:55:41.120 --> 00:55:46.960
his meetings with Gregory and Robbins, Mises probably spoke German. Gregory was an excellent

562
00:55:46.960 --> 00:55:51.120
speaker of the language and Robbins could follow a conversation in German even though

563
00:55:51.120 --> 00:55:58.000
he was not himself fluent in it. The LSE connection developed slowly and steadily during the 1920s,

564
00:55:58.000 --> 00:56:05.440
especially through Mises's impact on the young Lionel Robbins, 1898, 1984. Like most

565
00:56:05.440 --> 00:56:10.200
Most young intellectuals of his era, Robbins was a socialist, nurtured by school readings

566
00:56:10.200 --> 00:56:15.560
of Shaw, Wells and Ruskin. He had become a member of the National Guilds League after

567
00:56:15.560 --> 00:56:20.720
World War I, and collaborated in the labour campaign for the nationalisation of the drink

568
00:56:20.720 --> 00:56:28.000
trade. But these experiences with the real-world labour movement disillusioned the young idealist.

569
00:56:28.000 --> 00:56:34.320
He began to read the classical liberal economists, and from 1920 to 1923 studied economics at

570
00:56:34.320 --> 00:56:40.420
LSE, a creation of the leaders of the guild movement, Sidney and Beatrice Webb. Because

571
00:56:40.420 --> 00:56:46.080
Sidney Webb cherished academic freedom, unlike his wife or their friend George Bernard Shaw,

572
00:56:46.080 --> 00:56:52.280
LSE was spared the fate of becoming the academic mouthpiece of the Fabians. During the 1920s,

573
00:56:52.280 --> 00:56:58.620
the school counted a number of excellent economists in its ranks, most notably Edwin Canaan, but

574
00:56:58.620 --> 00:57:02.480
also Theodore Gregory and later Robbins himself.

575
00:57:02.480 --> 00:57:07.200
Gregory had Robbins and his other students read The Great Contemporary Economists in

576
00:57:07.200 --> 00:57:12.700
America and on the continent, many of whom he knew personally. Robbins was therefore familiar

577
00:57:12.700 --> 00:57:18.740
with the works of Gustav Kassel, Erwin Fischer and Frank A. Fetter. Later he turned to the

578
00:57:18.740 --> 00:57:24.180
Austrians and he probably read Socialism in the original German, soon after its publication

579
00:57:24.180 --> 00:57:30.920
in 1922. He later recalled that the book had a decisive impact on him and solidified his

580
00:57:30.920 --> 00:57:39.840
In those days LSE students had to prove their ability to translate from two foreign languages

581
00:57:39.840 --> 00:57:46.040
after their first year of study. To other teachers at LSE, Hugh Dalton and Graham Wallace

582
00:57:46.040 --> 00:57:50.820
reinforced in Robbins the resonance of the utilitarian perspective on political questions

583
00:57:50.820 --> 00:57:55.900
that emanated from Mises's work. Wallace in particular was a great teacher and authority

584
00:57:55.900 --> 00:58:02.180
on the Writings of Jeremy Bentham and the Philosophical Radicals. He constantly emphasised

585
00:58:02.180 --> 00:58:07.300
rationalism as the correct approach in politics, especially when it came to choosing political

586
00:58:07.300 --> 00:58:12.420
means. And like his young peers in Vienna, Robbins deepened his classroom knowledge through

587
00:58:12.420 --> 00:58:18.060
daily discussions with a group of highly gifted friends, such as Jacques Caen, Arnold Plante

588
00:58:18.060 --> 00:58:20.300
and Georg Tugendhat.

589
00:58:20.300 --> 00:58:24.720
Tugendhat was probably the same person who took part in Mises's first private seminar

590
00:58:24.720 --> 00:58:30.280
in the winter semesters of 1919-1920. In this case there was a strong early personal

591
00:58:30.280 --> 00:58:36.340
connection between the circles in London and Vienna. These men would form the core of British

592
00:58:36.340 --> 00:58:39.080
Austrianism in the following years.

593
00:58:39.080 --> 00:58:44.220
Mises probably met Robbins for the first time in the fall of 1924. In October of that year

594
00:58:44.220 --> 00:58:49.740
he wrote to Gustav Fischer that he had received a very serious offer for an English translation

595
00:58:49.740 --> 00:58:55.200
Translation of the second part of Gemeinwirtschaft from a Mr. Robbins, a tutor of economics

596
00:58:55.200 --> 00:59:01.480
in Oxford. Robbins turned out to be Robbins, and he came highly recommended. He had just

597
00:59:01.480 --> 00:59:08.020
accepted a temporary position at Oxford University until 1929. He would alternate between positions

598
00:59:08.020 --> 00:59:13.220
at Oxford and LSE. During the next few years, he worked on a translation of Gemeinwirtschaft

599
00:59:13.220 --> 00:59:18.860
– Socialism, and later initiated a translation of Mises' Theorie des Geldes und der Umlaufsmittel

600
00:59:18.860 --> 00:59:48.860
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

601
00:59:48.860 --> 00:59:53.720
of Economics in Britain culminated when Fr Hayek eventually became professor of economics

602
00:59:53.720 --> 00:59:59.120
at the London School of Economics in the fall of 1931.

603
00:59:59.120 --> 01:00:02.600
Advent of the Gold Exchange Standard

604
01:00:02.600 --> 01:00:06.900
It did not take quite as long to find the solution to Austria's post-war financial

605
01:00:06.900 --> 01:00:11.980
calamities. The first real breakthrough came at a conference that took place in the fall

606
01:00:11.980 --> 01:00:17.800
Protocol of 1922 in Genoa and led to the signing of a convention in Geneva on October

607
01:00:17.800 --> 01:00:23.900
4, 1922. The so-called Geneva Protocol was the last in a series of negotiations that

608
01:00:23.900 --> 01:00:30.300
had begun at the end of 1921 when Austria was promised loans from the British, French,

609
01:00:30.300 --> 01:00:36.460
Czechs and Italians. The condition was that the Austrian government had to grant institutionalised

610
01:00:36.460 --> 01:00:42.580
to provision inside of Austria, and to pledge some of its income and assets to the foreign

611
01:00:42.580 --> 01:00:47.380
creditors. These conditions were at first unacceptable to the Austrian Chancellor Johann

612
01:00:47.380 --> 01:00:52.460
Schauber, but time was running out. The only alternative to foreign loans was increased

613
01:00:52.460 --> 01:00:57.860
taxation and inflation, and these options were even less acceptable. The Social Democrats

614
01:00:57.860 --> 01:01:02.900
virulently opposed any more taxation of the general population. They were still advocating

615
01:01:02.900 --> 01:01:07.980
Having a special tax on wealth, always a popular proposal, but incapable of balancing

616
01:01:07.980 --> 01:01:13.740
the budget, and more inflation would certainly bring monetary breakdown and ensuing civil

617
01:01:13.740 --> 01:01:14.740
chaos.

618
01:01:14.740 --> 01:01:21.600
A turning point was reached when, at the end of May 1922, Monsignor Injatz-Zeipel assumed

619
01:01:21.600 --> 01:01:26.660
the chancellorship with a firm resolution to lead Austria out of the financial nightmare.

620
01:01:26.660 --> 01:01:31.280
He already had some experience in handling catastrophic situations in Austrian politics,

621
01:01:31.280 --> 01:01:44.280
Zipel was not a man to despair over the unpopularity of the decisions that needed to be made.

622
01:01:44.280 --> 01:01:49.160
Living in a Vienna monastery, he was not as exposed as were his other party comrades to

623
01:01:49.160 --> 01:01:54.960
the many temptations of personal friendship and the spotlight of fame. In Self a Monarchist,

624
01:01:54.960 --> 01:02:00.080
his great achievement was to reconcile Austrian Catholicism with the Republic and thus to

625
01:02:00.080 --> 01:02:05.280
to spare Austria the fate of other countries such as France, Italy and Spain, where after

626
01:02:05.280 --> 01:02:09.920
the establishment of the republic the political right split into conservative monarchists

627
01:02:09.920 --> 01:02:15.400
and republican democrats. He knew that reliance on international loans under the conditions

628
01:02:15.400 --> 01:02:19.720
spelled out by western creditors was a dangerous strategy because it would lead his country

629
01:02:19.720 --> 01:02:25.280
into dependence on foreign powers. But there was no alternative if the goal was to rid

630
01:02:25.280 --> 01:02:30.720
The country of the poison of inflation. Mises and his friend Wilhelm Rosenberg convinced

631
01:02:30.720 --> 01:02:36.400
Seipel of the necessity of this reform. A candid foresight, they stressed that the reform

632
01:02:36.400 --> 01:02:41.500
was bound to produce a crisis. There would be massive unemployment and other interests

633
01:02:41.500 --> 01:02:46.720
would be hurt as well. This crisis would merely bring to light the damage already done by

634
01:02:46.720 --> 01:02:52.360
the previous inflation, but public opinion would blame the reformer. Seipel appreciated

635
01:02:52.360 --> 01:02:56.080
the frankness of his advisors. Mises later recalled,

636
01:02:56.080 --> 01:03:01.640
He adopted fully my ideas about sound money, and I cooperated with him.

637
01:03:01.640 --> 01:03:06.800
Seipel's economic and political views were of course shaped to a large extent by prevailing

638
01:03:06.800 --> 01:03:12.080
Catholic moral views on social organisation, in particular by Pope Leo VIII and cyclical

639
01:03:12.080 --> 01:03:19.040
rerum nuvarum, 1891. He was also known as a sharp critic of radical anti-Semitism. In

640
01:03:19.040 --> 01:03:25.340
In his eyes, the Austrian Jews were a national minority and should enjoy all minority rights.

641
01:03:25.340 --> 01:03:30.960
In the same month, Mises was appointed the president of the Bureau for Claims Settlements.

642
01:03:30.960 --> 01:03:36.280
The former director, Mises' friend, Emil Perls, moved on to another position. He was

643
01:03:36.280 --> 01:03:41.680
appointed director of the Kreditinstitut für öffentliche Arbeiten, Credit Institute

644
01:03:41.680 --> 01:03:47.280
for Public Works. In one of his first actions, after his initial orientation, Seypert dealt

645
01:03:47.280 --> 01:03:53.240
a heavy blow to Austria's inflation party, which had its stronghold in the Austro-Hungarian

646
01:03:53.240 --> 01:03:59.880
Bank. Following the stipulations of Article 206 of the Treaty of Saint-Germain, he abolished

647
01:03:59.880 --> 01:04:05.320
the old Central Bank and established a new one under the leadership of Richard Reich,

648
01:04:05.320 --> 01:04:09.740
a former student of Carl Menger's and a civil servant under Boehm-Bawerk in the Ministry

649
01:04:09.740 --> 01:04:14.380
of Finance. At the time of his appointment to the presidency of the new Central Bank,

650
01:04:14.380 --> 01:04:19.820
He had just been appointed a Vice-President under Mises at the Bureau for Claims Settlements.

