Part 3 Officer, Gentleman, Scholar
Chapter 7 The Great War Like many others, Mises anticipated the outbreak
of the First World War years in advance. Unlike many others, he dreaded it. He was a lieutenant
of the Austro-Hungarian Army and dearly loved his country, but he was no chauvinist and
despised a militarism and statism that were about to drag an entire continent into catastrophe.
A number of eminent men and women in all countries, most notably Bertha von Zutner
in Austria and Bertrand Russell in England, felt the same way and dedicated themselves to making
the case for peaceful cooperation among nations and to fighting the frenzy of nationalism.
Patriotism These private initiatives proved insufficient
to tame the war party. The ruling philosophy of government glorification under the guise
of patriotism had made its cause irresistible. After the war, Mises would write on these
subjects in detail. He explained how the war had resulted from state worship, in this case
from worship of the nation-state. But for now he thought that he, the agnostic Jew,
The Austro-Hungarian state was the sole bulwark against the Russian hordes standing ready
to invade the land and destroy its western liberties. Maybe this attitude toward politics
was contradictory and anachronistic, but Mises believed he had no choice in the matter and
and he continued to believe that all his life.
As a contemporary friend and admirer would observe, a champion of individualism, you
cherish strikingly collectivistic orientations. In fact, even under severe duress for your
body and total lack of individual comfort, you never lose sight of the whole picture.
First Year in Battle Early on a Saturday morning, Mises stood ready
for Departure at Vienna's crowded Nordbahnhof station. He took the eight o'clock express
to the city of Przysztof-Michelow, in his native Galicia, where he would join his unit,
the Field Cannon Regiment No. 30. The train had special compartments for officers, which
made the long journey more comfortable, and thus he spent the day in the company of Ewald
Pribram and Karel Dornal, who were both cavalry officers and the physician Erwin Stransky,
A fellow private lecturer at the University of Vienna. None of the young men would ever
forget this journey.
Schransky later recalled that Mises spoke about his native Galicia, its history, its
peculiarities of its church architecture, etc. The time passed somehow, and in the evening
around seven o'clock, Mises left the train in Przemyśl, wishing his fellow travellers
farewell.
was August 1st, 1914. The fighting did not start immediately. Austria-Hungary did not
declare war until August 5th, after the war between Russia and Germany had broken out.
Even then, there was no significant fighting for another two weeks. Both camps needed time
to mobilise their forces. This should have been easier for Austro-Hungarian and German
and Troops, because of the shorter distances, but the Russians had apparently begun preparations
much earlier, shortly after the assassination of Austrian Archduke Ferdinand on June 28th.
The fundamental military problem for the Austro-Hungarian and German alliance was a three-front war
with numerically superior enemies on all sides, in particular the sheer overwhelming numbers
of the Russian army.
In 1914, Russia counted a population of roughly 173 million, as opposed to 68 million Germans
and 50 million inhabitants of the Austro-Hungarian Empire. Because of the immensity of the Russian
Empire, its 250 potential divisions could not be mobilised quickly. Still, the Russian
generals managed to throw 80 divisions into battle in the first few months. These troops
troops confronted only 10 German divisions and 38 Austrian divisions, 90 out of 100 German
divisions being bound up on the Western Front and 11 out of 49 Austro-Hungarian divisions
stuck on the Southern Front in Serbia. The mission of the Austro-Hungarian troops on
the Northern Front was to block the Russians in order to avoid Russian invasion of the
German planes, which lay almost defenceless. They could not retreat into the Carpathian
in mountains, which were easier to defend because the Russians could trap them there
with only a small number of their troops and throw their main force into Germany. Hence,
in spite of their numerical inferiority, the Kauka armies had not merely to resist but
to attack the Russians in an attempt to keep them in the Galician plains. The Kauka strategy
was to wear the Russians down in a long series of battles. This strategy counted on the Austro-Hungarian
Empire's Comparative Advantages of Morale, Training, Education and Fighting Spirit. After
the war, Mises said of these relentless Austrian offensives that the flower of the Austrian
army was uselessly sacrificed. He considered them goalless and purposeless. And yet they
did have a goal, to keep the Russians in Galicia as long as possible. In this they succeeded.
The human cost included many of Mises's relatives, friends, colleagues and students.
The battles that followed brought death and destruction on an unheard-of scale. Modern
science and technology had profoundly changed all aspects of war, from coordination to equipment
to tactics and strategy, giving a central place to the use of high-powered and highly
Mobile Artillery. Although the Kauka army was better equipped than its enemy, it was
numerically inferior and in almost constant retreat. By the end of September more than
10,000 civilian refugees from Galicia had poured into Vienna and the Kauka army had
been thrown far back behind Przemyśl and now stood with its back to the Carpathian
Mountains. In the first few weeks and months of the war,
Almost no day went by that did not see entire Kauka batteries about 100 men each and even
regiments about 500 being wiped out. Artillery was not only the main agent of destruction
but also one of the prime targets. Mises's battery constantly had to change position
often under fire. Heavy rainfall set in, hampered their movement and proved that Kauka uniforms
There was no hope of relief any time soon from the military bureaucracy, so Mises resorted
to private initiative. He had his mother send clothes for his men. Mises later denounced
the bad treatment of the common soldiers as a serious impediment to the war effort. From
the political point of view it was a grave mistake to follow completely different principles
in the compensation of the officer and the enlisted man, and to pay the soldier at the
front worse than the worker behind the lines. That contributed much to demoralizing the
army. He was himself the special object of motherly care through the army postal system.
Adèle von Mises sent her son furred leather gloves, several electric lamps, matches, shoelaces,
woolen clothes, camel-hair pants and camel-hair under-gloves, aspirin, cigarettes, glasses
Mises & Journals, Ludwig's favourite brand of suspenders, Audit Valette, Soap, Cognac
and Tunicans. Like an accountant she kept lists of the things she sent and thus controlled
both the punctual delivery and the consumption of her son, with a keen eye on his cigarette
consumption. She also kept him informed about various events in Vienna, although she could
not be too frank or go into too much detail because of the censor. Mises himself probably
He had access only to official or semi-official journals and newspapers. At the end of August
1914, he read that his beloved teacher, Eugen von Boehm-Bawerk, had died and to all on a
journey to Switzerland. Mail could take weeks to reach the soldiers, especially when troop
movements were quick and fervent. In September 1914, correspondence was interrupted for three
When, to the great relief of his family and friends, his name was eventually mentioned
in the Neue Freie Presse, Martin Ehrenstein wrote him immediately, This time too victory
will be on the side of liberty. Meanwhile, his brother Richard was stationed in Baden
near Vienna. He was experimenting with aircraft motors, commanding a research unit comprised
of several soldiers and a lieutenant. A professor of applied mathematics at the Prussian University
of Strasbourg since 1909, his interests had centred on aviation. He had become a pilot
himself and taught a university course on powered flight in 1913. With his army research
Research Unit, he constructed a 600hp plane, which was put to use in 1915. The military
research led to the publication of Fluglehre, which established Richard as one of the world's
foremost aviation pioneers. The book was first published in 1918 in Berlin and then remained
for decades a standard monograph of aviation theory, being reprinted in a posthumous sixth
Edition in 1957 in Berlin. Before the war Richard von Mises had already gained an expert
reputation based on his Elemente der Technischen Hydromechanik, but the young professor was
impatient to get to the front, where the battles continued to be fierce and numerous.
