Welcome to the fourth lecture of our seminar, this afternoon we are dealing with the Great War and its aftermath, that is with a period ranging from 1914 to 1919 and early 1920.
One of the crucial junctures of world history was World War I, few people were taken by surprise, Mises was not among these,
He had anticipated the outbreak of the war for quite a while.
It had also shaped the way he had written his habilitation thesis.
The Theory of Money and Credit was a one-volume book in which he only dealt very briefly with the theory of direct exchange or barter,
a subject that he developed in much greater detail later on when he finally published Nationale Economie and Human Action.
And in his notes and recollections he explained to us why he did so.
So, in fact, precisely because he anticipated an immediate outbreak of World War I, he had to hurry up finishing the habilitation thesis and so he cut short all parts that he considered to be non-essential and focused on the monetary part.
Well, then finally in the summer of 1914, the war broke out after a foreign policy crisis involving Serbia and Austria.
Mises was mobilized on August 1. He took a train to his native Galicia. It was only natural that as somebody who was familiar with the territory,
The territory, you would be recruited to what the Austrians called the Northern Front.
There were in fact two fronts, the Northern Front which the Austrian-Hungarian armies confronted the Russian enemy
and the Southern Front where they confronted first only the Serbians and later on also the Italians.
There was no fighting for about three or four weeks.
Fighting then eventually started in late August, early September 1914.
The fundamental military problem for the Austro-Hungarian and German alliance
was a three-front war with a numerically superior enemy,
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 roughly 49 million residents of Austria-Hungary.
Because of the immensity of the Russian Empire, its 250 potential divisions could not be mobilized quickly.
Still, the Russian generals managed to throw 80 divisions into battle in the first few months.
These troops confronted only 10 German divisions and 38, because 90 out of 100 German divisions were 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 a Russian invasion of the German planes,
which lay almost defenseless. They could not afford to retreat into the Carpathian 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.
Therefore, in spite of their numerical inferiority, the Austro-Hungarian armies had not merely to resist but to attack the Russians in an attempt to keep them in the Galician plains.
Their 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.
By the end of September, more than 10,000 civilian refugees from Galicia had poured into Vienna,
And the army had been thrown back far behind Premisse, which is one of the secondary towns in Galicia, and now stood with its back to the Carpathian mountains, that is that almost been defeated.
In the first few weeks and months of the war, almost no day went by that did not see entire batteries, that is about 100 men each, and even regiments, that is about 500 men each, wiped out.
Artillery was not only the main agent of destruction, but also one of the prime targets.
Mises was of course a lieutenant in an artillery battery.
Mises' battery constantly had to change position often under fire.
Heavy rainfall set in, hampered their movements and proved that their uniforms were not waterproof.
There was no hope for relief anytime soon from the military bureaucracy, so Mises resorted to private initiative.
He had his mother send clothes for his men.
There was one other crucial competitive advantage that the Austro-Hungarian leadership did not count on initially,
and that was due to their lack of economic education.
But Mises perceived and analyzed this competitive advantage very clearly after the war.
And this was comparatively high economic liberty for the industrial organization of Austria-Hungary.
The Russians had subjected their entrepreneurs and their industrialists to a tight system of control,
whereas in Austria-Hungary there was competitively great liberty during the first 18 months and two years of the war.
As a consequence, as the war wore on, even after a few months, the Austrians gained, due to this advantage, a competitive advantage.
of Advantage. In December victories in southern Poland, Leo Lodz and Limanova-Lapanov, they gained decisive victories and finally the Russian front lines collapsed in May 1915 and this despite the fact that Italy had joined the Western Alliance, the Cordial and Entente, as an enemy of Austria.
In August then, the Austro-Hungarian troops took Lemberg back, which had been quickly occupied at the beginning of the war by the Russians,
and Mises, who was of course very relieved, could finally go on a vacation, so after roughly one year of fighting.
He had spent more than a year on the front, survived against the odds, but looked fresh
and vigorous as ever, though a hip injury had plagued him for months.
He had helped himself with considerable quantities of a fever and pain reliever that his mother
sent him.
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 Landau, who died of 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
from 1916 to about November 1917. But none of these expeditions brought him even close to the chaos he had known in the first months on the northern front.
So in December 1915 he joined the war ministry in Vienna. This requires maybe an explanation.
Mises joined this bureaucracy after roughly speaking one and a half years of the war.
Some of his colleagues there had never been on the front in the first place.
Clearly these people had one competitive advantage to Mises which is the art of maneuvering the hallways of the ministries and bureaucracies
and having the right connections, knowing the right people, making yourself indispensable.
So that you could not be sent to the front because you were an indispensable intellectual leader of the war effort.
Now, Mises was not one of these. But eventually, so after 15 months on the front, he was recruited by the War Ministry.
And then a few months later, he joined in May 1916, he joined the Scientific Committee for War Economics.
And the mission of this committee was to reflect, was kind of a think tank.
and the Think Tank was to reflect on the strategic goals and means.
Now his other colleagues had used the time to bring about a step-by-step wartime socialism at an accelerating pace.
One crucial mechanism that came here into play was inflation, as all other countries as well.
Austria-Hungary had financed part of its expenditure through the printing press.
Increase the money supply, make the government the main beneficiary of this,
so that the government was benefitted from the can-ti-on effects that we discussed this morning.
It was among the first receivers or the first receiver of the new money supply
and could therefore buy those things, goods and services that it needed at the expense of the rest of the population who therefore not only subsidized it in the form of taxes but also inflation.
Now the problem with inflation finance is of course that the sooner or later becomes visible at least in the form of increasing prices.
So, one thing that the government did very early on was to introduce a system of price controls.