651
01:04:19.820 --> 01:04:25.380
Seipel's reforms hurt those groups whose incomes had been paid out of the inflation,

652
01:04:25.380 --> 01:04:29.820
in particular the nationalised industries and socialist municipal governments that had

653
01:04:29.820 --> 01:04:35.540
started creating expensive welfare programs immediately after the war, programs that could

654
01:04:35.540 --> 01:04:40.700
only be paid for through the printing press of the Austro-Hungarian Bank. Hurting these

655
01:04:40.700 --> 01:04:45.320
These interests entailed only moderate political costs for the government and might have even

656
01:04:45.320 --> 01:04:50.500
been a welcome side effect of Zyper's reform in that it promised to hurt groups that were

657
01:04:50.500 --> 01:04:55.260
part of the socialist opposition. It turned out, however, that the very success of the

658
01:04:55.260 --> 01:05:00.720
reform extended the survival of these groups. This stable monetary framework attracted a

659
01:05:00.720 --> 01:05:06.660
great volume of foreign credit to Austria, which was then used to finance local welfare

660
01:05:06.660 --> 01:05:13.780
Schemes. The reform did visibly curtail Austrian sovereignty in financial and economic matters.

661
01:05:13.780 --> 01:05:18.580
Seipel's government accepted the establishment of the office of a Commissar General, who

662
01:05:18.580 --> 01:05:23.980
henceforth controlled Austria's public finance. This action effectively surrendered control

663
01:05:23.980 --> 01:05:30.060
over Seipel's budget to the Entente-controlled League of Nations. Dr. Alfred Zimmermann,

664
01:05:30.060 --> 01:05:35.260
a former mayor of Rotterdam, was appointed Commissar General and stayed for three years

665
01:05:35.260 --> 01:05:41.900
With Austria colonised, its government is subject to foreign powers. The socialists

666
01:05:41.900 --> 01:05:46.380
did not hesitate to accuse Seipel of giving up the country's sovereignty. The German

667
01:05:46.380 --> 01:05:50.740
nationalists in Seipel's coalition saw things the same way.

668
01:05:50.740 --> 01:05:55.260
Mises had been one of the driving forces behind the reform. He thought Austria could have

669
01:05:55.260 --> 01:06:01.820
done without the 650 million kronen of credit, but not without the Kommissar. Austrian politicians

670
01:06:01.820 --> 01:06:07.200
Mises needed a foil guy to take responsibility for unpopular policies. He did not exactly

671
01:06:07.200 --> 01:06:11.420
have a high opinion of Zimmermann himself, but had great respect for Chief Executive

672
01:06:11.420 --> 01:06:15.500
Hans Patzauer, a civil servant from the Ministry of Finance.

673
01:06:15.500 --> 01:06:20.800
Mises was widely perceived as enjoying very good ties to Patzauer. This working relation

674
01:06:20.800 --> 01:06:25.420
turned him into a power broker. For example, the leadership of the University of Vienna

675
01:06:25.420 --> 01:06:46.980
In the 1870s, an international monetary system had emerged that covered the entire Western

676
01:06:46.980 --> 01:06:53.100
world and its colonies, the classical gold standard. The money of this system was gold,

677
01:06:53.100 --> 01:06:57.620
But in most cases the currency, that is the means of payment that actually circulated

678
01:06:57.620 --> 01:07:02.020
in the countries taking part in the system, were the fractional reserve notes of the various

679
01:07:02.020 --> 01:07:07.660
national central banks. In many countries, most notably in Russia, Austria-Hungary and

680
01:07:07.660 --> 01:07:13.100
India, the national currency was backed up not only by physical gold in the vaults of

681
01:07:13.100 --> 01:07:18.460
the central bank, but also by other gold denominated currencies. This practice of holding

682
01:07:18.460 --> 01:07:24.900
Both gold and gold-denominated foreign banknotes became known as the gold exchange standard

683
01:07:24.900 --> 01:07:29.680
when it became standard procedure in the interwar period. Some Austrians then claimed the new

684
01:07:29.680 --> 01:07:35.260
international system had been invented by their finance minister Steinbach in 1897.

685
01:07:35.260 --> 01:07:40.640
In fact, however, the system was devised by David Ricardo in proposals for an economical

686
01:07:40.640 --> 01:07:46.420
and secure currency. During the war most countries had abandoned the classical gold standard

687
01:07:46.420 --> 01:07:51.500
to finance war expenditure through inflation. After the war, many statesmen promoted the

688
01:07:51.500 --> 01:07:56.020
re-establishment of an international gold standard, but the accumulated war debts were

689
01:07:56.020 --> 01:08:01.460
so huge that redemption at pre-war parities would have ruined most governments. On the

690
01:08:01.460 --> 01:08:06.220
other hand, these same governments did not wish to create the correct impression that

691
01:08:06.220 --> 01:08:11.140
they had cheated their creditors and could not fulfil their promises. The natural solution

692
01:08:11.140 --> 01:08:15.860
in this context was the adoption of the gold exchange standard. The advantage of this system

693
01:08:15.860 --> 01:08:21.140
was that a central bank could minimize its non-interest-bearing gold holdings by trusting

694
01:08:21.140 --> 01:08:26.860
other central banks, which held the physical gold needed for redemption. The disadvantages

695
01:08:26.860 --> 01:08:32.080
were not as apparent before the First World War. It made redemption more uncertain than

696
01:08:32.080 --> 01:08:36.380
it had been under the classical fractional reserve gold standard, and because it made

697
01:08:36.380 --> 01:08:41.380
redemption dependent on a prior redemption in some other country, it gave political leverage

698
01:08:41.380 --> 01:08:47.340
to these foreign central banks. The Banque de France acquired a reputation for its ruthlessness

699
01:08:47.340 --> 01:08:52.640
in using this leverage. The first steps to it, the creation of the International Gold

700
01:08:52.640 --> 01:08:58.500
Exchange Standard, were made at the Genuine Conference in the fall of 1922. Here the representatives

701
01:08:58.500 --> 01:09:04.100
of the major central banks agreed to cooperate more closely. The idea was to help out central

702
01:09:04.100 --> 01:09:08.980
banks that were unable to redeem their notes as well as, more generally, to coordinate

703
01:09:08.980 --> 01:09:14.540
Central Bank Policies. A few years later, Mises stated in plain language what coordination

704
01:09:14.540 --> 01:09:19.800
meant – the Coordinated Central Banks would increase their note issues in concert, thus

705
01:09:19.800 --> 01:09:23.920
avoiding the embarrassment of the falling exchange rates that inevitably result from

706
01:09:23.920 --> 01:09:29.060
unilateral inflation. Coordination of national inflation policies in order to suppress one

707
01:09:29.060 --> 01:09:35.400
of the main symptoms of monetary decay has remained the state of the art to this day.

708
01:09:35.400 --> 01:09:40.160
For debtors in a very inflationary currency area, cooperation between the central banks

709
01:09:40.160 --> 01:09:45.320
is a boon. Without foreign assistance, the exchange rate of their currency would constantly

710
01:09:45.320 --> 01:09:50.960
fall, and thus it would be next to impossible to obtain foreign credit. Central bank cooperation

711
01:09:50.960 --> 01:09:57.560
solves this problem. At the expense of creditors, all would be debtors in the more stable countries.

712
01:09:57.560 --> 01:10:02.360
In the 1920s, this mechanism worked to the advantage of the most ruthless debtors – the

713
01:10:02.360 --> 01:10:06.800
Socialist Municipal and Provincial Governments in Austria and Germany

714
01:10:06.800 --> 01:10:11.360
Mises took part in expert meetings at the Finance Ministry discussing the implications

715
01:10:11.360 --> 01:10:16.400
of the Geneva Protocol for Austria. The Western loans had given Seipel's government some

716
01:10:16.400 --> 01:10:22.700
flexibility in the short run, and the inflation was under control starting in September 1922.

717
01:10:22.700 --> 01:10:28.840
The exchange rate stabilised around 70,000 kronen per dollar, but in the longer run economic

718
01:10:28.840 --> 01:10:33.940
Stability and Austrian Political Independence could only be gained if the budget was balanced

719
01:10:33.940 --> 01:10:39.700
without inflation. Large increases of government income were not to be expected because the

720
01:10:39.700 --> 01:10:44.020
economy was still in a slump, and a quick recovery was out of the question given the

721
01:10:44.020 --> 01:10:50.180
prohibitive trade barriers erected by neighbouring countries. The only way out was to cut government

722
01:10:50.180 --> 01:10:55.340
spending. The largest expenses were the heavy food price subsidies and the payments for

723
01:10:55.340 --> 01:11:00.320
For the huge deficits of the railroads and the post office, the government had a tobacco

724
01:11:00.320 --> 01:11:06.140
monopoly and one for salt, but the receipts were meager. But these were sacred cows of

725
01:11:06.140 --> 01:11:11.180
the socialists, and Zeipel did not dare touch them for fear of a violent reaction from the

726
01:11:11.180 --> 01:11:16.280
opposition, especially because unemployment would rise quickly. From the end of August

727
01:11:16.280 --> 01:11:20.860
till the end of December 1922, the number of unemployed receiving government assistance

728
01:11:20.860 --> 01:11:29.340
and the city of Vienna alone rose from 24,000 to 58,000. On February 24, 1923, there were

729
01:11:29.340 --> 01:11:36.060
112,000 unemployed in Vienna and the surrounding districts, of whom 98,000 received government

730
01:11:36.060 --> 01:11:37.060
assistance.

731
01:11:37.060 --> 01:11:42.060
See Mises's undated letter to an unknown recipient. This document summarises Mises's

732
01:11:42.060 --> 01:11:48.500
view on economic conditions in Austria in early 1923. Mises wrote it in reply to an

733
01:11:48.500 --> 01:11:53.380
An unknown Anglo-Saxon friend who had visited Vienna some time earlier.

734
01:11:53.380 --> 01:11:59.080
Throughout 1923 unemployment was at 110,000. It would further increase over the following

735
01:11:59.080 --> 01:12:06.660
years reaching some 200,000 by 1929. He therefore put all his hopes into reducing government

736
01:12:06.660 --> 01:12:11.140
expenditure by dismissing 50,000 civil servants.

737
01:12:11.140 --> 01:12:15.460
Eventually the tension in the Austrian budget was reduced through this process. The stabilisation

738
01:12:15.460 --> 01:12:20.220
of the Kroner and the virtual dependence of Austrian finance on foreign supervision had

739
01:12:20.220 --> 01:12:26.380
reinforced the creditworthiness of Austrian debtors and especially of Austrian local governments.

740
01:12:26.380 --> 01:12:30.880
This tendency was reinforced by those agreements of the Genua Conference that paved the way

741
01:12:30.880 --> 01:12:35.500
for the gold exchange standard, and it was further reinforced by the onset of the great

742
01:12:35.500 --> 01:12:42.320
US inflation of 1920, which came into full swing by early 1923. The United States had

743
01:12:42.320 --> 01:12:48.400
Overcome a minor post-war depression in 1920-1921, Austrian institutions now benefited from a

744
01:12:48.400 --> 01:12:52.660
near limitless inflow of new loans.

745
01:12:52.660 --> 01:12:57.360
This gave a further boost to the ambitious spending plans of the Austrian socialists,

746
01:12:57.360 --> 01:13:04.440
particularly in Red Vienna. American funds financed one of the great experiments of communal

747
01:13:04.440 --> 01:13:10.840
socialism. Within a decade, Vienna was turned into a miniature nanny state designed to provide

748
01:13:10.840 --> 01:13:14.600
for the needs of the working class from cradle to grave.

749
01:13:14.600 --> 01:13:21.040
One mayor of Vienna boasted in Mises' presence, The Viennese is born into social democracy,

750
01:13:21.040 --> 01:13:25.200
he lives in it and dies as he has lived.