In the first half of October, United German and Austro-Hungarian armies had driven the
Russians back, gaining about 60 miles, only to be driven back again after two weeks of
of Russian Counterattacks. But time was running out for the Russians. The Austrian economy
had retained a comparatively large degree of liberty that now increasingly weighed in
on the side of the Austro-Hungarian army. The huge profits deriving from the production
of war materials were not initially subject to excessive taxation, and thus could quickly
be reinvested to convert the structure of production to war needs. Mises emphasised
that wartime public opinion strongly favoured a confiscatory taxation of the great profits
made in the armament industries. Initially, the Austrian leadership did not give in to
these demands because it was aware of the military importance of having an efficient
private production of war materials. Many businessmen and industrialists had already
started adjusting their plans and their investments to the new situation, and as usual, these
These private ventures reacted quickly and efficiently to subsequent developments on the
front. For example, in October 1914, some Austrian businessmen set up a factory to produce
ammunition for captured cannons. But long-standing pre-war government control of war-related
industries did cause problems. Mises later explained,
"...Austrian industry not only had to deliver what the war required beyond peacetime provisions,
It also had to catch up on what had been neglected in peacetime. The guns with which the Austro-Hungarian
field artillery went to war were far inferior. The heavy and light field howitzers and the
mounted cannons were already out of date at the time of their introduction and scarcely
satisfied the most modest demands. These guns came from state factories and now private
industry, which in peacetime had been excluded from supplying field and mountain guns and
The higher productivity of private enterprise increasingly came into play and helped bring
Talking about an important Austrian victory that ended a month-long battle near the Polish
city of Lodz on December 6th, 1914. A few days later, the Austro-Hungarian Army won
another significant victory at Limonowa-Lapanow, about 15 miles from Carl Menger's birthplace
in Noizandek. On December 12th, the Russians were driven back more than 30 miles, in the
course of which 30,000 Russian prisoners were taken. These events marked a decisive turning
point on the Eastern War Theatre. After almost four months of intense fighting, the German
and KUK troops had balanced the initial numerical superiority of the Russians, and in the coming
months would drive them further back east. Richard wrote to Ludwig in characteristic
Mises family understatement that he was happy that it goes better with the Russians, in
the German, es mit dem Russen besser geht. Apparently Ludwig even found time now to study
the Ruthenian Language, possibly to prepare for the establishment of a new local administration.
At least this was the guess of Mises's uncle Alfred Landau. In a letter to Mises, dated
December 3, 1914, he surmises that Mises's studies of the Ruthenian language will be
helpful for the administration of the new gouvernement Tarnopol. Ruthenian was the language
of the Ukrainians living under Austrian rule in the eastern part of Galicia. He also wrote
Richard reported frequently to Richard inquiring about the health of their mother, who had
been suffering for some months from a foot injury. Richard reported that all cures had
failed so far, and that he had also tried in vain to engage the world-famous physician
Professor Adler, with whom the Mises family had personal contact. This must have been
Alfred Adler, 1870 to 1937. Up to the 1930s, Adler was the most famous Vienna psychologist.
He had first worked with Sigmund Freud, but early on went his own way in placing great
emphasis on the particular conditions of each individual patient, individual psychologie.
The better news came from the front. Three days before Christmas, Richard and his old
friends Martin and Hugo Nierenstein read in the Vienna Press that Ludwig had been promoted
to the rank of a KUK Oberleutnant, First Lieutenant. Only two months later, Ludwig was again mentioned
As the beneficiary of an allerhöchster Belobikon, the Emperor had praised his achievements in
battle. There followed a brief period of stasis on the battlefield, and public attention turned
to the decay the war was causing in the social fabric of the Empire.
In Vienna, the food supply shrank noticeably, and the lines in front of the shops grew longer
every day. Ludwig received desperate letters from his mother, describing her struggles
He later observed that only the Austrian Germans and the Hungarians fought for the monarchy
with full conviction, whereas the service of the Slavs and Romanians was half-hearted
at best. Many of them actually fought on the other side.
Starting early May 1915, however, the German and Austro-Hungarian troops finally began
their long march east. Not even Italy's May 23 entry into the war on the side of the
Triple Entente, Britain, France and Russia, could slow down the Central Powers' irresistible
Mises kept some news clippings about these successes which were reported on daily. He
later remarked that the success was due to the by then inferior armament of the Russian
troops. The causes of this complete reversal of the balance of power in the East were mainly
The Economic in Nature. Mises later explained, The great technical superiority that the armies
of the Central Powers had achieved in the spring and summer of 1915 in the eastern theatre
of the war, and that formed the chief bases of the victorious campaign from Tarnow and
Gorlice to deep into Vonya, was the work of free industry, as were the astonishing achievements
of German and also of Austrian labour and the delivery of war material of all kinds.
The army administrations of Germany and Austria-Hungary knew very well why they did not give in to
the pressure for state ownership of the war-supplying enterprises. They put aside their outspoken
preference for state enterprises which would have better suited their world view oriented
toward power policy and state omnipotence, because they knew quite well that the great
industrial tasks to be accomplished in this area could be accomplished only by entrepreneurs
operating on their own responsibility and with their own resources. War socialism knew
very well why it had not been entrusted with the armaments enterprises right in the first
years of the war. In early August, Lemberg was retaken, much
to Mises's relief, and he was finally granted a two-week leave. On August 16th, he went
from the front to Krakow and took the next train to Vienna. He had spent more than a
year on the front, survived against the odds, but looked as fresh and vigorous as ever,
though a hip injury had plagued him for months. He helped himself with considerable quantities
of salicyl, the fever and pain reliever his mother sent him. The main substance was willow
bark. Salix is willow. When he started asking for higher doses, she refused to send more,
Demanding that he return home and stay in bed, the family had already lost his cousin,
the physician Max Lundau, who died from infection from examining so many typhus cadavers.
Mises did not yet know that he had finished the hardest and most dangerous phase of his
military service. After the leave, he would return to the front for about six weeks and
then again from December 1916 to December 1917. But none of these expeditions brought
brought him even close to the chaos he had known in the first months on the Northern
Front. Sometime late in 1915, Mises was relieved
from active duty and sent to the city of Sopron in Hungary, where he stayed for about two
months trying unsuccessfully to recover from his hip injury, but happy to be alive. He
had survived the worst and finally enjoyed the gratitude and admiration of the civilian
and Population, who celebrated the returning troops as heroes. When he received another
medal for outstanding performance before the enemy, the Signum Laudis in silver, the imperial
praise for the unpretentious reserve lieutenant whom everybody knows and loves was enthusiastically
reported in the press.