Now, early on means at the end of 1915 and then early 1916 and very soon thereafter,
by the mechanisms that we will later talk about when we talk about Mises' theory of interventionism,
it was necessary to increase the interventionist impact because the first interventions,
The first price controls introduced all kinds of negative consequences, unintended consequences, like for example the creation of black markets,
like the shifting of entrepreneurial activities into those areas that were not yet regulated.
So the government wished that the entrepreneurs continued producing those goods that were now subject to price controls,
but the entrepreneurs would not do this if they had other choices.
So it became necessary to impose price ceilings on various other goods too that could have been produced
and finally to take over the central direction of industry both in Austria-Hungary and in Germany.
And this was organized within new institutions that were called the war centrals,
the Kriegszentralen, which were in fact central planning institutions.
After the war, Mises did not have very nice things to say about them.
He said, well, all these attempts to organize industry were in fact attempts to organize defeat.
What they did was not to organize the industry, but to organize our own defeat.
Our main advantage was the greater liberty that we enjoyed as compared to our enemy,
and this liberty disappeared to the extent that we now engaged in wartime planning.
and short-time planning.
Now his opposition to the prevailing wisdom turned out to be dangerous, personally dangerous for himself.
This is very instructive therefore that we take a brief look on the issues that were at stake in the debates of the scientific committee.
So we had here a forum for senior scholars and bright young students including Mises, Carl Pribram who was later an economist in the United States, Schumpeter, Barge and Alfred Ammann.
The whole idea was to establish a forum for in-depth analysis of the economic problems of the war and its strategic economic roles.
It was clear from the outset, at least for anyone even faintly acquainted with Mises, that he would disagree with some very influential people within the political and military leadership of Austria-Hungary,
and also with many committee members on the prospective economic benefits of military victory.
Mises 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 classical liberal position,
Mises was ready to speak up even to those who were higher in the wartime packing order and could make his life very unpleasant.
The French philosopher Montesquieu once said that although one had to die for one's country, one was not obliged to lie for it.
This seems to have been Mises' maxim too. He already had demonstrated his readiness to give his life for his country,
and now he showed his will to honor the truth, even if it brought him in conflict with powerful opponents.
Committee meetings and presentations featured Mises arguing for the economic irrelevance of political borders.
And the main argument is very straightforward. If you want to exploit the resources of a certain territory,
well, you have to pay for it anyway in one form or another, either in the form of providing labor services and capital investments
investments or in the form of payments for those who make the necessary, provide
the necessary labor services and capital investments. And this holds true
irrespective of whether these people are co-nationals that is subject to the same
government as you are or whether they are subject to another government. So the
political border or common political border does not convey a priori any
Now this of course was likely to be unpleasant or unwelcome use or unwelcome statements of fact to the war party.
And because the alleged economic benefits that could be obtained by conquest in the East were of course major justifications for continued war effort.
and continued war effort. Otherwise, you would have to say, well, if there are no advantages to be derived from this,
quite to the contrary, if the war through its destructions creates both detrimental effects for ourselves and for our enemies,
well, then the implication would be, well, you stop fighting as soon as possible, right? You stop fighting right now.
There's no point of trying to conquer these countries.
Now, at any rate, after Mises had published these views and stated the argument very clearly in unequal vocal terms in the leading social science journal of the time, which was edited by Max Weber,
It became impossible to ignore this anymore. You can just shut up about a debate that is being led in some bureaucratic committee.
It doesn't necessarily pertain to the rest of the world, but if one of its members publishes such a paper in a journal that everybody reads
or the entire intelligentsia reads in the country, well, of course, then this is likely to have an impact.
and now what happened next was that Mises was sent back to the front, okay, now I have no, I didn't find any evidence that there was a direct cause of connection between these two things, I never found a piece of paper that said, a letter, whatever, from General Sohn, so I said Mises you should have shut up and I was sending you back to the Carpathian Mountains, I didn't find anything like this, but yeah, I mean,
The case seems to be pretty straightforward. Mises alone was picked out of the scientific committee, all others could stay, and he was now sent back to the Northern Front on a mountain mission on top of this.
and the unit that he had to lead now was in dire straits, its equipment had been severely damaged on the southern front,
the morale of the troop were low and now they were sending them under this lieutenant from the war ministry to some mountaintop in the eastern Carpathian mountains.
Wonderful. Now there was one good thing, namely that the moral of the Russians was even lower and the Russian front was in a state of dissolution.
March 1917, so a few months after Mises assumed his new responsibilities in December 1916, there was a revolution in Russia.
The Tsar was overthrown and a new government came into play that made it clear that it would not like to continue the war.
And then the Russian front completely collapsed in the following months.
Starting July, the Austro-Hungarian troops were driving the Russians far back into Russian territory until finally the fighting stopped in early September.
Now from there, Mises was not allowed to return to the war bureaucracy, but he again was sent on another.
We'll find something else, right, so he was sent to another front mission, this time the Southern Front,
to fight the last battle that was being fought against the Italians.
It's the so-called 12 Isonzo battle, the Isonzo is a river in that part of the Alps,
Marketed the front lines between the Italian and Austro-Hungarian troops.
And so Mises took part in this last battle which was successful from the Austro-Hungarian side
and only then was allowed to return to Vienna, December 1917.
And then suddenly, again for reasons that were not entirely clear for me, his life started being much more pleasant.
Now, the fall of 1917 was full of other events just a year before the old emperor Franz Josef had died, so there was a new government in place.
This could also have something to do with Mises' return to the front.
But in any case, in December 1917, he quit the front, at the same time he quit the scientific committee to which he was nominally still attached.
He was promoted to the rank of captain and he joined now another department of the
War Ministry, the department number 10 and at the same time he was allowed to
resume his activities as a university lecturer, gave a seminar in the summer
semester of 1918 and was even appointed by the new Emperor to the rank of
professor, was a full professor but an extraordinary professor, professor
Another Extraordinarius, that is a professor that had the same rank as the other four professors but who was not paid.
He had tenure, but he had tenure to a position that was not paid.