751
01:13:25.200 --> 01:13:30.480
To the great dismay of the social bystanders, Mises replied with the Vienna proverb, Some

752
01:13:30.480 --> 01:13:34.960
say that even the owners of four-storey houses are mortal.

753
01:13:34.960 --> 01:13:40.240
The new US loans also supported the violent class struggle of the Vienna trade unions,

754
01:13:40.240 --> 01:13:46.220
which relied on the social infrastructure paid for out of the new public funds. A document

755
01:13:46.220 --> 01:13:51.560
from the time describes the situation from the perspective of Austrian firms. As a consequence

756
01:13:51.560 --> 01:13:57.280
of the terror of the free trade unions, that is, of the social democratic trade unions,

757
01:13:57.280 --> 01:14:02.560
the situation in the factories had become unsupportable. The free trade unions forced

758
01:14:02.560 --> 01:14:08.080
the non-social democratic workers under threats to join their organisations and to contribute

759
01:14:08.080 --> 01:14:12.920
to their various funds. Threatening strikes, they forced the entrepreneurs to recognise

760
01:14:12.920 --> 01:14:19.360
their organisations as the only representatives of the interests of the worker classes. They

761
01:14:19.360 --> 01:14:24.280
prevented the employment of workers with other political orientations, and even demanded

762
01:14:24.280 --> 01:14:31.520
that these persons be fired. Thus, thousands of workers were condemned to unemployment.

763
01:14:31.520 --> 01:14:35.880
The Christian Socialists sought to introduce legislation outlawing the terror of the trade

764
01:14:35.880 --> 01:14:46.380
The credit-fuelled increase of government power also had a profound impact on the traditional

765
01:14:46.380 --> 01:14:52.880
Austrian conflict between industrial and agrarian interests. Austria's conservative landed establishment

766
01:14:52.880 --> 01:14:57.800
came under pressure from two sides. While the imports of agrarian products from Hungary

767
01:14:57.800 --> 01:15:02.680
and other neighbouring countries reduced the price of their products, the Austrian industries

768
01:15:02.680 --> 01:15:08.700
had an ever-higher demand for workers and attracted former peasants through higher wages.

769
01:15:08.700 --> 01:15:13.400
To counter these trends, the landed interests sought to have the government protect them

770
01:15:13.400 --> 01:15:18.840
through tariffs and monopolies, and they sought, unsuccessfully of course, to strike a backroom

771
01:15:18.840 --> 01:15:24.240
deal with big industrialists, pointing out that a stable agrarian sector was the backbone

772
01:15:24.240 --> 01:15:30.200
of the conservative order. The more peasants were drawn into industrial occupations, the

773
01:15:30.200 --> 01:15:35.540
The more they would come under the spell of Marxist organisations and Marxist culture,

774
01:15:35.540 --> 01:15:40.460
it was therefore in the interest of Austria's industrialists, according to the landowners,

775
01:15:40.460 --> 01:15:46.920
not to compete for the agrarian workforce. A very similar, though less dramatic, development

776
01:15:46.920 --> 01:15:52.320
took place in other European countries. The general scheme was always the same – wartime

777
01:15:52.320 --> 01:15:57.620
inflation had been perpetuated after the end of the hostilities to finance the growth of

778
01:15:57.620 --> 01:16:03.740
the welfare state and to cover the deficits of nationalised industries. The governments

779
01:16:03.740 --> 01:16:09.660
of Germany and Russia had pursued this dangerous policy up to the bitter end of hyperinflation

780
01:16:09.660 --> 01:16:14.980
and the collapse of the monetary system. The other governments were less reckless but still

781
01:16:14.980 --> 01:16:20.820
followed the same strategy which they only abandoned once foreign loans, especially from

782
01:16:20.820 --> 01:16:25.580
the United States, became available on a large scale in the framework of the emerging gold

783
01:16:25.580 --> 01:16:31.720
Exchange Standard. At that point they shifted from inflation to debt. With the help of

784
01:16:31.720 --> 01:16:36.560
the United States, Europe's initial problem, a lack of discipline to curtail government

785
01:16:36.560 --> 01:16:43.460
deficits grew worse over the years, reproducing itself, as the Marxists say, on a higher scale.

786
01:16:43.460 --> 01:16:48.380
Mises repeatedly denounced the dispractice in the midst of the roaring twenties in a

787
01:16:48.380 --> 01:16:54.220
lecture on The Therapy of European Public Finance, which he delivered on February 27,

788
01:16:54.220 --> 01:17:00.220
In 1925, to the Hungarian Cobden Association in Budapest, he pointed out that halting the

789
01:17:00.220 --> 01:17:06.540
inflation was not enough. The Major Cobden Sovetschek, Hungarian Cobden Association,

790
01:17:06.540 --> 01:17:12.620
was a group of free market businessmen, economists and journalists in Budapest. Before Mises,

791
01:17:12.620 --> 01:17:18.520
Zombats, Oppenheimer, List and George Paish had spoken at its meetings. They were all

792
01:17:18.520 --> 01:17:23.540
received in the most luxurious conditions, hotel rents, and were probably very well paid

793
01:17:23.540 --> 01:17:29.340
as well. One of Mises's main contacts in Budapest was a certain Felix Schwarz, who

794
01:17:29.340 --> 01:17:35.220
was no academic. Schwarz visited regularly with Mises in Vienna and had contacts with

795
01:17:35.220 --> 01:17:40.800
the Pester Lloyd, a Budapest journal that frequently ran reviews of Mises's books.

796
01:17:40.800 --> 01:17:46.540
It was only the beginning, not the end, of monetary and financial reform. What was needed

797
01:17:46.540 --> 01:17:51.540
was a radical reduction of the expenditure side of the government's budget. It was an

798
01:17:51.540 --> 01:18:20.540
The seemingly unlimited availability of ever more foreign credit

799
01:18:20.540 --> 01:18:25.820
It created the impression that the government had endless resources. The demands for government

800
01:18:25.820 --> 01:18:32.580
support and the confidence in government omnipotence waxed limitless. The roaring twenties set

801
01:18:32.580 --> 01:18:37.500
the stage for the roaring dictators of the thirties.

802
01:18:37.500 --> 01:18:43.020
Hyperinflation, currency competition and monetary reform

803
01:18:43.020 --> 01:18:47.260
Meanwhile the Verein für Sozialpolitik had put the problem of monetary stabilisation

804
01:18:47.260 --> 01:18:53.460
on the agenda for its 1923 meeting. Mises had been invited to write one of the expert

805
01:18:53.460 --> 01:18:59.780
reports to serve as the basis for the discussions, an unexpected sign of attention. Many years

806
01:18:59.780 --> 01:19:05.400
later he wrote, When my money-book appeared in the year 1912, all German reviewers rejected

807
01:19:05.400 --> 01:19:11.120
it with very unfriendly words. It was only due to the monetary collapse, which destroyed

808
01:19:11.120 --> 01:19:16.080
much more than the monetary system that, when the currency catastrophe approached, even

809
01:19:16.080 --> 01:19:21.540
Even the Verein für Sozialpolitik had second thoughts and asked me, rather than Knupp or

810
01:19:21.540 --> 01:19:26.720
Ben Dixon, to write a report on the problems of monetary stabilisation, and that the second

811
01:19:26.720 --> 01:19:33.920
edition of my book in 1924 had a much better reception. He later recalled that his monetary

812
01:19:33.920 --> 01:19:39.920
theories have been studied only when and where inflationist policies faced immediate collapse

813
01:19:39.920 --> 01:19:42.960
such as in the German Reich.

814
01:19:42.960 --> 01:19:47.960
The most fashionable book on money in the years before 1923 was written by Albert Hahn,

815
01:19:47.960 --> 01:19:52.620
a young economist in Frankfurt, developing Schumpeter's Theory of Capital, in which

816
01:19:52.620 --> 01:19:58.760
capital was abstract purchasing power. Hahn stressed that fiduciary credit expansion had

817
01:19:58.760 --> 01:20:04.200
the beneficial effect of creating forced savings and thus higher growth rates than could be

818
01:20:04.200 --> 01:20:10.000
obtained without inflation. In his book he anticipated virtually all the essential propositions

819
01:20:10.000 --> 01:20:17.960
of Keynes' General Theory, 1936, Albert Hahn, Volkswirtschaftliche Theorie des Bankkredits.

820
01:20:17.960 --> 01:20:22.160
Hahn eventually changed his mind under the impact of the German hyperinflation and of

821
01:20:22.160 --> 01:20:28.360
criticism, most notably from Hayek and other members of the Austrian School. Still later,

822
01:20:28.360 --> 01:20:32.960
he wrote a piece comparing his 1920 statements with the corresponding passages in John Maynard

823
01:20:32.960 --> 01:20:39.160
Keynes' General Theory of Employment, Interest and Money. But in 1923, the German economists

824
01:20:39.160 --> 01:20:44.280
started having second thoughts about the blessings of inflation. They wished to listen again

825
01:20:44.280 --> 01:20:50.440
to the voice of dissent. At the end of February 1923, Mises submitted his manuscript, Die

826
01:20:50.440 --> 01:20:56.520
Geldtheoretische Seite des Stabilisierungsproblems, The Problem of Stabilisation Considered from

827
01:20:56.520 --> 01:21:01.960
the Point of View of Monetary Theory. This title is somewhat misleading. In fact,

828
01:21:01.960 --> 01:21:06.800
the essay combines a sophisticated analysis of what today would be called the dynamics

829
01:21:06.800 --> 01:21:12.680
of Currency Competition with the first concise statement of Mises' ideas on how to prepare

830
01:21:12.680 --> 01:21:17.560
for the transition from an inflationary currency to the gold standard. The essay was one of

831
01:21:17.560 --> 01:21:23.240
Mises' most influential works in the sense that it had an immediate and noticeable impact

832
01:21:23.240 --> 01:21:28.160
on the economic policy of the German Reich. Mises began by pointing out that continued

833
01:21:28.160 --> 01:21:32.760
inflation would necessarily end up in the collapse of the monetary system.

834
01:21:32.760 --> 01:21:43.760
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.

835
01:21:43.760 --> 01:22:00.760
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.

836
01:22:00.760 --> 01:22:06.720
1. This is the beginning of the demonetization of the notes. The panicky quality inherent

837
01:22:06.720 --> 01:22:12.120
in the operation must speed up the process. It may be possible to calm the excited masses

838
01:22:12.120 --> 01:22:19.120
once, twice, perhaps even three or four times. However, matters must finally come to an end.

839
01:22:19.120 --> 01:22:25.400
Then there is no going back. Once the depreciation makes such rapid strides that sellers are

840
01:22:25.400 --> 01:22:30.800
are fearful of suffering heavy losses, even if they buy again with the greatest possible

841
01:22:30.800 --> 01:22:36.200
speed, there is no longer any chance of rescuing the currency, that the German mark is still

842
01:22:36.200 --> 01:22:42.220
used as money today, January 1923, is due simply to the fact that the belief generally

843
01:22:42.220 --> 01:22:48.780
prevails that its progressive depreciation will soon stop, or perhaps even that its value

844
01:22:48.780 --> 01:22:54.960
per unit will once more improve. The moment that this opinion is recognised as untenable,

845
01:22:54.960 --> 01:22:59.900
The process of ousting paper notes from their position as money will begin. If the process

846
01:22:59.900 --> 01:23:04.420
can still be delayed somewhat, it can only denote another sudden shift of opinion as

847
01:23:04.420 --> 01:23:09.980
to the state of the mark's future value. The phenomena described as frenzied purchases

848
01:23:09.980 --> 01:23:16.040
have given us some advance warning as to how the process will begin. It may be that we

849
01:23:16.040 --> 01:23:21.580
shall see it run its full course. And indeed it did run its full course, at least as far

850
01:23:21.580 --> 01:23:28.100
as Germany was concerned. The process accelerated with exponential growth rates during 1923,

851
01:23:28.100 --> 01:23:34.500
culminating in the virtual collapse of the currency in October. In the fall of 1923,

852
01:23:34.500 --> 01:23:41.100
the Reichsbank operated some 1,700 printing presses 24 hours a day and had used the entire

853
01:23:41.100 --> 01:23:49.300
production of 30 paper factories. Eventually, the paper supply threatened to become a bottleneck.