The Well-Known and Beloved Reserve Lieutenant Dr. Ludwig Edler von Mises, in civilian life
an unsalaried lecturer at the University of Vienna and currently stationed with our 30th,
was honoured anew with the Signum Laudis in silver for his outstanding efforts before
The Home Front
If Mises could have gotten away earlier in any honourable manner, he would have welcomed
the opportunity. He tried, in the fall of 1914, to use his Comer affiliation to be transferred
to some other duty. The Comer had had to give up 45 men for military service, but some others
were allowed to remain in their pre-war functions or were transferred to the War Ministry, which
cooperated very closely with the Comer. Mises was not among the lucky few who never had
to expose themselves to harm. He had many talents, but he never mastered the art of
manoeuvring the hallways and offices of the various war administrations, making oneself
are self-indispensable to the bureaucrats and thus unavailable for dangerous missions.
The great transformation of all forms of modern leadership toward bureaucratic management,
which Max Weber so brilliantly described, was epitomised in many of Mises's former
colleagues and fellow students, most notably in the cases of Schumpeter, Lederer and Karl
Prebram. After the northern front had calmed down, Mises was finally considered suitable
for Bureaucratic Employment and the Karma Connections now prove to be effective. During
his Christmas holidays in Vienna on December 22, 1915, he received orders from the War
Ministry to join its department number 13 in Vienna. The most immediate benefit of being
stationed in Vienna was the availability of superior medical attention, but curing his
hip pain proved slower and more worrying than anticipated. At the end of December, Mises
was examined in the K.U.K. Army Hospital of the town of Baden, a base near Vienna.
Dr. Huck Muller found that Mises had typhus and ordered a sulphur-based treatment. This
did not bring the hoped-for results. In the following months, Mises was sent to two Vienna
experts for special hip treatments, which involved massages, hot air applications and
walking exercises under supervision. During this period he officially resided at a Villa
Ludwig von Mises, Murray Rothbard, Friedrich Hayek, Eugen von Boehm-Bawerk,
increasing scale. Because the existing government apparatus was unable to handle such a task,
they turned to the already existing cartel organisations, made them compulsory, and subordinated
them to the different Car-U-Car ministries. These Kriegszentralen, or war centrals, controlled
the distribution of industrial products and the allocation of raw materials to the firms.
Mises later pointed out that wartime central planning started with Devisenzentralen or
foreign exchange centrals. Their large-scale activities were financed through the KUK banking
establishment in Vienna and Budapest. Gutt's briefs later described the step-by-step process,
which led wartime Austria-Hungary on the road to the Big Brother State. Commercial advice
to the Civil Administration, import business first in competition with private importers,
and then on a monopolistic basis, economisation and distribution of the stocks, this was the
increasing extension of their tasks, which made them assume ever more control functions
within their organisations. These efforts, at top-down management of all society, did
not reach the proportions or intensity attained in the German Reich. Austrians were famous
Prejudices for schlamperei, a jovial carelessness, even sloppiness that effectively prevented
a full-blown German-style command economy, but they were effective enough, at least in
Mises' eyes, to demonstrate what applied socialism is all about, mass misery, and to
confirm every single prejudice he might, by then, have acquired about the idiocy of government
meddling with the free market.
In Nations, State and Economy, Nation, Staat und Wirtschaft, Vises writes, it will be the
The task of economic history to describe in detail the stupidities of the economic policy
of the central powers during the war. At one time, for example, the word was given to reduce
the livestock by increased slaughtering because of a shortage of fodder. Then prohibitions
of slaughtering were issued and measures taken to promote the raising of livestock. Similar
planlessness reigned in all sectors. Measures and countermeasures crossed each other until
Until the whole structure of economic activity was in ruins. They organised and did not notice
that what they were doing was organising defeat. With retail markets all but eradicated, huge
crowds of people lined up in front of a few select food shops that had benefited from
official allocations. Butterstehen, Eierstehen, Milchstehen, standing in line for butter,
eggs, milk and virtually everything else, often for hours. This was one of the new sad
and Realities of Daily Life. Around August 20th, Mises arrived in Vienna. Zerlin, her
relative, welcomed him after a week of Butterstein, Eierstein, Milchstein. How to cope with all
this, without losing one's mind? Mises commended the example of his uncle Markus, who somehow
managed savings under these conditions, truly a model for living at the existential minimum.
and he also offered more substantial support buying additional food on the black market
to supply his mother and other needy ladies. His basic salary in 1916 was 183 kronen, that
would be about 200 gold francs or 1.867 oz of gold, enough to buy some additional potatoes
or flour. When he had to leave again for the Eastern Front in December 1916, he asked
Emil Peres, a Krammerkornig and friend from Boehm-Bawerk seminar, to take care of these
women.
The Mises and Peres circle included one Valerie Adler, who worked as advisor in the Ernährungsamt,
Bureau of Nutrition, the brothers Carl and Ewald Pribram, one Olli Schwartz and one Emil
Scherl.
Ewald Pribram worked for the Zentralstelle für Wohnungsreform and, as of August 1917,
was the fiancée of Marianne Fürth.
They would often attend opera or theatre performances, or just meet at cafés to discuss politics,
economics and literature. Occasionally these meetings would also take place in a more extended
and official setting. For example, on November 16, 1916, Mises took part in a function of
the Österreichische politische Gesellschaft, Austrian Society for Politics, on current
monetary problems. Schumpeter, who had come from Graz to chair the discussion, had urged
Most Mises to debate his old opponent Walter Fedan. Schumpeter opened the session, stating
the currency problem was manifest as a high price level and low Kroner exchange rates.
He argued that the high prices were the cause of the low Kroner, and that prices were high
because of a shortage of commodities and because of banknote inflation. Normalcy could only
be restored through a reduction of the quantity of money. This was the crucial point. The
Kroner had to be restored to its former purchasing power. Mises had a few things to add and limited
himself to discussing the inefficiency of foreign exchange control through the Devisenzentrale,
whereas Federn gave a balance of payments explanation of the present situation blaming
import surpluses for the weak Kroner. Significantly, most speakers, not only Herr von Landesberger,
the head of the Devisenzentrale, followed in the same vein. Mises also resumed his activities
as a private lecturer at the University of Vienna, where he discussed in detail the differences
between his own theory of money and the various competing views that dominated the scene in
German language universities, in particular the theories of Knapp, Schumpeter, Wiese and
Filipowicz. He published these considerations shortly thereafter, in an article for Weber's
Archive, and later incorporated the piece as a chapter of the second edition of his Theorie
His experience on the front lines had changed his conduct and appearance, adding a war veteran's
personal weight to his exposition. Young Heinrich Treicher, who met him in those years at the
dinner table of his parents, was especially impressed by his dark red moustache. So must
have been his army comrades. Mises occasionally had the nickname Rotwild. The Rotwild is a
One of the greatest admirers of the straight and sharp young lecturer was a certain Louise
Sommer, who read all of his writings and would soon want to know all his views on everything.