It was a very peculiar system, but in any case this is how it was.
May 18 he had this appointment and he never received a promotion from there.
Okay, so his last great promotion to captain and then to professor, he received another monarchy, the following Austrian Republic was less generous with him.
Now there was a last mission that he performed at the end of the war, but that I will spare to you now because we need to move on, and which you can read anyway once the book will finally be out.
So we return now to the end of the war and the 18 months or so that followed it and which were a continuation in many respects of the war situation that at least from an economic point of view.
Central planning continued and in particular the policy of financing government expenditure with the help of the printing press.
This continued too, and brought problems that provide the scenery for what follows now.
So Germany and Austria-Hungary collapsed in 1918, militarily.
In the case of Germany, this was hard enough, but ironically, as it later turned out, once the so-called Peace Treaty of Versailles was concluded,
It turned out that this was a boon for the new central government in Germany, for the Bismarckian government.
Rather than weakening this relatively new structure, which had existed only since 1871, it reinforced its relative position to the other subordinate governments. Why?
Why? Because the western allies desire to have one discussion partner at the peace talks in Paris.
And therefore the only partner they admitted in the case of Germany were representatives of the central government.
So Germany came out of, the central government in Germany and the central political organization came out of these peace negotiations reinforced.
The case was completely different with Austria-Hungary. Austria-Hungary collapsed.
Now give me a second, we'll just look at, try to find our map again.
Austria-Hungary collapsed and the peace negotiations were led with the successor states of Austria-Hungary.
That is, negotiations were led only with those states that were held to be responsible for the war,
war, committed war crimes and these governments were in particular the governments of Hungary and of what was then called German Austria.
Why German Austria? We look at the map again. So this was Austria-Hungary before dissolution.
And now, as I explained to you yesterday in the morning, after the Ausgleich in 1867, the constitutional compromise that had to be found to appease seceding forces, in particular the Hungarians,
there was a dynamic within the Empire that strove toward dissolution, because each national group tried to gain advantages at the cost of all other groups.
This was most markedly the case of the Hungarians first, but then the Czechs joined and the others would join in turn.
Only the Poles remained relatively loyal until the end.
Now, when the war was lost, then these secessionist movements that existed latently anyway,
which had been appeased only through expansionary economic policies led before the war and other things,
and other things broke out and led to the dissolution of the Empire. Hungary seceded from the country, Czechoslovakia seceded from the country as a new political entity that emerged in the north involving Bohemia, Moravia and what is today the Slovak Republic, this area.
In the south, we had a secession of Serbia, Croatia and other territories which now formed Yugoslavia,
which again, for those of you who are aware of the current situation, has been dissolved a few years ago, 15 years ago.
And so after all this fell away, there was only a territory that was somehow left over here.
here. And this of course coincides with what is today known as Austria. But at the time, people didn't dare to say, well, that's Austria, because Austria was synonymous with the territory belonging to the Habsburg family, was ruled by the Habsburg family. So you could not simply say this was Austria. Austria should have been all of this year, except for Hungary, maybe. So how to call this? They call it, okay, this is German Austria. That's how they call themselves spontaneously. This is
This is German Austria because it's that part of Austria inhabited by Germans and no sooner had they gained, so to say, their unwanted independence because all the others were falling away that they themselves declared their annexation to Germany.
They declared their will to join the rest of the Reich in the north.
It was at the end of October 1918.
It was a constitutional meeting of the German national members of the Austrian parliament.
It constituted the new Austrian parliament.
And no sooner had they declared, okay, now we are establishing an Austrian Republic, in paragraph two they said, and we are joining the German Reich in the north.
It was one act, if you wish. Now this was eventually not tolerated by the western allies.
They did not want to have an integration of German Austria into Germany.
Germany, they had to remain separate. It's a very paradoxical and weird situation, especially if we recall that the policy of President Wilson, declared aims of this policy were to give political autonomy to each national group.
Only the Austrians were not allowed to do this. So they had to stay separate and they were not allowed even to call themselves German Austrians or German Austria.
So, when the Treaty of Saint-Germain was concluded, the peace treaty with the Austrian war enemy, one of its stipulations was that the new republic be called Republic of Austria.
So, everything was imposed from outside in this case.
Now, in this new republic, at first the social democrats were the prevailing power.
Let me show you a photo with the leading men.
So these were the leaders of the social democrats. We have here Otto Bauer, which was the number one intellectual of the social democratic party.
We have encountered him already when we talked about Boehm-Bawerk's seminar and the discussion about the Marxist value theory in the very first summer semester that Boehm-Bawerk taught his seminar,
in which he led discussions with young Otto Bauer.
So this is a photo from the late 1920s, 25 years later.
Bauer was also the most influential man within the party
because he was the most radical among the main figures.
He was the one of the group that strove for revolution,
proletarian overthrow of the existing political system
an analogy to what happened in Soviet Union or in Russia in those days.
We have another intellectual leader here, Emil Lederer. He too has already been mentioned.
He was also a member of the Bombardian seminar, also very influential social democratic intellectual
already before the war and then especially in the interwar period.
Later on taught at the University of Heidelberg and then moved to the New School for Social Research in New York.
And here we have Carl Renner, the main political figure of the Social Democratic Party.
Within his own party, he was less uncontested than Bauer.
But Renner was more moderate in his appearance and therefore had a greater acceptance within the general population.
Something that happens very often with political parties.
And as a consequence, he then became the leader of the social democratic governments that were formed immediately after World War I.
And then after World War II, when Austria again was dissolved, separated from Germany again, this time by the will of their political leadership,
Renner again became the first Chancellor of the Second Republic of Austria.
So it's a very important figure in the history of 20th century Austria.
And here, well, okay, it's kind of audacious to call him a social democrat. It is Mises' schoolmate, Hans Kelsen, the foremost legal scholar in Austria of the time, the person who authored the Austrian Constitution that was finally voted in 1920.