854
01:23:49.300 --> 01:23:53.620
For some time, Mises had to fear that his essay would not be published in time to influence

855
01:23:53.620 --> 01:23:59.180
policy. In May, he wrote to the publisher expressing his misgivings about the delay.

856
01:23:59.180 --> 01:24:03.460
The delay was caused by the other contributor to the volume, ex-Minister Klein, who was

857
01:24:03.460 --> 01:24:09.100
unable to return his proof pages in the agreed time. Publications of the Verein für Sozialpolitik

858
01:24:09.100 --> 01:24:14.540
were usually meant to have an impact on current policy. In his essay, Mises discussed two

859
01:24:14.540 --> 01:24:42.500
The Description given in his essay fits observations he made during the high post-war inflation

860
01:24:42.500 --> 01:24:43.500
in Vienna.

861
01:24:43.500 --> 01:24:55.500
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.

862
01:24:55.500 --> 01:25:05.500
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.

863
01:25:05.500 --> 01:25:10.040
In the country, as a result of the growing demand for foreign money, various kinds of

864
01:25:10.040 --> 01:25:15.400
foreign exchange equivalent to a part of the value of the goods shipped abroad are imported

865
01:25:15.400 --> 01:25:21.020
instead of commodities. Gradually there is accumulated within the country a supply of

866
01:25:21.020 --> 01:25:26.400
foreign monies. This substantially softens the effects of the final breakdown of the

867
01:25:26.400 --> 01:25:32.840
domestic paper standard. Then if foreign exchange is demanded even in small transactions, if,

868
01:25:32.840 --> 01:25:39.560
As a result, even wages must be paid in foreign exchange, at first in part and then in full,

869
01:25:39.560 --> 01:25:44.840
if finally even the government recognizes that it must do the same when levying taxes

870
01:25:44.840 --> 01:25:49.960
and paying its officials. The sums of foreign money needed for these purposes are, for the

871
01:25:49.960 --> 01:25:54.960
most part, already available within the country. The situation which emerges from the collapse

872
01:25:54.960 --> 01:26:00.840
of the government's currency does not necessitate barter. A cumbersome direct exchange of commodities

873
01:26:00.840 --> 01:26:15.480
Mises contrasted this smooth transition with the panic scenario which, as he said, was

874
01:26:15.480 --> 01:26:21.300
more likely in the context of the 1923 German inflation. Things will necessarily be much

875
01:26:21.300 --> 01:26:26.600
worse if the breakdown of the paper money does not take place step by step but comes,

876
01:26:26.600 --> 01:26:32.300
has now seems likely all of a sudden in panic. The supplies within the country of gold and

877
01:26:32.300 --> 01:26:37.740
silver money and of foreign notes are insignificant. The practice pursued so eagerly during the

878
01:26:37.740 --> 01:26:42.880
war of concentrating domestic stocks of gold in the central banks, and the restrictions

879
01:26:42.880 --> 01:26:48.400
for many years placed on trade in foreign monies have operated so that the total supplies

880
01:26:48.400 --> 01:26:53.880
of hoarded good money have long been insufficient to permit a smooth development of monetary

881
01:26:53.880 --> 01:26:58.960
circulation during the early days and weeks after the collapse of the paper note standard.

882
01:26:58.960 --> 01:27:02.720
Some time must elapse before the amount of foreign money needed in domestic trade is

883
01:27:02.720 --> 01:27:07.880
obtained by the sale of stocks and commodities, by raising credit and by withdrawing balances

884
01:27:07.880 --> 01:27:12.800
from abroad. In the meantime, people will have to make out with various kinds of emergency

885
01:27:12.800 --> 01:27:14.800
money tokens.

886
01:27:14.800 --> 01:27:20.300
In the early fall of 1923, several institutions sprang up spontaneously that would lead Germany

887
01:27:20.300 --> 01:27:26.420
on the path to replacing the mark. In October, the Hamburger Bank started issuing notes covered

888
01:27:26.420 --> 01:27:31.540
by foreign exchange, and a similar bank was set up in Kiel. Meanwhile, preparations were

889
01:27:31.540 --> 01:27:36.180
made in the Rhineland to establish a bank on a gold standard. The disintegration of

890
01:27:36.180 --> 01:27:40.860
the German economy into several currency areas was imminent, but history took a different

891
01:27:40.860 --> 01:27:42.620
course.

892
01:27:42.620 --> 01:27:47.540
In early August, Carl Hellfleich had presented the government with a rescue plan. Hellfleich's

893
01:27:47.540 --> 01:27:52.060
Helferich's idea was to create new confidence among the population that the decline of the

894
01:27:52.060 --> 01:27:54.300
mark had reached its limit.

895
01:27:54.300 --> 01:28:00.100
His strategy was based entirely on speculations about the layman's monetary psychology.

896
01:28:00.100 --> 01:28:05.380
Helferich proposed to establish a new bank to be called the Rentenbank, endowed with

897
01:28:05.380 --> 01:28:12.220
a claim to 3,200 million marks backed up by all commercial assets in Germany.

898
01:28:12.220 --> 01:28:17.500
Thus, all German firms, including farmers and banks, were said to have a collective

899
01:28:17.500 --> 01:28:23.600
liability to the Rentenbank. The Rentenbank would then issue Rentenmarks.

900
01:28:23.600 --> 01:28:29.100
In the mind of the average German citizen, the Rentenmark, founded on value-stable soil,

901
01:28:29.100 --> 01:28:33.600
had successfully stopped the further erosion of the mark. But the end of the crisis had

902
01:28:33.600 --> 01:28:39.340
a very different source. On the same day the first Rentenmarks came into circulation, the

903
01:28:39.340 --> 01:28:43.900
Printing of new marks was halted, as Mises had emphasized in his report to the Verein

904
01:28:43.900 --> 01:28:49.460
für Sozialpolitik, the first precondition of any monetary reform is to halt the printing

905
01:28:49.460 --> 01:28:55.700
press. Mises believed it was also necessary to bring about a return to gold, advocating

906
01:28:55.700 --> 01:29:03.020
a 100% marginal gold standard. The expression 100% marginal gold standard is, I believe,

907
01:29:03.020 --> 01:29:09.460
Professor Philippe Natars. These two measures were intimately connected. Together they were

908
01:29:09.460 --> 01:29:14.100
designed to drive the government out of the monetary arena. He explained,

909
01:29:14.100 --> 01:29:20.040
The reason for using commodity money is precisely to prevent political influence from affecting

910
01:29:20.040 --> 01:29:25.620
the value of the monetary unit. Gold is not the standard money merely on account of its

911
01:29:25.620 --> 01:29:30.300
brilliance or other physical and chemical characteristics, but because the increase

912
01:29:30.300 --> 01:29:35.900
or decrease of its quantity is dependent of any orders issued by political powers. The

913
01:29:35.900 --> 01:29:40.440
crucial function of the gold standard is that it makes changes in the quantity of money

914
01:29:40.440 --> 01:29:46.260
subject to the laws determining the profitability of gold production.

915
01:29:46.260 --> 01:29:51.860
Yet which particular type of gold standard did Mises have in mind? Apparently he believed

916
01:29:51.860 --> 01:29:57.220
that a full-blown gold standard which involved the circulation of gold coins was not necessary

917
01:29:57.220 --> 01:30:02.540
or advisable under present circumstances. He also believed that a gold exchange standard

918
01:30:02.540 --> 01:30:08.160
in which the currency consists exclusively of fractional reserve banknotes was acceptable

919
01:30:08.160 --> 01:30:14.220
if bank laws strictly limited the issuance of these banknotes. His pre-war studies had

920
01:30:14.220 --> 01:30:18.980
already alerted him to the likelihood that fractional reserve banknotes would be issued

921
01:30:18.980 --> 01:30:25.220
on a growing scale and that there was no natural limit to this type of inflation if it proceeded

922
01:30:25.220 --> 01:30:32.740
slowly in a step-by-step manner. His 1923 proposal therefore advocated 100% reserves

923
01:30:32.740 --> 01:30:38.580
for all additional note issues. Mises's plan thus took the present existence of fractional

924
01:30:38.580 --> 01:30:43.820
reserve notes as irreversible and focused instead on the prevention of any further issuance

925
01:30:43.820 --> 01:30:50.020
of such notes. All additional issues must be completely covered by gold deposited with

926
01:30:50.020 --> 01:30:52.140
the issuing bank.

927
01:30:52.140 --> 01:30:57.600
The foundation and cornerstone of the provisional new monetary system will be the absolute prohibition

928
01:30:57.600 --> 01:31:03.060
of the issue of any notes not completely covered by gold, the amount of Reichsbank banknotes,

929
01:31:03.060 --> 01:31:08.740
of banknotes, of the Dalian Kassen, of the emergency currency of any kind and of token

930
01:31:08.740 --> 01:31:14.400
money will be legislated to be, after deduction of the stocks of gold and of foreign exchange

931
01:31:14.400 --> 01:31:19.500
held by the Reichsbank and by the private banks of issue, the maximum amount of German

932
01:31:19.500 --> 01:31:25.300
and notes in circulation. Any extension of this maximum must be avoided under any circumstances

933
01:31:25.300 --> 01:31:30.660
except for the facilitation of end-of-quarter payments that we already have mentioned. Any

934
01:31:30.660 --> 01:31:35.780
note issue beyond this limit must be fully covered by a deposit of gold or a foreign

935
01:31:35.780 --> 01:31:40.820
exchange with the Reichsbank. This is obviously the adoption of the main Provision of Peels

936
01:31:40.820 --> 01:31:45.780
Bank Act with all its deficiencies, but for the moment these deficiencies hardly have

937
01:31:45.780 --> 01:32:06.500
The deficiencies alludes to concern the absence of legal limitations on checking accounts

938
01:32:06.500 --> 01:32:12.340
and other money substitutes. To determine the most suitable redemption ratio between

939
01:32:12.340 --> 01:32:16.640
Between gold and the currency, Mises recommended that the monetary authority should proceed

940
01:32:16.640 --> 01:32:22.240
by one, stopping the printing press and then, two, letting the exchange rate between its

941
01:32:22.240 --> 01:32:28.260
currency and gold stabilize on the market. In short, stop inflating and then let the

942
01:32:28.260 --> 01:32:34.000
market determine the gold value of the mark. Mises maintained the same views on the technical

943
01:32:34.000 --> 01:32:39.500
aspects of monetary reform for the rest of his career. In 1953, he made the case for

944
01:32:39.500 --> 01:33:01.960
Mises rejected the idea, which would later be maintained by the influential Gustav Kassel,

945
01:33:01.960 --> 01:33:05.500
that there might not be enough gold available to put all countries in the world on a gold

946
01:33:05.500 --> 01:33:22.500
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.