Apparently, they even met for extended evening discussions, in the course of which Fräulein
Sommer became a friend perhaps more. The otherwise unapproachable Mises shared his thoughts and
and feelings with her, including depressive moods. When he had returned to the front,
he mailed her the first flowers of spring. After the war, Louise Zommer became an ardent
proponent of Mises' views on liberalism and politics.
On May 5, 1916, Mises received orders to join the Scientific Committee for War Economics,
a new committee of the War Ministry. It seems as if shortly before, in April 1916, he had
Like many such wartime institutions, the committee provided privileged employment for the upper
class of the intelligentsia. It brought together established senior scholars and bright young
students, including Mises, Broda, Karl Pribram, Brockhausen, Adler, Peros and Barch, and possibly
and also Schumpeter and Alfred Amon. The whole idea was to establish a forum for in-depth
analysis of the economic problems of the war and its strategic economic goals. It was clear
from the outset, at least for anyone even faintly acquainted with Mises's views, that
he would disagree with some very influential people within the KUK political and military
leadership, and also with many committee members on the prospective economic benefits of military
Victory. He definitely did not believe that conquests in the East would convey any economic
advantages for the future Austro-Hungarian economy. And in distinct contrast to other
committee members who also knew the rationale for this classic liberal position, Mises was
ready to speak up even to those who were higher in the wartime pecking order and could make
his life very unpleasant.
Montesquieu once said that although one had to die for one's country, one was not obliged
to lie for it.
Être vrai partout, même pour sa patrie.
Tout citoyen est obligé de mourir pour sa patrie.
Personne n'est obligé de mentir pour elle.
This seems to have been Mises' maxim too.
He had already demonstrated his readiness to give his life for his country.
Now he showed his will to honour the truth, even if it brought him in conflict with power
Vom Ziel der Handelspolitik, on the goal of trade policy, in Max Weber's archive.
After Mises' sudden departure from Vienna, Lederer would eventually read the proof pages.
for Publishers sent a statement of honorarium of 93.75 marks at the end of December, but
Mises probably answered this letter only in May 1917. In June, Moore wired the money to
Mises' post-Sparkassan account, 142 kronen and four heller. Mises argued that, from a
purely economic standpoint, the case for free trade and against protectionism was unassailable.
It was true that classical free-trade theory, the theory refined and perfected by Ricardo,
had been developed under the assumption that capital and labour were mobile only within
national borders, but Mises proceeded to show that the case for free trade stood firm even
if these conditions were no longer applicable. In a Ricardian world of free trade, there
would be rich and poor countries, and tariffs and import quotas could not change this. In
In a Misesian world of free international migration, there would be more densely populated
countries and less densely populated countries, in all of which the wage rates and interest
rates would tend to be equal, and again, protectionism could not do anything to improve this state
of affairs. Mises also pioneered a comparative criterion for relative overpopulation and
underpopulation. We consider a country to be overpopulated if it is more densely inhabited
Then it would be if a system of freedom of migration covered the entire surface of the
earth. His interest in the theoretical and political implications of modern migration
might have been stirred as early as the Filipovitz seminar. Since the 1890s, Filipovitz had promoted
migration research among German economists, even though he never succeeded in getting
the subject discussed at any of the meetings of the Verein für Sozialpolitik. Mises pointed
out that no economic case could be made against cross-border movements of people and capital,
and then spent most of his paper discussing the paramount non-economic rationale, which
was nationalism. He stated that international migrations conflict with the principle of
nationality, that is, with the policy goal of promoting the numerical number and the
welfare of co-nationals. Emigration leads to the assimilation of the emigrants to the
The Foreign Nation. They are then lost to their original nation, and this loss presents
a prima facie, non-economic case against free trade. But Mises showed that this anti-free
trade conclusion is unwarranted. It is true that emigration to foreign countries weakens
the nation, but protectionism cannot correct the problem. At least, Mises contended, it
cannot reach this goal in a manner beneficial to the nation. He observed that even the champions
of Protectionism had to notice that their proposed policies could not accomplish those
goals that they had set themselves.
By contrast, the anti-German immigration laws of other countries were rational responses
to the threat of national alienation resulting from mass immigration. He pointed out that
industrial workers in the typically Anglo-Saxon immigration countries could successfully call
for anti-immigration laws because the mass immigration from Europe threatened national
and Unity. There can be no doubt that all countries will effectively close themselves
off against immigration that threatens their national composition, just as the countries
settled by white men have long since closed themselves off against yellow immigration.
In short, Germany could not change its calamities through protectionism, and was helpless in
the face of other countries' policies that further aggravated its problems. Mises soberly
They summarized this state of affairs, despairing from the point of view of German nationalism.
The foundations of a global empire, Weltreich, are a population that multiplies approximately
at the same rate as the population of the other global empires, and a settlement area
that offers this population space for its development. Trade policy cannot contribute
anything to establish a global empire for a nation if these conditions are not given.
The isolation of Germany in international politics, Mises surmised, was a result of
the fact that it lacked sufficient territories to host its rapidly increasing population.
The other nations which controlled territories suitable to satisfy German expansionism were
united through common interests in defending their possessions and rightly sensed that
Germany must be their natural enemy. Mises then criticised the plans of the social democratic
leader Carl Renner to establish an all-encompassing system of protective tariffs as the foundation
of the future relations between Austro-Germans and the other nations of Austria-Hungary.
Renner argued that political unity between the various nations was based on common economic
interests and he thought to create this common basis artificially through protectionism.
But Mises objected that, in the present age of nationalism, protectionism actually reinforces
is the antagonisms between the various nations, because it privileges the already industrialised
nations. He illustrated this point with the pre-war antagonism between Austria's ethnic
Germans and the Hungarians, which had made Austria-Hungary's political order so tenuous.
The power of the argument and the place of publication made it impossible for the War
Party to ignore Mises. Trouble lay ahead.
Back to the Front
At the end of August 1916, Romania entered the war on the side of the Entente powers.
With new vigour, the United Russian and Romanian forces pushed forward into Transylvania and
started making their way into the Hungarian plains, but their success was short-lived.
Within two months, the German armies of Falkenhayn and Mackensen halted the enemy, regained the
The lost territory drove the Entente forces back into the Transylvanian Alps and from
there into the Romanian heartland around Bucharest. When the Entente abandoned its positions in
the mountains, it was clear that they would not be able to hold the Romanian plains either.
Within another month, all of Romania had been conquered, and the Russian and Romanian troops
were driven back into Ukraine. The entire campaign took place in the midst
of a deep crisis in Austrian politics. On October 21, 1916, Friedrich Adler, the radical
son of social democratic leader Viktor Adler, gunned down Prime Minister Karl Sturck in
a Vienna restaurant, ostensibly in protest against the government's long-standing refusal
to convene the parliament. Exactly one month later, 86-year-old Emperor Franz Josef died.