And Kelsen too, therefore, had strong ties with the government, though more or less as a consultant.
Now, there had been no elections in Austria since 1911. In these elections, the social democrats had been less important than in previous elections for reasons that we do not need to discuss now.
But in the meantime, of course, in the years that had passed since 1911, the political establishment had become discredited, particularly due to the lost war.
War. So at the end of the war then the social Democrats even though they did not
represent an absolute majority in Parliament had the upper wind, they had
the moral high ground in particular and the other parties, the other political
leaders thought that it was only now a question of time until the next
election there would be an absolute majority for the social Democrats and
and they felt their own standing had no moral justification.
So the social democrats by and large determined the course of events throughout the next months until February 1919.
The February elections then, it turned out that the popular will was far less in favor of the social democrats than it had been assumed.
and by far not an absolute majority, and they were then also forced to admit members from other parties into their government.
But from late October 1918 until these elections, they ruled more or less uncontested, more or less supreme,
and backed their moral high ground up with open threats against the other parties.
If you do not agree, because the numerical relationships within the parliament, they still did not have an absolute majority.
So they said, if you do not vote for the laws that we now propose, well, we'll just call for the revolution.
We'll just send in the proletarian forces. Okay, that's how these things were handled.
Mises became involved in these government affairs. He was hired as a consultant to the Ministry of Foreign Affairs, the ministry that was headed by Otto Bauer.
Renner became Chancellor, Bauer Minister of Foreign Affairs
and he needed experts on foreign economic relations in particular
in preparation of the peace talks that were to be led in Paris
in particular there was the question of war debt, financial obligations between different countries
German countries, not only Austria as compared to its former enemies, but also Austria, that is German Austria, as compared to its former co-nationals.
So he needed experts, and Mises was one of these experts. Others were, for example, Richard Schüller, whom we have already mentioned,
I grew very, very old, the last personal disciple of Carl Menger, but also a student from Mises by the name of Steiner and others.
Now I'll go, I'll spare you the details of the activities of Mises and his capacity as a consultant, but we'll notice of course that this increased his prestige within the general population,
was not only now a university professor but he was also a member of the of the
government so whenever he pronounced himself in the press signed an article
and so on it necessarily had more attention than if he had just signed as
the professor but his main activity in the next few months that ensued was to
to prevent a Bolshevik coup in Vienna.
As I said Otto Bauer was the leader of the radical faction within the Social Democrats
and he was not only considering but actively planning a Bolshevik coup
that is simply pushing aside the existing government and setting up a proletarian government
after the model of the Russian Revolution.
Now Mises reports on his activities in the following words.
So this is a quote now from his notes and recollections,
which is by the way the only source that we have on these things.
He said, it was solely due to my efforts that Bolshevism did not then prevail in Vienna.
Now this sounds rather boastful, but I can assure you that's the only passage that you will ever find
of Mises writing where he says anything of this sort. It was only due to my efforts that Bolshevism did not then prevail in Vienna.
Only a few people had supported me in my efforts and their help was rather ineffective.
I alone managed to turn Bauer away from seeking union with Moscow. The radical young men who rejected Bauer's authority and were eager to proceed alone
alone and against the will of the party leadership, were so unexperienced, incapable and torn by mutual rivalry, they could not even form a halfway viable Communist Party organization.
The events lay in the hands of the leaders of the old Social Democratic Party, where Bauer had the final word.
The main argument that Mises brought up in his discussions with Bauer, that is more precisely with the Bauer's, because Bauer's companion was always his wife, Helene Gruplowitz.
So Mises had discussions with them too, and we must imagine that these discussions took place during the night, because during the day, well, they had lots of other business, fully occupied.
were occupied and then at night, well the evening hours, they came together and discussed these things and lay back and reflect and then they discussed these issues.
And probably the discussions took place during a week or so, a few evenings, a few nights, they grow ever more tired.
And Mises stressed again and again, one crucial consideration, if you perform a coup now, the allies, the western allies, will cut your supply lines.
and supplies in Vienna will not even last eight days.
After eight days, you will start starving and what will happen then is not organized,
proletarian government, but anarchy and complete chaos on the streets.
People will start killing one another and grabbing for available food and so on.
So this would be the alternative.
In other words, so Mises did not come up with any moral argument,
with a moral argument, but with what we might call today a praxeological argument, a utilitarian consideration.
You will simply not be able to do it. It will not work.
Western allies have no interest in subsidizing a communist experiment not far away from their garden door,
and they will simply let you starve, and then you have a real hell going on.
So what happened then? He said, again a quote from Mises' notes and recollections,
Bauer could never forgive me for having made him take the position of a milleron.
The milleron was a politician of the 19th century who also turned from a radical into a moderate,
once he had actual government responsibility.
The attacks of his fellow Bolsheviks especially hurt him, Bauer.
However, he directed his passionate hatred not against his opponents, but against me.
He endeavored to destroy me by inciting chauvinist professors and students against me, but his scheme failed.
From that time on, I never again spoke with the Bauers.
So this was the end of some kind of friendly relationships that started in early student days in 1903 or 1904
and ended in 1914 over a discussion in which Mises just stressed a matter of fact and didn't even appear to morals or didn't say, wow, that Bauer was just whatever, a Bolshevik idiot or something, just stated a matter of fact.
Now after this, then what were the alternatives? So outright Bolshevism was no longer possible, the social democrats from now on pursued other main policies
And here we can distinguish in particular three aspects. First of all, a policy of expropriation and nationalization. Second, a policy of inflation to finance government expenditure.
And third, as a corollary, subsidies to unemployed Vienna workers. Let's go this in some more detail.
Now expropriation, nationalization was very high on the social democratic agenda and Bauer, once he had to renounce the Bolshevik coup, revised the strategy and now called for the piecemeal introduction of socialism.