947
01:33:22.500 --> 01:33:28.660
Finally, it was not necessary to bring about a full-blown gold circulation. A return to

948
01:33:28.660 --> 01:33:33.220
the gold standard would not necessarily mean a return to the actual use of gold money for

949
01:33:33.220 --> 01:33:38.300
small and medium-sized payments within the country, for even the gold exchange standard

950
01:33:38.300 --> 01:33:44.740
developed by Ricardo in his work Proposals for an Economical and Secure Currency, 1816,

951
01:33:44.740 --> 01:33:50.140
is a true and sound gold standard. The monetary history of the recent decades has clearly

952
01:33:50.140 --> 01:33:55.560
have already shown this. Following Ricardo further, he even suggested legislating that

953
01:33:55.560 --> 01:34:01.660
the Reichsbank only be obliged to redeem gold ingots rather than gold coins. This would

954
01:34:01.660 --> 01:34:06.480
act as an effective deterrent against redemption demands that the bank might not be able to

955
01:34:06.480 --> 01:34:11.480
comply with in its first years of operation under the gold standard. At some later point

956
01:34:11.480 --> 01:34:16.860
it might however be useful to counteract the note-using habits of the population and thus

957
01:34:16.860 --> 01:34:28.460
They turned out that Mises's apprehensions about the remaining inflation dangers in a

958
01:34:28.460 --> 01:34:34.380
gold exchange standard were justified. Writing many years later in Human Action, he regretted

959
01:34:34.380 --> 01:34:39.100
the moderate stance he had taken in his earlier writings because it left too much power in

960
01:34:39.100 --> 01:34:43.120
the hands of the government which, through its monetary authority, still issued the gold

961
01:34:43.120 --> 01:34:48.760
Gold Exchange Currency. He denounced the root error behind the gold exchange standard, which

962
01:34:48.760 --> 01:34:54.560
was in seeing the costs involved in the preservation of a metallic currency as a waste. This had

963
01:34:54.560 --> 01:34:59.960
been the mistake of both Adam Smith and David Ricardo, and thus enjoyed immense credibility

964
01:34:59.960 --> 01:35:06.320
and prestige, yet Mises had come to consider it as one of the most serious shortcomings

965
01:35:06.320 --> 01:35:11.560
of the classical economists. In dealing with the problems of the gold exchange

966
01:35:11.560 --> 01:35:17.320
Standard all economists, including the author of this book, failed to realize that it places

967
01:35:17.320 --> 01:35:23.400
in the hands of governments the power to manipulate their nation's currency easily. Economists

968
01:35:23.400 --> 01:35:29.480
blithely assumed that no government of a civilized nation would use the gold exchange standard

969
01:35:29.480 --> 01:35:35.600
intentionally as an instrument of inflationary policy. Mises's case for the restoration

970
01:35:35.600 --> 01:35:39.720
of the gold standard was obviously based on the premise that an inflation-free monetary

971
01:35:39.720 --> 01:35:44.840
Every order would be a good thing, but what if someone objected to this view on fiscal

972
01:35:44.840 --> 01:35:51.080
grounds? These conditional inflationists, as Mises called them, admitted that inflation

973
01:35:51.080 --> 01:35:57.360
was not necessary to equilibrate the balance of payments, but they held that in some situations

974
01:35:57.360 --> 01:36:04.320
it was suitable and expedient for the government to use inflation as a particular form of taxation.

975
01:36:04.320 --> 01:36:09.240
Mises observed that paper money production was indeed one of three possible resources

976
01:36:09.240 --> 01:36:15.160
of Government Revenue, the other two being taxation and borrowing. In his view, economic

977
01:36:15.160 --> 01:36:19.760
science could not determine which of these techniques should be used, but it had a few

978
01:36:19.760 --> 01:36:24.560
things to say about the social and economic consequences of paper money inflation and

979
01:36:24.560 --> 01:36:30.400
also about its political significance. Mises suggested that inflation was by its very nature

980
01:36:30.400 --> 01:36:37.200
undemocratic. A government always feels compelled to resort to inflationary measures when it

981
01:36:37.200 --> 01:36:42.880
is unable to issue bonds and, when it does not dare to increase taxes because it fears

982
01:36:42.880 --> 01:36:48.240
to lose support for its system of government, if the latter's financial and general economic

983
01:36:48.240 --> 01:36:53.660
consequences become obvious too quickly. Thus, inflation becomes one of the most important

984
01:36:53.660 --> 01:36:59.720
psychological instruments of an economic policy bent on camouflaging its effects. In this

985
01:36:59.720 --> 01:37:05.520
sense it may be called a tool of anti-democratic policy because it makes it possible, through

986
01:37:05.520 --> 01:37:10.080
and the deception of public opinion to perpetuate a system of government which would have no

987
01:37:10.080 --> 01:37:16.040
prospect of public approval if all things were openly explained.

988
01:37:16.040 --> 01:37:20.800
Mises here rediscovers a fact that had been first stressed in the writings of Nicolas

989
01:37:20.800 --> 01:37:28.300
Orem, a 14th century scholastic and author of the very first monetary treatise. Orem pointed

990
01:37:28.300 --> 01:37:35.260
out that the basement, the inflation technique of his age, served to enrich the princes at

991
01:37:35.260 --> 01:37:41.740
At the expense of the community, the prince is thereby turned from kings into tyrants.

992
01:37:41.740 --> 01:37:47.140
I have the opinion that the main and final cause why the prince pretends to the power

993
01:37:47.140 --> 01:37:52.780
of altering the coinage is the profit or gain which he can get from it. The amount of the

994
01:37:52.780 --> 01:37:57.580
prince's profit is necessarily that of the community's loss, but whatever loss the prince

995
01:37:57.580 --> 01:38:03.980
inflicts on the community is injustice and the act of a tyrant and not of a king, as

996
01:38:03.980 --> 01:38:09.580
as Aristotle says, and so the prince would be at length able to draw to himself almost

997
01:38:09.580 --> 01:38:15.900
all the money or riches of his subjects and reduce them to slavery, and this would be

998
01:38:15.900 --> 01:38:23.460
tyrannical, indeed true and absolute tyranny as it is represented by philosophers and in

999
01:38:23.460 --> 01:38:30.140
ancient history. Recalling the intimate relationship between the welfare state and the warfare

1000
01:38:30.140 --> 01:38:58.580
Inflationism belongs to imperialism, to militarism, to protectionism, to statism, to socialism,

1001
01:38:58.580 --> 01:39:02.980
in the same way as the sound money policy of the champions of the gold standard had

1002
01:39:02.980 --> 01:39:09.480
belonged to liberalism, to free trade and to pacifism. And just as the global catastrophe

1003
01:39:09.480 --> 01:39:15.960
that has swept over mankind since 1914 is not an elementary fact of nature but the necessary

1004
01:39:15.960 --> 01:39:21.940
consequence of the ideas that rule our times, so is the destruction of our monetary system

1005
01:39:21.940 --> 01:39:27.000
nothing but the necessary consequence of the dominance of certain ideologies of monetary

1006
01:39:27.000 --> 01:39:28.000
Policy

1007
01:39:28.000 --> 01:39:32.960
A few months after the stabilization of the mark, the position of the banks and other

1008
01:39:32.960 --> 01:39:39.220
private firms that depended on continued inflation in Germany had become untenable and they started

1009
01:39:39.220 --> 01:39:44.960
scrambling for cash. Many went under, the most prominent case being the Biedermann Bank,

1010
01:39:44.960 --> 01:39:50.800
whose president was Josef Schumpeter. In the interwar period, the large Austrian banks

1011
01:39:50.800 --> 01:39:56.240
had consciously sought to win economists of Schumpeter's standing as frontmen to reassure

1012
01:39:56.240 --> 01:40:01.060
for their creditors from abroad. They had also asked Mises for support several times,

1013
01:40:01.060 --> 01:40:06.400
but he always rejected these proposals because he thought the commercial banks were all bankrupt.

1014
01:40:06.400 --> 01:40:12.100
He probably could have increased his revenue several times if it is licit to extrapolate

1015
01:40:12.100 --> 01:40:18.000
pre-World War I data. Indeed, before the war, the leading executives of the Kreditanstalt,

1016
01:40:18.000 --> 01:40:24.480
Spitzmüller, and of the Bodenkreditanstalt, Sieghart, had a basic annual income of 50,000

1017
01:40:24.480 --> 01:40:47.360
Theory of Money and Credit reconsidered. Sometime before March 1923, Mises had talked

1018
01:40:47.360 --> 01:40:52.480
to representatives of Dunker and Humblot about a second edition of Theorie des Geldes und

1019
01:40:52.480 --> 01:40:59.400
He planned to incorporate several major necessary additions, but intended to make cuts elsewhere

1020
01:40:59.400 --> 01:41:04.360
in order to maintain the overall size of the book. He rejected a first offer as insufficient,

1021
01:41:04.360 --> 01:41:09.840
both financially and because it stipulated that he cut the book by one sixth. He pointed

1022
01:41:09.840 --> 01:41:14.880
out that the contract concerning the first edition, which eventually sold out entirely,

1023
01:41:14.880 --> 01:41:20.380
had been unfavourable to him since he did not even recover his expenses. Eventually,

1024
01:41:20.380 --> 01:41:26.940
He signed a contract on May 31, 1923 that stipulated a production of 2,000 plus 50 complimentary

1025
01:41:26.940 --> 01:41:34.540
copies and 150 for review. Mises had Duncker und Homblat send 14 of the 50 complimentary

1026
01:41:34.540 --> 01:41:40.340
copies directly to the recipients. He himself distributed the remaining 36 copies. Although

1027
01:41:40.340 --> 01:41:45.620
the message of the first edition was unaltered in its essentials, he felt obliged to take

1028
01:41:45.620 --> 01:41:50.020
like account of various recent developments in economic theory as well as changes in his

1029
01:41:50.020 --> 01:41:55.940
own views, most notably his new perspective on the economics of socialism. He also wanted

1030
01:41:55.940 --> 01:42:00.260
to further develop the theory of interest and business cycle theory about which he now

1031
01:42:00.260 --> 01:42:05.860
believed he had previously underestimated the significance of his own contribution.