The only man who had successfully held the reluctant nations of the empire together had
had gone the way of all flesh. His grand-nephew, 29-year-old Carl, ascended the throne and
appointed a new government, an account club Martinique. In the wake of this regime change
Mises was ordered to leave department 13. The order came on very short notice. He might
have expected a transfer from one part of the war ministry to another, but it became
It was then clear that he had been picked out for another mission on the front lines.
As details came forward, the picture darkened. Initially he thought he would lead a battery
of regular field cannon regiment, as he had done before, but the last-minute order made
it clear that he would be sent on a mountain mission, which implied even greater physical
duress. To top it all, his new mountain artillery battery was in terrible shape. It had been
were created during the February 1916 Italian campaign and had been involved in the bloodiest
encounters ever since. They had suffered many losses of men, horses and material. Just before
Mises took over, Romanian forces had destroyed their supply line for ammunition. It looked
as if someone in Vienna was bent on getting rid of Mises forever. And as things stood,
The chances looked good that this someone would succeed.
On December 5th he joined his new unit, the Cannon Battery No. 1 of the Mountain Artillery
Regiment No. 22 in the Romanian town of Ramcul Valsiri, today Ramnicul Valcea. There he obtained
a motor vehicle from the German Army and moved on to Bucharest. He arrived in the Romanian
capital on December 11th, received his orders at the headquarters of the Prussian Army and
and continued with his regiment to a summit position in the Carpathian mountains between
Transylvania and the Bukovina. They did not reach their position before December 19, probably
because of bad roads and enemy action hampering their moves. It took three weeks to receive
the first mail from Vienna. He wrote back to his friends in Vienna for the first time
on January 11, 1917, sending New Year's greetings. His mother's parcels did not reach him at
at all, and she eventually had Franz Weiss, who held a position with the war administration,
send them for her. Meanwhile, Mises discovered that the human body can endure amazingly low
temperatures without fainting, and he renewed the painful acquaintance with his hip.
The news from Vienna did not help his morale. In mid-February, his uncle Markus had had
a complete mental and physical breakdown, proving that Ludwig had grossly underestimated
Minimum Living Standards. He also received a letter from Carl Pribram, who had taken
Mises' place at the scientific committee. Worried what Mises would think, Pribram wrote
to give assurances that he had not pushed for his own nomination. Pribram later on proved
that he had great talents for self-promotion. Mises did not suffer from envy, and was ready
for continued sacrifice, even in the face of such injustice.
He was a good sport throughout his life, yet one wonders what he must have felt in March
of 1917 when, freezing behind a cannon in the Carpathian Mountains, he received news
from Pirols that Karl Pribram had received the Ritterkreuz, Knight's Cross, and had
moved on to a position as Ministerial Secretary in the Trade Ministry's Department for Social
policies. While the climatic conditions in the Carpathian mountains were severe, the
new mission was actually less dangerous and certainly less exciting than the first months
of war on the northern front. The enemy troops were tired and hardly posed a threat while
there was increasing political resistance within Russia against the Tsar and against
continuing the war in particular. The eastern front was relatively quiet and Mises had time
On March 14, 1917, the Russian monarchy was overthrown, soon followed by a provisional
government under Alexander Kerensky. Three weeks later Woodrow Wilson, who had been reluctant
to ally the United States to the ostensibly autocratic Russian Tsar, led his country into
In early April, Mises' battery moved to a new strategic position further north. It was
also higher in altitude. They set up cannons at 6,000 feet, the front remained quiet, however,
and the men on both sides were increasingly difficult to motivate. Peace resolutions of
The powerful social-democratic parties in Russia, Germany and Austria had reinforced
the general mood of increasing scepticism about the continuation of hostilities. There
were also other distractions, such as handling their new German neighbours. The problem was
that the German army was at least as arrogant as it was efficient. Even its regular soldiers
had the tendency to treat foreign allies as incompetent junior partners. On at least one
On occasion, Mises himself had to confront pretentious German officers claiming jurisdiction
over KUKA troops, and after the war, when in a high-profile paper he analysed the problems
of the proposed Austro-German monetary unification, he mentioned the tendency of the North Germans
to consider anything South German, and in particular anything Austrian, to be inferior
and alien.
At the end of May and in early June 1917, Mises was in Vienna, probably on a two-week
leave. Here he could see first-hand the changes introduced under the new emperor. Carl was
about to place his cronies in positions of military and political leadership. Displacing
the old elite would have a political cost, but he tried to compensate by attempting to
win greater popularity among the general public. Under Franz Josef, nobody could get in touch
He reached with the emperor to discuss political matters except through his majesty's ministers,
but Carl opened his antechamber to anyone who wished to offer advice. It turned out
that many of his subjects felt such a calling. Just among Mises' friends, Hans Kelsen and
Joseph Schumpeter each wrote several memoranda in which they made detailed policy recommendations.
Another witness of the event, Rudolf Sieghart, recalls,
There was a plethora of memoranda and audiences. Everybody gave counsel. Arch-Duchesses and priests, lower skirts and suit-hands, profiteers and chaps.
The new government also convened the upper and lower chamber of the Austrian parliament for the first time in more than three years, on May 30th.
This, too, was part of the Emperor's strategy to strengthen his bonds with the population,
a necessity given the dramatic deterioration of living conditions in the past few months.
Mises was shocked to see how the food supply had collapsed during his six months absence.
He predicted that very soon no more food would be found at the markets even after hours of
standing in line. At one point his grandfather's cook stood three hours in line for meat. His
His mother had to dismiss her cook, Thérèse, because she could barely afford to feed her.
Sadder news was the loss of his old teacher Eugen von Filipowicz, who died on June 4th
from a long illness. With these impressions he left Vienna on June 9th to return to his
battery. He was back in time to prepare the last great action on the Eastern Front. Starting
July 1st, 1917, the united German and Kauka troops completed the reconquest of the Bukovina
In the wake of the so-called Kerensky Offensive, at the end of July Mises and his regiment
reached their new permanent field of operations, about 60 miles east of their initial position
in the area of Brusturi and Czarnoki. The documents also refer to the following places
– Kozmacz and Prokhorov, Prvorszkij Roč, Kutyn Tomnatek and others. Mises's code
name is Rohtwild. One of their last engagements in battle seems
was to have taken place on August 8th, confronting Romanian troops. One month later the war on
the Eastern Front was virtually over and his regiment would receive recognition for its
performance at the attack on Czardachy. The recognition was pronounced on September 3rd.
Meanwhile his colleagues from the scientific committee experienced the war under safer
conditions. Mises knew it was the fate of political opponents to become marginalised
within the state apparatus, and the ruling war party had an especially successful means
of marginalization. It could send its opponents to the front. Still, it was exasperating to
see how much the threat of combat intimidated the would-be intellectual leaders of the country.