How was this to happen? Well, we had to give the power within industry within each firm to the workers.
So we ventured some scheme of what was called at the time economic democracy.
We do not only have political democracy, we have also democracy at the workplace.
Investment decisions, hiring and firing decisions and all relevant decisions should no longer be taken by the capitalist,
a few capitalists alone, but by the collective of all people who, as we might say today, were stakeholders in the firm.
and also in particular the employees, that's economic democracy and the consequence if you do this piecemeal for one industry after the other would of course be some sort of nationalization or socialization of capital.
The first industry where this was tried out was in the case of the coal and mining industries. These were nationalized very early on in the first few months of 1919.
In Austria-Hungary followed there only a movement that had already started in Germany.
The main organizational vehicle or new bureaucracy that pushed for these nationalizations were the Staatskommission für Sozialisierung, the state commission for socialization.
Okay, so what's the difference between socialization and nationalization or statization?
Well, they didn't explain. Of course, if we know today, they did not explain this distinction, and nobody has been able to explain this distinction until today.
Because there is ultimately no difference, what's the only way to take this property away from the capitalist? Well, you've got to bring the government in.
The government is the owner or the director who controls the apparatus of compulsion and coercion, as Mises and Max Weber would say.
So, what they did was to nationalize these industries and this found an intellectual vindication through these state commissions.
So in fact, commissions that regrouped representatives of the intelligentsia, typically economics professors, of labor unions and of capitalists.
Capitalists. Of course, the capitalists were in a majority and the professors who were called to take part in these meetings were, of course, politically reliable, so voted with the labor unions to get the desired result.
Among those who were politically reliable were, for example, Schumpeter, a famous economist who ventured a value of freedom in scientific analysis but then showed himself to be a man of honor when the government called him to duty.
And the government called him to duty. And in Austria, so they did this just a few weeks after the Germans and they also had a state commission for socialization brought this about.
And the second policy that they pursued was a policy of inflation, so the printing press as during the war years continued to be a main source of government expenditure.
In fact, tax revenue had collapsed. The Vienna workers or the urban population were in fact incapable of paying any taxes because they could barely survive.
The only ones who could have paid taxes, at least in the form of agricultural products, were the farmers.
But the farmers were unwilling to do this, in particular since nobody could coerce them.
The government was weak, the army was in a state of dissolution, police could hardly
feed themselves, so the farmers were on their own. They didn't like the Vienna
socialists, let them go to nowhere. And so nobody collected taxes for them. So how
can the government finance its expenditure? There was only one means left and that was
the printing press. So they had pursued a policy of inflation and asked during the
wartime in order not to make the consequences of inflation, I mean
and plummeting exchange rate and increasing price level be felt by the citizens, they pursued a policy of price controls.
And if you have this policy of price controls, then of course you destroy the markets, destroy production, you create black markets.
That's how things went on during 1919.
Third, the new government pursued a policy of subsidies to the unemployed Vienna workers.
So much of this expenditure that we talked about, finance by inflation, went in the form of subsidies to Vienna workers who did not work.
Urban population who did not work were called workers.
In fact, the government had, again in the very first months of the republic, had introduced the latest wisdom of social policy into law.
That is, at the very moment when the country would have needed every pair of arms to work as much and as hard as possible to get the country out of the shovels and out of the ruins, they prevented people from working.
So, what did they do? Well, they said, okay, from now on, we have eight hour work days.
Okay, you imagine the absurdity, and you need every effort possible, and they say, okay, after eight hours, you've got to stop.
Then you've got to take a vacation, okay? Every worker must have a vacation, two weeks or so per year.
Then we must have co-management of the firms and we must have unemployment insurance.
Unemployment insurance is another disincentive to work. It's too hard, it's really disgusting.
Well, you better go on relief and many of them did.
So we have very high unemployment and the subsidies for these people were paid out of the printing press.
So the currency goes down the hill, workers are paid for doing nothing and get the benefits of enjoying agricultural products at lower than world market prices.
Well, there was a fourth policy that we might mention. So the social democrats were engaged in a policy of decapitating, at least symbolically, all vestiges or remnants of old authority, in particular the nobility.
So whereas the German aristocrats could keep their traditional names, von Humboldt and whatever, von so and so, the Austrians had to do without.
So the government abrogated all noble pedigrees and expressions and so on with the law from early April 1919.
1919. The major benefit of this unparalleled legislation was to spur Austrian wit. One gentleman
of venerable descent circulated his business card with the imprint, geadelt von Karl dem Großen
and adelt von Karl Renner, ennobled by Karl the Great, denobled by Karl Renner. So from
From then on, then Mises was officially Ludwig Mises, but he had his Nonde Plün, his writer's name, under which he continued to be known.
He published in the interwar period while he was in Austria under Ludwig Mises, and then as soon as he was in the free country, again in Switzerland, he could publish under Ludwig von Mises.
and then in the United States also because there was no, no pedigrees allowed, it was officially Ludwig Mises but published, continued to publish under Ludwig von Mises as whom we know him still today.
Now let me come to one of Mises' main activities in these first few months and the first year after the end of the war, which was his fight against inflation.
As we have said already, so this was one of the major policies of the Social Democratic Party and this fight of inflation involved three elements.
On the one hand, Mises sought to protect the residents of Austria-Hungary against inflation that would have resulted from the reflux of coronal notes from the old parts of the Empire.
So this political entity had used until 1918 the same currency, the Kroner, the Kroner.
Now the Kroner also then, as a consequence of the war, circulated in other areas, in Serbia, in Romania, in parts of Russia and so on, all the occupied territories.
Now, what does this mean? Now, if Austria-Hungary is dissolved and there remains only German-Austria here and there are still Cronan notes elsewhere in the country.
The only place where these Cronan notes have legal tender status is German-Austria.