1032
01:42:05.860 --> 01:42:10.540
I have come to the conclusion that the theory which I put forward as an elaboration and

1033
01:42:10.540 --> 01:42:15.720
and continuation of the doctrines of the currency school is, in itself, a sufficient explanation

1034
01:42:15.720 --> 01:42:20.940
of crises, and not merely a supplement to an explanation in terms of the theory of direct

1035
01:42:20.940 --> 01:42:26.800
exchange as I supposed in the first edition. He also added a section on current problems

1036
01:42:26.800 --> 01:42:32.140
of banking policy, a chapter dealing with the monetary theory and policy of statism,

1037
01:42:32.140 --> 01:42:37.600
and an essay on the classification of theories of money. He deleted long sections dealing

1038
01:42:37.600 --> 01:42:43.280
with historical cases of hyperinflation. These passages had been necessary in 1912

1039
01:42:43.280 --> 01:42:48.840
at the end of a long phase of monetary stability to illustrate the possibility of inflationary

1040
01:42:48.840 --> 01:42:55.520
dangers lurking around the corner if the policies of the day continued. In 1924 this was no

1041
01:42:55.520 --> 01:43:00.320
longer necessary. The experiences of recent years afford sufficient illustrations of the

1042
01:43:00.320 --> 01:43:06.520
fundamental argument to allow these discussions now to be dispensed with. Indeed, Germany's

1043
01:43:06.520 --> 01:43:12.120
Mises' hyperinflation was a striking illustration of Mises' argument, especially impressive

1044
01:43:12.120 --> 01:43:17.440
were his predictions of inflation's social consequences, that is, the redistributive

1045
01:43:17.440 --> 01:43:23.600
effects. All inflations entail redistribution to the benefit of those who received the new

1046
01:43:23.600 --> 01:43:29.320
currency first, but the German inflation entailed redistribution on such a massive, visible

1047
01:43:29.320 --> 01:43:35.400
scale that few could fail to notice it. While the personal savings of most people had become

1048
01:43:35.400 --> 01:43:46.840
Mises' anger about these events was not directed against those with political connections,

1049
01:43:46.840 --> 01:43:52.240
but to those who made such connections relevant to amassing such fortunes. A passage from

1050
01:43:52.240 --> 01:43:56.360
an unpublished draft of his introduction to the second edition reveals his state of mind

1051
01:43:56.360 --> 01:44:02.480
at the end of 1923. Reckoning with the leaders of the campaign of lies against his book,

1052
01:44:02.480 --> 01:44:08.040
Between the first and second edition of this book, the European governments waged a war

1053
01:44:08.040 --> 01:44:14.200
against economic science that was as tenacious as it was unsuccessful. It was the pitiable

1054
01:44:14.200 --> 01:44:19.560
collapse of their politics that showed those empowered the limits of their might. The statist

1055
01:44:19.560 --> 01:44:25.080
theories have collapsed with the politics of statism, and economic science, long disdained,

1056
01:44:25.080 --> 01:44:30.240
has reclaimed its place of honour. It was inevitable that the first edition of this

1057
01:44:30.240 --> 01:44:35.160
His book, although it only sought to serve the truth, was passionately, bitterly and

1058
01:44:35.160 --> 01:44:40.160
perfidiously attacked by the champions of the theories that prepared the way for monetary

1059
01:44:40.160 --> 01:44:45.360
debacle. He had planned to give the new introduction the title, The Place of the Theory of Money

1060
01:44:45.360 --> 01:44:50.280
and Fiduciera Media, within the system of theoretical economics, but also abandoned

1061
01:44:50.280 --> 01:44:56.560
this idea. At the end of March 1924, the last part of the manuscript was in the hands of

1062
01:44:56.560 --> 01:45:00.760
of the Publisher and Dunkle und Humblatt worked feverishly toward completion of the printing

1063
01:45:00.760 --> 01:45:05.160
in the summer semester. The first paperback copies were finally ready in the second week

1064
01:45:05.160 --> 01:45:11.760
of July and the bookbindery delivered the hardcover copies on July 18th.

1065
01:45:11.760 --> 01:45:16.200
From the start, the book sold exceedingly well for a theoretical treatise, especially

1066
01:45:16.200 --> 01:45:23.160
one that opposed mainstream views on its subject. In 1932, Dunkle und Humblatt already talked

1067
01:45:23.160 --> 01:45:27.100
about a third edition of the book, and in light of the sales, it is certain that this

1068
01:45:27.100 --> 01:45:32.960
edition would have been forthcoming. The rise of National Socialism in Germany prevented

1069
01:45:32.960 --> 01:45:39.240
this project. The success was not entirely surprising, given Mises' new prominence as

1070
01:45:39.240 --> 01:45:44.500
a member of Austria's first post-war government and author of Gemeinwirtschaft. The German

1071
01:45:44.500 --> 01:45:49.640
hyperinflation and the enormous inflation in German Austria had seriously damaged the

1072
01:45:49.640 --> 01:45:54.920
and the credibility of the established authorities. Professional economists and other social scientists

1073
01:45:54.920 --> 01:45:59.480
were looking for other approaches. In this context Weber's remark in his posthumous

1074
01:45:59.480 --> 01:46:05.480
Wirtschaft und Gesellschaft, that of all monetary theories Mises's was the most acceptable,

1075
01:46:05.480 --> 01:46:12.200
had directed the attention of a broader learned readership to the work of this Austrian economist.

1076
01:46:12.200 --> 01:46:16.380
German Economists Return to Classical Liberalism

1077
01:46:16.380 --> 01:46:20.780
The second edition of Theories des Geldes unter Umlaufsmitteln arrived just in time

1078
01:46:20.780 --> 01:46:25.040
for the annual meeting of the Verein für Sozialpolitik, which took place in late September

1079
01:46:25.040 --> 01:46:31.940
1924 in Stuttgart. It provided a welcome antidote to the German edition of John Maynard Keynes's

1080
01:46:31.940 --> 01:46:36.700
tract on monetary reform, which Dunkler & Humlatt had published some months before Mises's

1081
01:46:36.700 --> 01:46:42.060
book. In his book, Keynes had adopted the position of Irving Fischer and Gustav Kassel,

1082
01:46:42.060 --> 01:46:46.380
According to which, monetary policy should strive to stabilize the purchasing power of

1083
01:46:46.380 --> 01:46:47.380
money.

1084
01:46:47.380 --> 01:46:51.460
Meanwhile, Germany's situation had improved considerably.

1085
01:46:51.460 --> 01:46:56.540
In May, the revanchiste Pointe-Carré government had lost the general elections in France,

1086
01:46:56.540 --> 01:47:02.060
and the new leadership under Ariel Pernedé and Brion immediately set out to bring about

1087
01:47:02.060 --> 01:47:05.300
an end to the politics of seizure in the rule.

1088
01:47:05.300 --> 01:47:09.340
As a consequence, the German government was finally able to come to a financial agreement

1089
01:47:09.340 --> 01:47:13.700
with its former enemies, and obtained even better conditions than Austria had in the

1090
01:47:13.700 --> 01:47:19.140
Geneva Protocols two years earlier. Germany obtained Western credit for 800 million gold

1091
01:47:19.140 --> 01:47:24.420
marks to bolster the reserves of the Reichspank and thus enable it to operate on a gold exchange

1092
01:47:24.420 --> 01:47:30.020
standard. In contrast to Vienna, the Berlin government did not have to make any of the

1093
01:47:30.020 --> 01:47:35.060
far-reaching concessions that would have diminished its political sovereignty. The agreement that

1094
01:47:35.060 --> 01:47:50.740
A level of optimism finally returned to the population.

1095
01:47:50.740 --> 01:47:55.060
This apparently helped the German economists face up to the crisis of social policy that

1096
01:47:55.060 --> 01:47:58.700
Weber and Mises had caused with their recent writings.

1097
01:47:58.700 --> 01:48:03.760
The assembly in Stuttgart broke new ground in the history of the Verein für Sozialpolitik

1098
01:48:03.760 --> 01:48:08.000
Then, on the last two days of the meeting, the great majority of the speakers endorsed,

1099
01:48:08.000 --> 01:48:13.160
with some qualifications, the case for free trade. This ended the more than 50-year-old

1100
01:48:13.160 --> 01:48:19.280
tradition of monolithic advocacy of the welfare state, inflation and protectionism.

1101
01:48:19.280 --> 01:48:24.240
Two years before, at the 50th anniversary convention in Eisenach, Mises's friend Georg

1102
01:48:24.240 --> 01:48:31.280
Hahn had unsuccessfully agitated for the transformation of the Veyrein into a pure research association.

1103
01:48:31.280 --> 01:48:36.800
Two motivations seem to be at work in this attempt. On the one hand, Max Weber's ideal

1104
01:48:36.800 --> 01:48:42.520
of a value-free social science had won many followers among the younger generation. On

1105
01:48:42.520 --> 01:48:48.320
the other hand, the Socialist November Revolutions of 1918 had produced a political radicalisation

1106
01:48:48.320 --> 01:48:53.760
of its members and of the larger society. This radicalisation diminished the status

1107
01:48:53.760 --> 01:48:58.760
of the middle-of-the-road mainstream, which in the past had been the main agent of political

1108
01:48:58.760 --> 01:49:03.480
for Compromise within the Verein and of its application in government policy.

1109
01:49:03.480 --> 01:49:07.720
The debate had been put on the schedule at the very last minute. Two considerations came

1110
01:49:07.720 --> 01:49:13.520
into play. First, in January 1925, the German government was going to recover its sovereignty

1111
01:49:13.520 --> 01:49:18.920
in matters of foreign trade. It had been denied this freedom by the Treaty of Versailles.

1112
01:49:18.920 --> 01:49:24.780
Second, the Doors plan had finally created a reliable basis for policy-making. True to

1113
01:49:24.780 --> 01:49:29.260
To its mission, the Vereins sought to give intellectual guidance to the forthcoming parliamentary

1114
01:49:29.260 --> 01:49:34.540
debates, though it was impossible to commission any research papers before the Stuttgart meeting.

1115
01:49:34.540 --> 01:49:39.560
Herckner's choice of the invited speakers was therefore bound to set the tone for the

1116
01:49:39.560 --> 01:49:41.060
entire debate.

1117
01:49:41.060 --> 01:49:45.980
He chose four well-established economists, who he knew to be open to free trade – Max

1118
01:49:45.980 --> 01:49:50.500
Ehring, Christian Eckert, Bernhard Harms and Georg Gotthein.

1119
01:49:50.500 --> 01:49:55.380
At the meeting, these men did indeed call on the German government to pioneer the re-establishment

1120
01:49:55.380 --> 01:50:00.780
of global free trade, but Gotthein and Ziering argued that some tariffs should be kept in

1121
01:50:00.780 --> 01:50:06.640
place, not as a protection for certain industries, but as the basis of future international negotiations

1122
01:50:06.640 --> 01:50:09.980
to enhance further the freedom of trade.

1123
01:50:09.980 --> 01:50:16.000
These statements were so well received that 107 participants went on to sign a proclamation

1124
01:50:16.000 --> 01:50:25.680
Mises' friend Georg Jahn expressed the significance of the event in a 1927 essay on the free trade

1125
01:50:25.680 --> 01:50:27.760
movement in Germany.

1126
01:50:27.760 --> 01:50:31.820
The new free trade initiatives have found expression in a proclamation that was agreed upon in

1127
01:50:31.820 --> 01:50:37.160
Stuttgart 1924 in the wake of a meeting of the Verein für Sozialpolitik dealing with

1128
01:50:37.160 --> 01:50:42.800
the reform of trade policy, and which was signed by a great number of academic economists.

1129
01:50:42.800 --> 01:50:48.500
The Proclamation says, Germany's new economic structure, the implications of the London Agreement

1130
01:50:48.500 --> 01:50:53.640
and important changes in the forces cooperating on the world market have confronted Germany

1131
01:50:53.640 --> 01:50:59.420
with an entirely new trade political situation. The undersigned representatives of the economic

1132
01:50:59.420 --> 01:51:04.880
and social sciences, among them many who before the war had advocated the basic principles

1133
01:51:04.880 --> 01:51:11.080
of then protectionist German trade policy, emphasize that under current conditions Germany

1134
01:51:11.080 --> 01:51:16.040
Industry is forced to make the advantages of world trade its own, most notably in order

1135
01:51:16.040 --> 01:51:22.060
to rationalise its agriculture and its industry. Hence they can concur with industrial and

1136
01:51:22.060 --> 01:51:27.040
agrarian tariffs, only to the extent that these are necessary and adequate means to

1137
01:51:27.040 --> 01:51:29.560
make international trade more liberal.