With the opposition to its expansionary plan silenced and a technocratic elite composed
of Corrupt Cowards, the Austrian Wall Party, and carte blanche within the government.
Mises did not capitulate. In the midst of the July battles, with biting pains in his
hip, apparently the hip problem deteriorated considerably during the battle, he somehow
found the time to write for the Neue Freie Presse on public policy. The pieces were published
around August 20th and before. His friends back in Vienna were grateful and amazed. Louise
Mises Omer wrote him,
How I envy your proficiency in using the method of isolation to suppress disturbing personal
problems. I almost envy you your life of narrowly circumscribed activities. Surely you have time
to work, you find time even in a shower of bullets.
The envious feelings might have originated from the fact that she had taken care of a
foster child, but was not up to the task. She seems to have been convinced, however,
But Mises himself was inexhaustible. She urged him to publish, at last, the typology of
monetary theories that he had presented in his course on Monetary Economics of the year
before. Fortunately, Mises was not showered by bullets in the next two months. The regiment's
July and early August battles were the last in Dubukovina, but this did not mean that
Mises's frontline mission was over. His battery had ordered to join the 1st Corps of the
The 12th Isonso Battle in October and November 1917 would be Mises's last engagement in
this war, and the last battle he would ever fight with guns. He spent six exhausting weeks
on the southern front, under fire, enduring cold weather in the Alps, and still suffering
On one of those days, his regiment was stationed on Hohr-Romborn, a major peak in the area.
Mises reported in a report dated October 21st, 1917,
Thick fog and snowstorm. Fifty centimetres new snow. Always are stuck. Many electric
cables are damaged and can be repaired only under life danger. He also mentioned that
his men had no more wood to burn and suffered from colds and rheumatisms.
Fortunately for him and his troops, this was just three days before the decisive breakthrough of the united German and Austro-Hungarian forces in a frontal attack against the better-equipped Italians, pushing them far back into the plains of Friul and the Veneto.
In Mises's judgement, the success was due to the inferiority of the Italian soldiers.
Mises points out that the Austrian army had never been defeated in battle by Italian forces.
One historian speculates that the attackers would have moved even faster had they not paused to gorge their rumbling stomachs with the undreamt of quantities of good Italian food and wine.
What a way to escape once more the jaws of death!
New Life
By mid-November, Mises had left both the front and the scientific committee. The details
of his departure from the latter are unknown, but it appears to have been part of a general
improvement in his situation. From this point on, in fact, his life would continue to improve
for quite a while. A few days after quitting the committee, he was promoted to the rank
of captain, and on December 3rd, 1917, he had just started an 18-day leave in Vienna,
CETN-KW Abteilung des KUK Kriegsministerium CETN-KW Abteilung des KUK Kriegsministerium
The department was located in the Hotel National in the 2nd Viennese district, the so-called
Leopoldstadt at Taborstrasse 18. The head of the department was one Colonel Linoch,
with whom Mises enjoyed very good relations. Linoch left him at liberty to engage in academic
and Economic Pursuits. He also seems to have been involved in Kammer activities. Mises devoted
as much time as possible to a new book with the working title of Imperialismus. This book
would later be published as Nation, Staat und Wirtschaft, Nation, State and Economy,
which would summarise his reflections on the war. He also resumed his teaching activities.
The winter semester had already started, so it was too late to set up a seminar, but Mises
was probably held Sunday lectures at the Volksbildungsverein.
If so, the experience dealt a heavy blow to his views about educating the masses.
He said in his notes and recollections, 1940, he now realized that the classical liberals
had overestimated the ability of the common people to form independent judgments.
In the spring and summer of 1918, he directed a university course on banking theory and
and advised several students on what to read and which subjects to study.
Women would not be admitted to the Department of Law and Government Science for another
year, but most participants on Mises' course were young ladies. Because of the war there
were few male students left in Vienna. His female students were probably from the Department
of Philosophy, which had admitted women since 1897.
Among the few male students was Dr. Richard von Striegel, who had been a fellow student
in Boehm-Bawerk's seminar. Striegel would become one of the most important and influential
Austrian economists in the interwar period. The presence of Striegel and of Helene Dube,
wife of the economics editor of the Neue Freie Presse, highlighted a particular feature of
university seminars in those days. The seminars were not mere schooling functions, but also
Mises also provided a forum for discussions among senior members who were often on par
with the lecturer. Each session began with a presentation on the subject of the day,
usually delivered by one of the students. Then Mises commented on both the presentation
and the subject itself and answered questions from other participants.
On May 18th, Mises was promoted from an unpaid private lecturer's position to the rank
of Professor Extraordinarius, also identliche Universitätsprofessor.
The promotion followed an imperial decision of May 7th. This position does not have an
equivalent in the American university system. An extraordinaryist position is not entitled
full professorship and is unpaid, but it does include tenure and enjoys greater social prestige
than does an associate professorship.
Another welcome event for Mises was his new personal acquaintance with Max Weber on November
1919. Weber lived at Jaffe's place since his own apartment had to be repaired. Some
years after Weber's death, Mises contributed to Richard's sculpture of Weber, which can
still be admired in Heidelberg University. The German scholar was already a living legend,
but he had not lectured for more than 10 years pursuing his studies in private at the University
of Heidelberg. Weber now celebrated an unexpected and spectacular comeback in Vienna and attracted
and huge crowds of students and professors. His encounters with Mises produced mutual
admiration. Much of what Mises wrote in the late 1920s on the logical and epistemological
problems of economic science was in reaction to Weber's position. And in his university
courses and private seminar, Mises relentlessly encouraged the study of Weber's work. Weber
in turn praised Mises' Theory of Money as the most acceptable in print, and he seemed
During Weber's 1918 stay in Vienna, Mises convinced him that there was in the social
sciences a discipline separate and distinct from history. Economic theory was a truly
scientific discipline. Its subject matter was the analysis of the relationships between
means and ends, an analysis that could be performed without making value judgements.
Moreover, Mises persuaded Weber that economic rationality, that is, economic calculation,
would be absent in a socialist commonwealth. We will deal with this influence in more detail
in a subsequent chapter.
As the wartime welfare state continued to grow, Mises continued to prefer private alternatives,
not just in theory, but in the actions he took in his own life, from the improvement
of his family's food supply, even the black market was deteriorating, to the professional
Placement of Friends and Colleagues Eager to Get Away from the Front
An August 29th, 1918 letter by a certain Irene Schmerling is revealing. She wrote,
Frau Singer recently told me that you had asked for me. I suppose you were interested
in food? I have only ersatzhoney. Frau Singer erzählte mir kürzlich, daß sie nach mir
gefragt hätten. Wohl um Lebensmittel? Es ist nur Kunsthonig da.