So, what if the people from these other countries sell the chrono notes to residents of German Austria, that is, buy real goods and services from them?
Well, you have an enormous increase of the money supply and real goods are leaving the country.
So, you have an enormous increase of the price level, at least potentially, in particular, if these other nations start introducing monies of their own.
And that's precisely what they did in the first few months after the war.
So how to solve this problem? Well, Mises came up with a plan that was then finally enacted.
So he proposed that the Austrian, German Austrian notes be stamped.
So you take the bank note and you put a stamp on it to make this note distinguishable from the other notes that were formerly the same,
formally the same but still circulating in other parts of the former empire which would no longer belong to Austria-Hungary.
And only the stamp notes would then have legal tender power. So this was enacted in the first few weeks of 1919.
And Mises also provided hands-on support in this context for the creation of a separate Austrian currency.
So we had a good friend running a printing press, which was a private printing press, so they printed newspapers and so on,
but they could have printed bank paper notes as well.
So he said, well, we need to change our currency very quickly, can you help us?
which is of course a charming episode or rather paradoxical because Mises is known as the great champion of some money but here in order to keep the government running and the only source of income was inflation well he provided hands-on support to create a new paper money which shows well again that moral considerations, I don't know how to put it,
and absolute moral considerations, inspired by natural law and so on, where from his point of view, secondary or at least had to be combined with utilitarian considerations.
For him, the government was absolutely essential to keep the country from falling into a state of anarchy, by which he understood each man killing other men.
And so the government had to be financed by any possible means and the only means available at that point was inflation.
The second element in this fight against inflation was the education of the public.
So here Mises stressed in particular the true elements and the rock-solid elements of the quantity theory of money.
can distinguish two versions of the quantity of theory of money, one we might say is a general or moderate version according to which there exists a relationship between variations in the money supply and the price level.
The price level increases, sorry if the money supply increases the price level will increase as well, if the money supply decreases the price level will decrease as well.
Now, only there is no strict quantitative relationship between the two events, right, because there are no strict quantitative laws, right, if we increase the money supply by 10%,
doesn't mean that the price level will also increase by 10%, it could increase by 1% or by 29%, something, and the other way around.
And there's also a strict version of the quantity theory, according to which there exists a strict proportionality between variations of the money supply
and variations of the price level. So if the price level increases five percent, sorry, the money supply increases five percent, the price level also will increase five percent.
Now this is wrong, right? But one should not throw this wrong quantity theory baby out with the correct quantity theory, bathwater.
And Mises stressed this point, which was important because very wrong theories about price formation dominated in the public forum.
We had already talked about the balance of payments theory of exchange rate formation, which was one of these wrong theories.
And one could see that it was wrong once we consider the impact of variations of the price level, of the quantity of money on the price level.
The third element in Mises' fight against inflation were monetary reform plans that he developed in 1919 and in the following years.
But in particular in 1919 he developed two reform plans, one official one that was meant to be applied in normal times
and one unofficial one, in which Mises proposed a revolutionary approach to monetary reform, which was to be applied in emergency situations.
The worse it gets, the more you need to bring in private people. Very interesting.
Now we'll just quote from his paper, which he proposed this, yeah, okay, just a second, so the official or normal plan involved in particular the halting of the printing press.
Burgeoning hyperinflation, which threatened to get out of control, and Mises said the first condition for monetary reform is that we stop printing new notes.
We've got to stop the printing press. Unless you understand basic economic mechanisms, unless you understand the sound quantity theory of money, of course you do not see this point, therefore you have to educate the public about it.
So you've got to stop the printing press and add the exchange rate between the Kroner and gold that will be established at this new exchange rate that comes into play once the printing press is stopped.
We should resume payments in terms of gold, that is, return, re-transform the Kroner, which was then a paper money, into a money substitute, into a legal title for gold.
Okay? Now this was a plan that means the sale should be applied in normal times, that is, when the depreciation of the currency was fairly moderate.
But what to do in a situation in which the situation gets really out of control, what to do in a situation in which there's a collapse of the price system, a situation in which the prices increase so fast that people are no longer willing to use the chrono notes, it's losing its purchasing power by the hour, they get paid maybe in the morning and in the afternoon their payment is only worth 25% or 20%
20% of what it was worth in the morning. So what do you do then? Well, what people do is simply to get rid of these, of this money. They would not accept it, first of all try to spend it as quickly as possible, which would further increase the prices and secondly at some point they would simply refuse to be paid in terms of this money and then you have a collapse of the price system. The money disappears from circulation and you return to barter. Of course barter is much too primitive, you cannot continue
and a sophisticated division of labor in such a situation, so the economy would collapse too.
Now in order to prevent this, one had to introduce a new currency,
when Mises thought that this should be done by private parties because they were much more efficient than the government.
Let me now quote from a confidential paper that is circulated in 1919 and which addressed precisely this point.
He said, one can hardly expect the government to make such preparations.
It cannot be assumed that the financial administration that for five years has not only followed but also repeatedly sought to defend the disastrous inflation policy
and which in complete ignorance of the sole source of the decreasing value of money
has accelerated the decline of the Kroner, that this administration would certainly change its mind.
Leaders responsible for its policies who correctly saw the economic connections
have up to now been unable to overcome prevailing in-house traditions.
Citizens must seek to achieve through their own powers that which the government fails to bring about.
All one can hope for on the part of the government is that it not hamper the initiative of the private sector.
It is the duty of the banks and with the banks that of big corporations in industry and trade
to make ready the measures that appear necessary to overcome the catastrophic consequences of the collapse of currency.
This is in their own interest and also a service to society as a whole.
He went on, it's also an interesting passage, one has to accept the catastrophic devaluation of our currency as foregone.
Sorgang, imperialist and militarist policy necessarily goes in hand with inflationism.
A sentence he would repeat throughout the rest of his life again and again.
Imperialist and militarist policy necessarily goes in hand with inflationism.