1138
01:51:29.560 --> 01:51:34.620
Jan went on, What these academic economists demand is nothing less than restoration of

1139
01:51:34.620 --> 01:51:40.520
trade policy to the free trade ideas of the nineteenth century. Major parts of agriculture

1140
01:51:40.520 --> 01:51:45.440
and Industry might continue to be in need of protection, but the greater interest of

1141
01:51:45.440 --> 01:51:50.840
the State is in free trade and not in the conservation of a system of protective tariffs

1142
01:51:50.840 --> 01:51:57.140
which increases rather than diminishes the problems. It was probably the most joyful

1143
01:51:57.140 --> 01:52:02.080
experience that Mises ever had at averein meeting even though he did not fully concur

1144
01:52:02.080 --> 01:52:07.980
with all provisions of the proclamation. By the end of October 1924 he had not signed

1145
01:52:07.980 --> 01:52:13.980
The events most certainly took him by surprise. Returning from his summer vacation in Bad

1146
01:52:13.980 --> 01:52:19.780
Gastein, Mises had spent only a couple of days in Vienna and then travelled to Stuttgart.

1147
01:52:19.780 --> 01:52:24.700
He did not plan to take part in the discussions, but eventually gave in to the demands of the

1148
01:52:24.700 --> 01:52:29.060
other participants who rightly saw in him one of the main driving forces behind the

1149
01:52:29.060 --> 01:52:35.740
apparent new orientation. Mises spoke from notes consisting of key words. He later developed

1150
01:52:35.740 --> 01:53:04.400
protectionist ideas had lost much if not all of their old attractiveness for this group,

1151
01:53:04.400 --> 01:53:08.720
And it is not different in the field of monetary theory. All advocates of the state theory

1152
01:53:08.720 --> 01:53:13.860
of money have disappeared, and some who not long ago advocated abolishing the gold standard

1153
01:53:13.860 --> 01:53:18.400
now advocate calculation in gold and the gold standard.

1154
01:53:18.400 --> 01:53:22.980
He also took a shot at those who, like Alfred Schmidt Essen, in those days an influential

1155
01:53:22.980 --> 01:53:27.620
writer on monetary questions, claimed that the gold standard is a monetary order in the

1156
01:53:27.620 --> 01:53:33.360
exclusive interests of the United States and England. Turning this argument on its head,

1157
01:53:33.360 --> 01:53:38.560
Mises said, It was not a foreign commodity that depreciated our currency but a foreign

1158
01:53:38.560 --> 01:53:43.720
doctrine, the fight against and the rejection of the quantity theory that we accepted with

1159
01:53:43.720 --> 01:53:45.920
a banking theory.

1160
01:53:45.920 --> 01:53:49.800
Then he recollected the story of how, on an evening three years earlier, he walked with

1161
01:53:49.800 --> 01:53:52.920
a German visitor through the streets of Vienna.

1162
01:53:52.920 --> 01:53:58.120
While most factories stood silent or had significantly reduced their operations, only the printing

1163
01:53:58.120 --> 01:54:02.600
presses of the Austro-Hungarian bank were busy.

1164
01:54:02.600 --> 01:54:07.600
Mises had definitely improved. The inflation had been stopped, and the party of inflation

1165
01:54:07.600 --> 01:54:14.500
and its theories, most notably the banking theory of money, had lost much of their authority.

1166
01:54:14.500 --> 01:54:19.600
At the Verrhein meeting, Mises's views did not encounter any serious resistance. Melchior

1167
01:54:19.600 --> 01:54:25.240
Parry merely objected that his criticism of the banking theory had gone too far. The only

1168
01:54:25.240 --> 01:54:31.000
view that Mises himself opposed was Frederic Sommarney's contention that monetary reform

1169
01:54:31.000 --> 01:54:36.860
was a matter of constitutional amendment. Anticipating a tenant of the late 20th century

1170
01:54:36.860 --> 01:54:42.420
school of constitutional economics, Zummery claimed that monetary stability was essentially

1171
01:54:42.420 --> 01:54:47.900
a legal issue that could be solved through a suitable monetary constitution that limited

1172
01:54:47.900 --> 01:54:53.040
the powers of the central bank management. Mises objected that this approach does not

1173
01:54:53.040 --> 01:54:58.960
get to the root of the problem, namely the inflationist mindset. Ultimately, central

1174
01:54:58.960 --> 01:55:04.080
Bank policies are determined by ideas, not by legal codes.

1175
01:55:04.080 --> 01:55:08.340
Criticising the effectiveness of monetary policy, Mises also seemed to advance an early

1176
01:55:08.340 --> 01:55:14.020
version of the rational expectations argument. He stressed that he did not want to argue

1177
01:55:14.020 --> 01:55:18.840
that future inflation would be prevented by more enlightened monetary authorities. His

1178
01:55:18.840 --> 01:55:24.060
point was rather that economic enlightenment of the general public would deny inflationary

1179
01:55:24.060 --> 01:55:41.620
Silver Linings on the Horizon

1180
01:55:41.620 --> 01:55:47.100
The successful second edition of the Theorie des Geldes and the reorientation of the Verein

1181
01:55:47.100 --> 01:55:52.700
für Sozialpolitik were symptoms of a changed intellectual and political climate that came

1182
01:55:52.700 --> 01:55:57.980
came into full swing after 1923, the year of the crisis of social policy and of the

1183
01:55:57.980 --> 01:56:03.820
stabilisation of the mark. Central to both events were Mises's writings. This fact

1184
01:56:03.820 --> 01:56:08.900
did not reach the attention of the larger public but was obvious to all leading circles

1185
01:56:08.900 --> 01:56:15.040
in academia and in monetary policy. His impact in those years was limited primarily by his

1186
01:56:15.040 --> 01:56:21.060
deficiencies as a communicator. He was not an orator and lacked the charismatic personality

1187
01:56:21.060 --> 01:56:26.900
to win over an audience. He had a fine and dry wit, but was often too subtle for those

1188
01:56:26.900 --> 01:56:32.180
outside Europe's highest society, and when he gave talks in foreign languages his wit

1189
01:56:32.180 --> 01:56:38.040
abandoned him. He certainly was not at ease in French or English. His accent was strong

1190
01:56:38.040 --> 01:56:43.740
when speaking English, and his French, although significantly better, was far from perfect.

1191
01:56:43.740 --> 01:56:50.220
Who knows what turn the history of the 1920s might have taken had Mises enjoyed the communicative

1192
01:56:50.220 --> 01:56:56.900
of Gifts, a Maynard Keynes, an Erwin Fischer, a Werner Sombart or an Ottmar Spahn.

1193
01:56:56.900 --> 01:57:02.640
Still Mises did have a significant impact. After 1924 he became a sought-after speaker

1194
01:57:02.640 --> 01:57:08.060
and also after 1925 the official representative of the Austrian Chambers of Commerce at the

1195
01:57:08.060 --> 01:57:12.700
International Chamber of Commerce. These meetings and the connections he was building at the

1196
01:57:12.700 --> 01:57:18.220
London School of Economics provided Mises with the opportunity to disseminate his views

1197
01:57:18.220 --> 01:57:19.980
throughout Europe.

1198
01:57:19.980 --> 01:57:24.460
Next week I will travel to Brussels, to the Chamber of Commerce Convention, and then to

1199
01:57:24.460 --> 01:57:27.780
London where I will again look up my English friends.

1200
01:57:27.780 --> 01:57:34.260
I have great expectations for the visit, even if I can only stay in London for a short time.

1201
01:57:34.260 --> 01:57:37.940
He was a vocal champion of a return to a gold standard.

1202
01:57:37.940 --> 01:57:43.200
His efforts were crowned with the introduction of a gold exchange standard in Austria.

1203
01:57:43.200 --> 01:57:47.940
It was only a gold exchange standard, a fractional reserve system with a lower reserve ratio

1204
01:57:47.940 --> 01:57:53.300
show than its predecessor the classical gold standard, but at least notionally gold was

1205
01:57:53.300 --> 01:57:58.540
once again the money of the country. A new gold-based currency, the shilling, replaced

1206
01:57:58.540 --> 01:58:05.780
the corona on January 1st 1925. The conversion rate was 10,000 kronen for one shilling. The

1207
01:58:05.780 --> 01:58:12.940
corona had been introduced in 1892 in substitution for the golden banknotes, which however circulated

1208
01:58:12.940 --> 01:58:19.980
during the next few years. The substitution process was ended by January 1st, 1900. Little

1209
01:58:19.980 --> 01:58:25.000
Austria thus spearheaded a movement that came into full swing when Great Britain returned

1210
01:58:25.000 --> 01:58:31.640
to gold a few months later, on April 25th. In many ways this reform paralleled the 1892

1211
01:58:31.640 --> 01:58:36.980
reform that had first introduced the kroner itself a gold-based currency. Both reforms

1212
01:58:36.980 --> 01:58:42.720
enjoyed the decisive support of Austrian economists. Just as the original kroner could be called

1213
01:58:42.720 --> 01:58:48.280
The brainchild of Carl Menger, so the original shilling was the fruit of Mises's labour.

1214
01:58:48.280 --> 01:58:53.600
In the preceding year, Mises had been given a prominent forum to explain and justify the

1215
01:58:53.600 --> 01:58:59.360
necessity of the reform. He did so in a widely publicised lecture that he delivered to the

1216
01:58:59.360 --> 01:59:04.640
annual plenary meeting of an association of German industrialists in the new Czechoslovakian

1217
01:59:04.640 --> 01:59:10.100
republic. Mises made the case that the return to the gold standard was the most pressing

1218
01:59:10.100 --> 01:59:13.380
Problem of Present-day Monetary Policy

1219
01:59:13.380 --> 01:59:18.380
The name of the association was Deutsche Hauptverband der Industrie. The meeting took place at

1220
01:59:18.380 --> 01:59:24.420
the association's headquarters in Teplitz on March 15, 1924. Mises might have given

1221
01:59:24.420 --> 01:59:31.140
a similar talk to the Association of Merchants and Industrialists in Berlin, der Rhein-Berliner

1222
01:59:31.140 --> 01:59:37.260
Kaufleute und Industrieller. A local newspaper had been given a long abstract of his manuscript

1223
01:59:37.260 --> 02:00:01.020
The circumstances of this appearance are interesting in that they give a taste of the conditions

1224
02:00:01.020 --> 02:00:06.460
under which Mises had to operate in those days. The secretary of the association, a

1225
02:00:06.460 --> 02:00:11.820
and Dr. Janowsky had approached Mises to give a talk on present-day problems of public finance

1226
02:00:11.820 --> 02:00:17.460
and monetary policy. When Mises chose the title Return to the Gold Standard, the main

1227
02:00:17.460 --> 02:00:22.580
problem of present-day monetary policy, Janowsky feared this speech would seem irrelevant to

1228
02:00:22.580 --> 02:00:27.660
people interested in practical affairs. He also feared that Mises' remarks would be

1229
02:00:27.660 --> 02:00:33.460
too controversial. The meetings of the association did attract considerable attention among political

1230
02:00:33.460 --> 02:00:38.020
Social circles in Czechoslovakia and neighbouring countries and statements from the keynote

1231
02:00:38.020 --> 02:00:44.020
speakers were commonly interpreted as reflecting the official position of the association.