Mises' annual salary in November-December 1918 was 1,120.51 Kronen. This corresponded
to 71 US dollars and 5 cents according to the data given in Mises, Austrian Empire,
Finance and Banking in the Encyclopædia Britannica. Mises was known to be responsive to calls
for getting people out of the death zone and into an administrative position in Vienna
Mises helped, among others, the following persons. The brother of his fellow 122 officer
Greifs, one paycheck, one Steiner, one Scheme, one Sattler, one Sussmann, and possibly also
Richard von Striegel. Other friends of Mises had a very different reputation. Greifs, who
had also approached Kelsen to help place his brother Carl, wrote to Mises, If you see Kelsen,
Please tell him that I am not astonished about his silence, but embarrassed I am, but even
complete strangers approached him. Leo Fischmann many years later recalled his visit with Mises.
He was often helped in these missions of mercy by his friends Victor Gretz and Ludwig Wettelheim
Cabillon. Mises' success in placing others was at least in part due to his increased
notoriety. His courageous public opposition to the War Party and its claims for the economic
The benefit of military expansion had not changed policy, but it had attracted interest
to him and his work. He had become a public figure when he was invited to lecture on Austrian
public finance to the plenary meeting of the Advokatenwählerverein, an electoral association
of lawyers. The invitation came from Wilhelm Weiseltier and Julius Loewe. It is likely
that Mises addressed the same themes he had two months earlier in an article for the Neues
in this piece, he characterised Austrian tax law as the patchwork product of 100 years
of tax reforms, errors and competing special interests, and he vigorously criticised the
government's plan to introduce a one-time emergency tax, Sonderabgabe, warning that
the new tax would become permanent, and arguing that sound financial policies must consider
for both government revenue and government expenditures. His lecture was a great success.
On Monday, March 11th, 1918, Mises started a 15-year career as the economist of Austria.
In May 1918, the Office for the Defence Against Enemy Propaganda invited him to lecture on
the significance of the war bond. The lecture took place in the context of an information
course for officers who were to offer patriotic instructions to the troops. The main purpose
of the office was to promote car or car war bonds. But Mises was unwilling to be an instrument
of propaganda and made instead a compelling case for free market war finance. He especially
emphasised the perils of financing the war through inflation. The speech was published
from stenographic lecture notes without giving Mises the opportunity to review the transcript.
A Last Mission
After their overthrow of the Kerensky government in November 1917, the Bolsheviks called for
an immediate end of the war on the Eastern Front on a status quo anti-basis and without
reparations for either side. Moreover, they began to make public highly secret pre-war
entente plans for punishing Germany in case of victory. These revelations increased the
political pressure on the Allies to seek an early peace as their reasons for going to
war now appeared in a decisively less saintly light. The stark contrast between the evil
Germanic autocrats and the humane democracies of the West faded away and was slowly replaced
by a more realistic picture of the situation. But most of all, the Bolshevik push for peace
changed the military situation since it brought the prospect of relieving Austria and Germany
from their awkward two-front struggle. These prospects materialised very slowly, though,
because the German side insisted on war reparations that the Bolsheviks would not accept. The
peace negotiations started in Brest-Litovsk shortly before Christmas 1917 and were brought
to an end only after an Austro-German ultimatum forced the Russian side to sign a treaty by
which it ceded military control of the entire Ukraine to its enemies. Thus, what initially
promised to be a great military and political success for the Austro-German side had turned
into a disaster. Precious time had been lost to move troops to the Western front, and the
The newly imposed agreement failed to pacify the Russians, so precious Mittelmeister forces
were diverted to defend against a possible Russian backlash, in short, all political
advantages had vanished. Lloyd George, Wilson and the Western press immediately presented
the Treaty of Brest-Litovsk as evidence of the imperial expansionism of their enemies.
The official rationale for a military occupation of the Ukraine was the exploitation of its
and its rich natural resources. Few people in Germany and Austria knew that this idea
was flawed. Mises knew it in his archive article On the Goal of Trade Policy he had
pointed out that economic control over resources can be enjoyed even in the absence of political
control. Access to Ukrainian resources would have been possible through regular trade channels
and did not require military occupation of the entire country. Mises relentlessly insisted
on this point with an intransigence that had almost cost him his life.
The real economic rationale for the occupation of the Ukraine was the usual one, it brought
unearned riches to a select few. In the present case, the economic exploitation of the occupied
zone was to be confided to an Ost-Zinnikart, a cartel of big industrialists and big bankers
with good government connections, each of them would have monopoly rights to certain
and Ukrainian products.
A May 1918 meeting in Berlin brought all interested men together and determined the broad division
of the loot, in particular each party's trade contingent, its exclusive trade domain.
The economic exploitation of occupied territories to finance the war effort has a long tradition.
However, the First World War added the instrument of all-around planning.
One of the unsettled questions after the Berlin meeting was the future monetary constitution
of the Ukraine. The Austrian side had a special interest in the question because Austrian war
inflation had swept large quantities of Kronen into the occupied zone. Decisions about Ukrainian
money and currency would most certainly affect the demand for Kronen notes and thus could
possibly break up the Kroner's fiat exchange rate.
The fundamental problem was that Austria-Hungary, like all other warring states, had vastly
inflated its currency, which consistently lowered its exchange rate with other, less
inflated currencies. The only thorough way to stop both the inflation and its symptoms
– higher prices and depreciating exchange rates – was, of course, to stop producing
additional coroner notes. But many statists and money-cranks sought schemes to get around
this appalling measure. One of these tricks was to make payments in money titles issued
on behalf of banks other than the Austro-Hungarian Central Bank in Vienna. The Austrians applied
this measure in their occupied territories in Italy. They made payments to their Italian
suppliers in Dali and Kastenschreinen. Loan Bureau notes denoted in lira to bolster the
and the Corona exchange rate against the lira.
Similar measures were taken on the Eastern Front. In August 1918, when the Germans had
for some time already made ruble payments in the territories they controlled, the Banksteller
Bank Office of the East Army Command submitted a member random dated August 25, 1918, proposing
similar measures for the territories occupied by Austrian forces. According to the economists
of the Banksteller, the Corona Surplus on the market resulted from large military payments
that were not sufficiently compensated by Cronen flowing out as payments for import from Germany.
The German authorities, selfishly concerned with the strength of the Mark, were unwilling
to cooperate to achieve stable exchange rates. Therefore, the Austrian army should also change
its policies by a. Suppressing contraband imports from Austria and exports to Russia
and making payments in rubles. These policies would give the Banksteller time to absorb
Kroner surpluses in the Ukraine by offering interest-paying 2% demand deposits with the
local exchequer of the East Army, which would assume the function of a branch office of
the Austro-Hungarian Central Bank. This would supposedly bring the millions of Kroner now
being hoarded in private wallets and strong boxes back into circulation where they could
could be used in the interest of the national economy and of the currency itself. The Banksteller
clearly had no idea that these measures were entirely unfit to attain the end that it sought.
Few in Austria-Hungary could even comprehend, let alone solve, such problems.