A consequent policy of socializations necessarily leads to a complete collapse of the monetary order.
The proof is delivered not only through the history of the French Revolution, but also through the present events in Bolshevist Russia and a couple of other states that more or less imitate the Russian example, even if they do not display the atrocious brutality of the Jacobins and the Bolsheviks, but prefer less bloody methods instead.
As unbecoming as the collapse of the currency is in its consequences, it has the liberating effect of destroying the system that brings it about.
Now here we have a statement that some might find sarcastic, but again brings into play a completely new consideration that we did not find before Mises.
As unbecoming as the collapse of the currency is in its consequences, it has the liberating effect of destroying the system that brings it about.
Mises' fellow economist and colleague Josef Schumpeter has coined the phrase creative destruction.
He has simulated the market economy to a process of creative destruction.
New ideas that prevail, more profitable, more important, more beneficial than the old production ideas displays these old production ideas because there is competition for scarce resources.
So only the best production ideas, the most profitable production ideas are applied and all others are abandoned and these projects are dissolved.
Now, what Mises argues here, in fact, without using the phrase creative destruction, is precisely this, a collapse of a monetary system is something like a creative destruction.
It has many negative consequences, misery and so on, but at least there's one good aspect that we get rid, first of all of the inflation, but also of the institutions that were responsible for the inflation.
The collapse of the Essen Yards, says Mises, was the kiss of death for the
Jacobin policy and marked the beginning of a new policy. In our country too, a
decisive change of economic policy will take its impetus from the collapse of
the currency. So what Mises then recommended is that these private
parties, these entrepreneurs, make provisions for such an emergency
situation that they get in touch with foreign colleagues and provide credit
facilities that they might need to set up a new currency. In particular he
recommended that the Austrian bankers should take credit
facilities from their Swiss colleagues so that they could get gold coins and
Swiss bank notes into the country in sufficiently small
denominations so that they could be used to pay wages to survive just the first
in the first month, get the new currency going within Austria.
They did not rely on bureaucracy, but on private initiative.
Apart from this were his main activities in 1919.
He obtained a new function at the Chamber of Commerce, something that we neglected so far.
Mises joined the Chamber of Commerce in Vienna in 1919.
After the completion of his studies at the University of Vienna, he first started a career within the financial administration of Lower Austria, that is the area that is just around Vienna, the capital city.
But he was dissatisfied with the bureaucratic experience, he just couldn't bear it.
So after six months he abandoned it and then started off on a completely new track. He became a lawyer. So he had additional training in a law firm.
And there he stayed two years, completed this internship and then accepted an employment at the Chamber of Commerce where he was first a consultant and his main task was to write reports, statements on economic policy.
Now again, so he did this for a few years, four years or five years and then the war came in and he was still nominally affiliated to the Chamber of Commerce,
but this was a secondary aspect of his life. And then in 1920, the Chamber of Commerce obtained a new organization.
organization, again it's not important for us to go into the details, but what is important is that a new organization was created by law which provided for the creation of a department for money and credit within the Chamber of Commerce,
and Mises was appointed the head of this division, an appointment that is not very surprising because by then he had obtained the reputation of one of the major authorities on monetary theory and monetary policy within Austria through his treatise on money, but also through his activities during the war and in the scientific field.
monetary policy within Austria through his treatise on money, but also through his activities during the war in the scientific committee and so on, and then in the new government.
So he was a sufficiently high-ranking personality anyway and was a suitable nominee for this position.
And apart from this, we might mention his intellectual activities, and I'll close on there, which were of course the most pleasant part of his activities, after all, fighting against inflation, that's heroic,
That's heroic. Fight against Bolshevism is heroic too, but not necessarily pleasant.
And if you have to debate all these people and shouting matches and so on.
So his intellectual activities were much more satisfying. He was a professor at the University of Vienna.
He continued to be a professor there. He was a founding member of an association of economists,
a kind of a workshop in which people presented their papers, which was called the National-Economische Gesellschaft, the Association for Economics,
which had resulted from a discussion group that he had established before the war with a couple of friends and fellow students,
and which was then set up on a more formal level after the war under this name.
So he continued this. He taught his university seminar and in particular he created a new institution
namely his private seminar. And he created in fact this private seminar in the fall of 1919
ostensibly to provide a forum for the more advanced students who were not entirely satisfied with the more basic classes that he taught at the university.
And we have one or two charts that I can show you here.
So these are among the most famous members of the seminar, especially in later years.
So we have here Hayek, Friedrich August von Hayek, Gottfried Haberler, Alfred Schütz, Fritz Machlub,
of Fritz Machlub-Wolf, as he called himself in those days.
Schutz was a philosopher and was mainly interested in epistemological problems, that was the overlap with Mises' later work.
Haberler was economist, particularly interested in international relations, international economics, Hayek, his work.
and then Machlop too, initially he started off as a monetary economist, writing his doctoral dissertation on the gold exchange standard and then a 1931 habilitation book on the economics of the stock market.
Mises had the highest opinion of Machlop. He rated Machlop higher than any of these others.
He called Machlop's 1931 book a masterpiece, a designation he applied to no other book, to none of the works of Hayek, for example.
But still Hayek would become his main associate for various reasons. What he appreciated in particular in Hayek were his character.
So Hayek would not fall from the line, not out of opportunism and any other weaknesses, and of course there were political affinities, both were staunch classical liberals.
Whereas in the case of Maklop, he was a little bit deceived because his character was a little bit less reliable.
That's something, one of the sins that Mises would not forgive easily, not to say not at all.
Connections to Schutz were friendly, but not necessarily very close.
I mean, it would be socializing with the Mesises after World War II when Schutz also moved to New York City.
We would see one another very often, but it was not necessarily a great professional connection.
Then we have here also a list of those who would attend the private seminar.
I'll zoom in a little bit so you can read it better.