1232
02:00:44.020 --> 02:00:48.620
According to Yanovsky, the association had not yet come to a firm opinion on the question

1233
02:00:48.620 --> 02:00:54.300
of Czechoslovakian monetary policy. Yanovsky mentioned, however, that the last resolution

1234
02:00:54.300 --> 02:00:59.680
the association passed on monetary questions had endorsed the policies advocated by John

1235
02:00:59.680 --> 02:01:05.640
and Maynard Keynes, who opposed the return to pre-war parities for all strongly depreciated

1236
02:01:05.640 --> 02:01:11.240
currencies. He did not mention that he himself was an advocate of banking theory-style economic

1237
02:01:11.240 --> 02:01:19.080
policies and had engaged in in-fights with local admirers of Mises, such as Fritz Wolfram.

1238
02:01:19.080 --> 02:01:24.800
Yanovsky later became a Misesian, see his February 3, 1932 letter to Mises in which

1239
02:01:24.800 --> 02:01:29.520
In which he criticizes the currency proposal of a certain Jelinek as not conducive to

1240
02:01:29.520 --> 02:01:36.320
the aims he has set himself. In the fall of 1932, Janowski gave a speech before the Gesellschaft

1241
02:01:36.320 --> 02:01:42.800
Österreichischer Volkswirte. Mises was instrumental in arranging this talk. Mises criticized the

1242
02:01:42.800 --> 02:01:48.760
reform proposals of Keynes, Josiah Stamp and Fisher as overrating the usefulness of price

1243
02:01:48.760 --> 02:01:54.180
indices to measure the value of money. He stressed that the great advantage of the gold

1244
02:01:54.180 --> 02:01:59.000
The gold standard was not any sort of value stability, but rather its independence from

1245
02:01:59.000 --> 02:02:04.780
the political process. The pre-war decline in the purchasing power of gold had not resulted

1246
02:02:04.780 --> 02:02:09.700
from the production of this metal, but from the production of fiduciary media. Whatever

1247
02:02:09.700 --> 02:02:15.820
its deficiencies, the gold standard was superior to government-managed money.

1248
02:02:15.820 --> 02:02:21.660
For Mises, 1925 also brought a significant breakthrough on an entirely different level.

1249
02:02:21.660 --> 02:02:28.540
He finally met the woman who would become his wife. Margit Sereni had been one of six

1250
02:02:28.540 --> 02:02:34.500
guests at a dinner party held by Fritz Kaufmann, a young lawyer and member of Mises' private

1251
02:02:34.500 --> 02:02:39.820
seminar. It is almost a miracle that Mises won the heart of the lady sitting next to

1252
02:02:39.820 --> 02:02:46.080
him, for he spent most of the meal discussing economics. On the other hand, his preoccupation

1253
02:02:46.080 --> 02:02:53.000
and gave her the opportunity to observe him. This is how she perceived him.

1254
02:02:53.000 --> 02:02:58.120
What impressed me were his beautiful clear blue eyes, always concentrated on the person

1255
02:02:58.120 --> 02:03:04.680
to whom he talked, never shifting away. His dark hair, already a little greyish at the

1256
02:03:04.680 --> 02:03:11.520
sides, was parted, not one hair out of place. I liked his hands, his long slim fingers,

1257
02:03:11.520 --> 02:03:17.020
which clearly showed that he did not use them for manual work. He was dressed with quiet

1258
02:03:17.020 --> 02:03:24.560
elegance, a dark custom-made suit, a fitting silk necktie, his posture indicated that he

1259
02:03:24.560 --> 02:03:28.300
must have been a former army officer.

1260
02:03:28.300 --> 02:03:33.360
This book is, as the author correctly points out, the only available testimony on Mises,

1261
02:03:33.360 --> 02:03:38.880
the man from a first-hand source, but its statements are not fully reliable as two examples

1262
02:03:38.880 --> 02:03:43.480
So, first, the author lied about her age, claiming to be six years younger than she

1263
02:03:43.480 --> 02:03:50.720
really was. Even on her gravestone, the birth year is incorrectly given as 1896. Her correct

1264
02:03:50.720 --> 02:03:55.760
birth year is stated in her marriage certificate as well as in US immigration paperwork as

1265
02:03:55.760 --> 02:04:02.200
1890. Second, Margit states that she was the only woman he wanted to marry from the first

1266
02:04:02.200 --> 02:04:08.160
moment he met her. While this statement might be true, the following sentence in which she

1267
02:04:08.160 --> 02:04:13.940
He claims that Ludwig never changed his feelings or his mind about this decision is demonstrably

1268
02:04:13.940 --> 02:04:20.180
wrong as we will see in a later chapter. These examples show that Margit von Mises' biographical

1269
02:04:20.180 --> 02:04:25.460
recollections must be read with caution. The present work uses his statements only where

1270
02:04:25.460 --> 02:04:31.440
other evidence does not contradict them. He talked to her after dinner and they went to

1271
02:04:31.440 --> 02:04:37.500
a dance club. Apparently Mises was a poor dancer, at least by Margit's standard, and so they

1272
02:04:37.500 --> 02:04:41.760
When they spent most of the night talking, actually she did most of the talking and he

1273
02:04:41.760 --> 02:04:47.660
listened attentively. Margit was an attractive woman of five foot four with brown hair and

1274
02:04:47.660 --> 02:04:54.900
grey-blue eyes. Now as they talked he discovered she was also a witty and warm person. He must

1275
02:04:54.900 --> 02:05:00.300
have fallen in love with her that evening. The next day he sent her red roses and asked

1276
02:05:00.300 --> 02:05:06.780
her out for dinner. It was the first of many such dinners over the next two years.

1277
02:05:06.780 --> 02:05:12.500
Margit Zereny was an actress from a bourgeois background in Hamburg. During the war she had

1278
02:05:12.500 --> 02:05:17.720
performed on one of the leading stages in Vienna, the Deutsches Volkstheater. When Mises

1279
02:05:17.720 --> 02:05:24.460
met her she was 35 years old and a very attractive widow with two children, Guido and Gitta.

1280
02:05:24.460 --> 02:05:31.860
Shortly after her arrival in Vienna in early 1917 she had married Ferdinand Zereny, a Hungarian

1281
02:05:31.860 --> 02:05:37.460
An aristocrat who died in 1923 bequeathing to her assets that had lost most of their

1282
02:05:37.460 --> 02:05:43.920
value during the inflation. Characteristically, Mises was cautious even when his feelings

1283
02:05:43.920 --> 02:05:49.620
might have threatened to overwhelm him. Could he trust an actress? As Margit later pointed

1284
02:05:49.620 --> 02:05:56.500
out, most people in polite society considered actresses to be high-class call girls. Ludwig

1285
02:05:56.500 --> 02:06:01.380
Friedrich seems to have shared this prejudice. At any rate, he took precautions, as he later

1286
02:06:01.380 --> 02:06:05.940
confessed to his wife he had checked some of her statements about her professional development

1287
02:06:05.940 --> 02:06:12.100
by consulting the records in the archives of the Neue Freie Presse. He probably also

1288
02:06:12.100 --> 02:06:17.980
talked to his cousin Rudolf Streisauer, who had been Ferdinand Zerlini's physician. These

1289
02:06:17.980 --> 02:06:22.600
investigations confirmed Margit's version of things. But there were more fundamental

1290
02:06:22.600 --> 02:06:31.320
Ludwig's mother Adele had great reservations about Margit.

1291
02:06:31.320 --> 02:06:35.340
Actually none of his girlfriends had ever met with her approval.

1292
02:06:35.340 --> 02:06:40.440
She must have imagined a different sort of wife for her beloved son, and her opinion

1293
02:06:40.440 --> 02:06:45.120
had a great weight for Ludwig, especially since he held certain philosophical views

1294
02:06:45.120 --> 02:06:48.520
that would have deterred him from marriage anyway.

1295
02:06:48.520 --> 02:07:05.520
As a social institution, marriage is an adjustment of the individual to the social order by which

1296
02:07:05.520 --> 02:07:12.320
a certain field of activity, with all its tasks and requirements, is assigned to him.

1297
02:07:12.320 --> 02:07:16.840
Exceptional natures, whose abilities lift them far above the average, cannot support

1298
02:07:16.840 --> 02:07:22.880
The Coercion, which such an adjustment to the way of life of the masses must involve.

1299
02:07:22.880 --> 02:07:28.000
The man who feels within himself the urge to devise and achieve great things, who is

1300
02:07:28.000 --> 02:07:33.000
prepared to sacrifice his life rather than be false to his mission, will not stifle his

1301
02:07:33.000 --> 02:07:38.200
urge for the sake of a wife and children. In the life of a genius, however loving the

1302
02:07:38.200 --> 02:07:43.800
woman and whatever goes with her occupy a small place. We do not speak here of those

1303
02:07:43.800 --> 02:07:49.360
as well as great men in whom sex was completely sublimated and turned into other channels,

1304
02:07:49.360 --> 02:07:55.720
cunt for example, or of those whose fiery spirit insatiable in the pursuit of love could

1305
02:07:55.720 --> 02:08:00.920
not acquiesce in the inevitable disappointments of married life and hurried with restless

1306
02:08:00.920 --> 02:08:05.960
urge from one passion to another, even the man of genius whose married life seems to

1307
02:08:05.960 --> 02:08:11.240
take a normal course, whose attitude to sex does not differ from that of other people,

1308
02:08:11.240 --> 02:08:18.380
can not in the long run feel himself bound by marriage without violating his own self.

1309
02:08:18.380 --> 02:08:23.340
Genius does not allow itself to be hindered by any consideration for the comfort of its

1310
02:08:23.340 --> 02:08:29.900
fellows, even of those closest to it. The ties of marriage become intolerable bonds

1311
02:08:29.900 --> 02:08:36.380
which the genius tries to cast off, or at least to loosen so as to be able to move freely.

1312
02:08:36.380 --> 02:08:42.500
The married couple must walk side by side amid the rank and file of humanity. Whoever

1313
02:08:42.500 --> 02:08:48.500
wishes to go his own way must break away from it. Rarely, indeed, is he granted the happiness

1314
02:08:48.500 --> 02:08:54.900
of finding a woman willing and able to go with him on his solitary path.

1315
02:08:54.900 --> 02:09:00.100
Mises's treatment of the genius was anticipated by George Bernard Shaw in his Earning a Living

1316
02:09:00.100 --> 02:09:05.780
and Creative Work. Mises did not know this passage from Shaw at the time. Twenty-five

1317
02:09:05.780 --> 02:09:11.280
Five years later a German correspondent pointed out the parallel. This passage survived all

1318
02:09:11.280 --> 02:09:17.780
editions of the book. Ludwig was slow to allow Margit on to his hitherto solitary path, but

1319
02:09:17.780 --> 02:09:23.380
on the other hand he was longing for the love of a true companion. Margit later surmised

1320
02:09:23.380 --> 02:09:28.980
that a deep-seated dissatisfaction with his entirely public life was the true cause of

1321
02:09:28.980 --> 02:09:35.980
of his infamous temper, the most terrible outbursts he reserved for the woman he loved.

1322
02:09:35.980 --> 02:09:42.060
His temper was as astonishing as it was frightening. Occasionally he showed terrible outbursts of

1323
02:09:42.060 --> 02:09:48.180
tantrums. I do not really know what else to call them. Suddenly his temper would flare

1324
02:09:48.180 --> 02:09:55.180
up, mostly about a small unimportant happening. He would lose control of himself, start to

1325
02:09:55.180 --> 02:10:18.500
After a few years of married life, however, he became much more reasonable and less easy

1326
02:10:18.500 --> 02:10:19.780
to Anger.