In June 1918 Otto Katz, director of the Union Bank in Vienna, approached Mises on behalf
of a financial policy mission to solve the currency problems in the Ukraine. Mises would
should be charged with monetary policy in this important occupied territory. The head
of the group would be Excellents Coles, under whose leadership Mises had already fought
the last battles of the Buccovina and the 12th Isonzo battle. Interestingly, it was
the bank director Cutts who approached Mises on behalf of a political mission. Apparently
Cutts was known to have closed ties to top political circles in Vienna, for Mises took
The mission represented a great opportunity for Mises. A 36-year-old captain, he still
had one of the lower ranks, and his position in civilian life was not especially elevated
either. His main capital was the solid reputation he had gained as an expert on money and banking.
Cutts's offer was therefore a unique career opportunity. At the very least, it promised
exceptional exposure to high-profile policy-making. There was nothing to do but to thank God,
fate and Cutts for the offer, and to accept it immediately and wholeheartedly. Characteristically,
Physically, however, Mises spelled out his conditions. He would offer his services for
this venture only if he had full decision-making power, being the officer with exclusive responsibility
for the financial and monetary policy of the Ukraine. This required, in turn, that he be
transferred into the civil service and obtain a position corresponding to that of Bosnian
secretary of state. But such a position cannot be accepted by a captain of the artillery,
A charge I hold neither outwardly nor within the context of the inner workings of the administration.
In my view, the position in question ought to be comparable to that of the Bosnian Secretary
of State. Most importantly, he demanded that his bureaucratic authority be completely clarified
to avoid later frictions that could turn out to be harmful to the cause. He combined this
demand with a heart-hitting attack on the bad habits of Austrian bureaucracy. Unlike
Their German cousins, he argued, the Austrians lacked the ability for detached commitment
to a cause.
The usual words of appeasement, offered in response to claims made about us, they will
get ahead based on character alone, or things will sort themselves out in time, are completely
false.
I am convinced that I could assert myself and secure a comfortable position.
But what matters is objectivity, for such personal advantages are gained through a yielding
Being of resolve when it comes to things in which one should have remained firm and through
needless cabaling, which leaves no time for solid work, one must be capable of pure objectivity
that the Germans are objective is the basis of their success.
Mises had no illusions about the acceptability of his proposals, setting clear terms of cooperation
in the interest of the cause was simply not the style of the Austrian administration,
And he therefore thought the negotiations at an end.
But some days later, Lieutenant Colonel Maximilian Edler von Bescher, a high officer from the
Imperial General Staff in Vienna, asked him to name the concrete conditions under which
he would be willing to join the Second Army Command as a financial and monetary consultant.
He answered in a letter dated June 26, 1918.
Mises suggested dividing the civil service of the Second Army Command into three departments,
one for political affairs, one for financial and monetary affairs, and one for public finance.
He would become director of the Department for Financial and Monetary Affairs.
He had to be made a civil servant to have authority in dealing with the other representatives
of the state, and he had to be an imperial Kauka employee to reduce conflicts with Austrian,
Hungarian and local state agents.
For the same reason, it would not be advisable for him to remain an officer of the Cummer,
for in his capacity as monetary officer, he would have to revise agreements between the
Ukraine and the Austrian Trade Bureau, an appendix organisation of the Cummer, which
had monopoly privilege in Ukrainian imports and exports. His negotiations with the Bureau
would lack credibility because of the Bureau's executives within the Cummer, and they risked
inciting nationalist resentments since they could be depicted as an inner Austrian deal
to the detriment of the other nations.
Becher seemed to endorse Mises' arguments
and restated them almost word-for-word
in an official recommendation to his superiors.
In this public paper of which Mises received a copy,
Becher suggested that Mises be invited to go to Odessa
for an oral presentation and also to study conditions
in Kiev and other large Ukrainian towns.
Behind the curtains of the general staff, however,
plans were made to induce the cooperation
of the Recalcitrant Captain without giving in to his demands.
In mid-July, the head of Department 10, Colonel Linoch, received an order to further reduce his
staff. The order came from very high up, and it was specific about the staff members to be
dismissed. Mises was among them. When he received the news from Linoch, he knew the only choice left
to him was between the front and a Ukrainian mission without conditions. Linoch managed
to extend Mises' leave in Bad Gastein. His leave was extended through August 25th. Mises
stayed in the Hotel Badeschloss. Then the commander of the East Army, General Alfred
Krauss, sent Mises on a two-week mission to Odessa and Kiev and ordered him to report
about Ukrainian currency and finance. Mises arrived in Odessa on September 7th and quickly
learned that the Germans were pushing to establish a Ukrainian fractional reserve central bank
Bank, whereas the Austrians, in particular Herpolak from the Kaulka Ministry of Finance
and the Vienna Association of Bankers resisted this plan. As things stood, it was politically
inevitable that any monetary constitution for the Ukraine would have to involve a central
bank with a monopoly on the issuance of banknotes. The question was whether a new establishment
could be limited to providing currency, or if it would also be drawn into attempts to
to solve the pressing financial problems of the country.
Such attempts would jeopardise the stability of the new currency, but how else could the
financial burdens be shouldered?
At a meeting with the local Austrian commander, Mises convinced the Austrian bankers to promote
sales of Vienna stocks and bonds to the Ukrainian public.
To avoid the monetary inflation the Germans advocated, the Misesian strategy was to seek
make a private business solution through an increase of foreign holdings of Austrian stock
and debt. In a later report to General Krauss, he made comments and suggestions to improve
the proposed institution as much as possible. In particular, he recommended that the future
Central Bank be built on the model of the Bank of the Russian Empire. The report was
printed without indication of authorship. However, style and content reveal it to be
a pure product of Mises' pen.
The Ukrainian Central Bank should be a pure government institution, as distinct, for example,
from the formal set-up of the Bank of England or the German Reichsbank, and half of its
endowment should be held as cash reserves. In its investment policies, the new bank should
follow private banking principles, no risky investments and no long-term engagements.
Mises also stressed that reserve ratios were of crucial importance to create trust and
for the banknotes. The reserves had to be in cash.
Anything else would not offer any tangible security for the note owner, or in any way prevent an unlimited note issue that eventually results in the note's complete devaluation.
The history of the French Asignat, which had been covered through liabilities on all of the state's territories, serves here as a warning example.
Mises thus proposed a form of fractional reserve central banking system, better known as the
gold exchange standard.
He recommended keeping reserves for one third of all circulating banknotes, and these reserves
should be either in cash, gold and silver, in foreign currency, or in bills of exchange
on foreign currency.
Moreover, the management of the bank should, of course, be subordinate to the government,
preferably to the trade minister, since the finance minister would be tempted to abuse
use it for fiscal purposes. Mises' proposals were never put into practice. A week after
his return to Vienna, the Bulgarian front crumbled, and after another month, both Austria-Hungary
and Germany were in a state of political and military disillusion. The war ended in sudden
Chaos, and the Empire, centuries-old order, vanished almost overnight.