This is from the second half of the 1920s.
So you see this is the list that the Mises secretary drew up after handwritten lists and Mises corrected here those things that had to be added.
Ständige Mitwieder, he strikes out, that's Privatseminar, Privatseminar should be added up here.
He's doing the layout too, you cannot trust his secretaries.
And then he adds always the function, so Hans Bayer, though I ask myself whether this is not a misprint, but anyway it doesn't matter.
He is an assistant at the Institute for Government Science at the University of Vienna.
Then we had Bethlehem Gabillon, who was a very good friend of Mises.
He was a high-ranking bureaucrat in the finance ministry and then various other people.
Martha Stephanie Brown, in those years Brown-Herman, after her husband, later on also moved to the United States.
Engel Janoschi also moved for some time to the United States.
Walter Froehlich also moved to the United States, I believe he taught in Milwaukee.
Habela moved to Harvard, Hayek of course as we know, London School of Economics and then Chicago and other places.
Marianne von Herzfeld, she was at the time a secretary of the Association of Austrian Banks and Bankers and so on.
So it was a nice list. We have Kaufmann that some of you might know and Lene Lieser was another female star student of Mises's.
Machlub, Minz, Schiller, Morgenstern, didn't bring a picture of Morgenstern.
and the association between Mises and Morgenstern was not very close, so his main relations were with Hayek, Haberla, Machlop and others.
Okay, yeah so these activities as I've said were much more satisfying, they started off right in the fall of 19 which was therefore a year well full of events for Mises, many activities that he would later develop in much more detail would become much more important,
such as the private seminar were started there, the fight of inflation would rest with him for the next couple of years,
would only wane a little bit as from the mid-1920s, and of course socialization would also remain a classic,
but here we have an interesting intermix between theory on the one hand and practice on the other hand.
Mises was clearly in 1919, was a dramatic year, was a man not only intellectual, not only a thinker,
Mises is a thinker, but someone who was a protagonist, who took active part also in the decision making on a governmental level.
Okay, I'll stop here and give you time for questions.
If Mises recognized what Simpeter called the creative destruction that accompanied the boss who had been pushing, why did he work with the government instead of letting the whole thing collapse?
The question is, why did Mises cooperate with the government at all if he recognized that there was a positive role to be played by creative destruction?
Well, I mean, he cooperated with the government not only as an expert for monetary policy.
Monetary policy, we should remember, was in the hands of the Central Bank, the Austro-Hungarian Bank.
Those years, a few years later, it turned into the National Bank.
So, Mises would pronounce himself on monetary policy, would commend on monetary policy, and that's what he did here, but he had no active decision-making power in monetary policy.
His main responsibilities, as far as the government was concerned, were to lead debt settlement negotiations with foreign countries.
What was it about Machlop that Mises admired so much?
Well, Machlop had great intellectual prowess, comparable to one of Schumpeter,
and he was familiar with all aspects of economic theory and he had extremely sound analysis, a really brilliant analysis.
Analysis. I mean the book that Marklope wrote in 1925 as his doctoral dissertation, Mises praised it very much, unfortunately it's completely
unaccessible today, but maybe Jeff Tucker will do us the favor of republishing it if he gets a copy because these copies are extremely hard to find.
And the 1930-1931 book, again I recommend to you just simply to have a look at it, you'll see what Mises is talking about.
There is an English translation, but the English translation is already toned down.
It is much more hardcore, much more thorough and straightforward in its approach in the original German edition.
The English edition appeared in 1940, and there Marklub already tried to accommodate the views of his new colleagues and friends at the University of Buffalo and his new Keynesian environment.
It was a constant concern of Mises in the 1930s that his former star students might turn Keynesian and they all, several of them assured them in correspondence, well you don't need to worry that I'll become a Keynesian. It was not always true.
Yes.
Why did Mises not believe that there would be a spontaneous re-emergence of governing forms even if the government collapsed?
So why did he help to maintain the government in this crisis situation?
Well, to make it short, we could say Mises was not Murray Rothbard.
One way to answer this. Well, he believed that, let's say in present economic jargon,
we would have to say Mises believed that there was a market failure as far as security production is concerned.
Okay, so you need to have government to provide these services.
In order for society to function at all, these services need to be provided by the government
And unless you have a government there, no other thing can be produced.
So, at any cost, you need to have this minimum apparatus in place.
That's it.
And there's a psychological account that doesn't say that it's correct, but that was his view.
And that was Mises's view?
Yes, until the very end.
Until the very end.
Did Mises ever write a long thing about why he thought that the market couldn't provide security?
I mean, of course, we have to say Mises first encountered a serious literary expression of this new theory only very late in his life, in the late 1950s, then maybe in the 1960s,
and yeah, I mean, it was maybe difficult for him to adjust and completely rethink, in any case he didn't do it.
Those things that he did contribute in those days were clarifications of his previous thoughts, in particular in the field of epistemology, not necessarily in this field.
Was Mises' position as a private lecturer, as a privatotzent, was this exceptional or unexceptional?
No, it was quite ordinary. It was the usual case that after your habilitation degree, you would be admitted to the rank of privatozen, the private lecturer.
In fact, it would have almost been considered to be impolite not to grant this.
In some cases it was not granted, but in many, many cases it was granted and as a consequence there were literally dozens of private lecturers at the universities who offered their classes.
and as I said it's still quantitatively it has declined although I don't have any precise figures historical evolution but it has declined at our university maybe we had one or two affiliated to our department and it's true in economics today it's no longer very frequent but that is because the opportunity costs are too high usually people who are in economics while they have opportunity incomes in industry and so on so they rather get a job elsewhere
and elsewhere, which would prevent them from being a lecturer.
But in other fields like philosophy, history of art and so on, you have lots of private lecturers.
Well, you don't need to exhaust your time.
Thank you for your attention. See you tomorrow morning.