The Interwar Years: Ludwig von Mises as Economic Adviser

Ludwig von Mises

By Murray N. Rothbard

As soon as he returned from war service [in World War I], Ludwig von Mises resumed his unpaid teaching duties at the university, adding an economics seminar in 1918. Mises writes that he only continued working at the Chamber because a paid university post was closed to him. Despite the fact that "I [did not] aspire to a position in government service," his teaching duties and the leisure hours he devoted to creative scholarship, Mises performed his numerous tasks as economics official with great thoroughness, energy and dispatch.1 After the war, in addition to his Chamber of Commerce post, Mises was employed as the head of a temporary postwar government office dealing with the prewar debt. Young F.A. Hayek, though he had been in Mises's class at the university first got to know him as Mises's subordinate in the debt office. Hayek writes that "there I came to know him mainly as a tremendously efficient executive, the kind of man who, as was said of John Stuart Mill, because he does a normal day's work in two hours always has a clear desk and time to talk about anything. I came to know him as one of the best educated and informed men I had ever known…."2

Many years later, Mises related to me, with typical charm and gentle wit, a story of the time when he was appointed by the Austrian government as its representative for trade talks with the short-lived postwar Bolshevik Bela Kun government of Hungary. Karl Polanyi, later to be a well-known leftwing economic historian in the United States was the Kun government representative. "Polanyi and I both knew that the Kun government would fall shortly," Mises told me with a twinkle, "and so we both made sure to drag out the 'negotiations' so that Polanyi could remain comfortably in Vienna. We had many delightful walks in Vienna until the Kun government met its inevitable end."3

Hungary was not the only government to go Bolshevik temporarily in the tragic and chaotic aftermath of World War I. Amidst the turmoil of defeat, many countries of central and eastern Europe were inspired and tempted to follow the example of the Bolshevik Revolution in Russia. Parts of Germany went Bolshevik for a time, and Germany only escaped this fate because of the turn to the Right of the Social Democratic Party, previously committed to a Marxist revolution. It was similarly touch and go in the new, truncated little country of Austria, still suffering from the Allied food blockade during the tragic winter of 1918–19. The Marxist Social Democratic party, led by the brilliant "Austro-Marxist" theoretician Otto Bauer, headed the Austrian government. In a profound sense, the fate of Austria rested with Otto Bauer.

Bauer, son of a wealthy North Bohemian manufacturer, was converted to Marxism by his high school teacher, and dedicated his life to never flagging in zeal for the radical Marxist cause. He was determined never to abandon that cause to any form of revisionism or opportunism as so many Marxists had done in the past (and would continue to do in the future). Bauer enlisted in Böhm-Bawerk's great seminar determined to use the knowledge he would gain to write the definitive Marxian refutation of Böhm's famous demolition of the Marxian labor theory of value. In the course of the seminar, Bauer and Mises became close friends. Bauer eventually abandoned the attempt, virtually admitting to Mises that the labor theory of value was indeed untenable.

Now, with Bauer planning to take Austria into the Bolshevik camp, Mises, as economic adviser to the government, and above all as a citizen of his county and as a champion of freedom, talked night after night, and at great length with Bauer and his equally devoted Marxian wife Helene Gumplowicz. Mises pointed out that with Austria drastically short of food, a Bolshevik regime in Vienna would inevitably find its food supply cut off by the Allies, and in the ensuing starvation such a regime could not last more than a couple of weeks. Finally, the Bauers were reluctantly persuaded of this incontrovertible fact, and did what they had sworn never to do: turn rightward and betray the Bolshevik cause.

Reviled as traitors by radical Marxists from then on, the Bauers turned in fury against the man they held responsible for their action: Ludwig von Mises. Bauer tried to get Mises removed from his university post, and from then on they never spoke to each other again. Interestingly, Mises claims credit for preventing the Bolshevik takeover singlehandedly; he had no help in his dedicated opposition from conservative parties, the Catholic Church, or from business or managerial groups. Mises recalls bitterly that:

Everyone was so convinced of the inevitability of the coming of Bolshevism that they were intent merely on securing for themselves a favorable position in the new order. The Catholic Church and its followers, the Christian Social Party, were ready to welcome Bolshevism with the same ardor that archbishops and bishops twenty years later welcomed Nazism. Bank directors and big industrialists hoped to earn a good living as "managers" under Bolshevism.4

If Mises succeeded in stopping Bolshevism in Austria, his second great task as government economic adviser was only partially successful: combating the post-war bank credit inflation. Armed with his great insight and expertise into money and banking, Mises was unusually well-equipped for going against the tide of history and stopping the modern rage for inflation and cheap money, an urge given full rein by the abandonment of the gold standard by all the warring European countries during World War I.

In the thankless task of opposing cheap money and inflation, and calling for a balanced budget and a cessation of all increases of bank notes, Mises was aided by his friend Wilhelm Rosenberg, a former student of Carl Menger and a noted attorney and financial expert. It was because of Mises and Rosenberg that Austria did not go the whole way of the disastrous runaway inflation that would ravage Germany in 1923. Yet Mises and Rosenberg only succeeded in slowing down and delaying the effects of inflation rather than eliminating it. Due to their heroic efforts, the Austrian crown was stabilized in 1922 at the enormously depreciated — but not yet runaway — rate of 14,400 paper crowns to one gold crown. Yet, Mises writes, their "victory came too late," The destructive consequences of inflation continued, capital was consumed by inflation and welfare state programs, and the banking collapse finally arrived in 1931, postponed by Mises's efforts for ten years.

In order to pursue their unwavering battle against inflation, Mises and Rosenberg sought political allies, and managed to secure the reluctant support of the Christian-Social Party, in particular of its leader Father Ignaz Seipel. Before Seipel agreed to stabilize the crown in 1922, Mises and Rosenberg warned him that every stoppage of inflation results in a "stabilization recession," and that he must be prepared to undergo the gripes of the public when the inevitable recession occurred. Unfortunately, the party put its financial affairs into the hands of the attorney Gottfried Kunwald, a corruptionist who secured friendly politicians and businessmen privileged government contracts. Whereas Kunwald in private saw that Mises was right, and that a continuation of the inflationary policies after stabilization was leading to catastrophe, he insisted that Mises as government economist keep quiet about the realities of the situation so as not to scare the public or foreign markets about the situation of the banks. And, in particular, so that Kunwald would not lose his influence in procuring licenses and government contracts for his clients. Mises was indeed in the midst of an oppressive situation. In 1926, Mises had founded the Austrian Institute for Business Cycle Research. Four years later, Mises became a member of the prestigious governmental Economic Commission to inquire into the economic difficulties of Austria. When Mises had the Institute prepare a report for the Commission, it became clear that the banks were on the point of collapse and that Austria was disastrously consuming capital. The banks, of course, objected to the Commission or the Institute publishing the report and thereby endangering their own precarious positions. Mises was torn between his devotion to scientific truth and his commitment to trying to bolster the existing system as long as possible; and so, in a compromise, he agreed that neither the Commission nor Institute would publish, but instead the damaging report would appear under the personal name of the Institute's director, Oskar Morgenstern.

Under these crippling pressures, it was no wonder that Wilhelm Rosenberg, despairing of the situation, was driven to death; Mises, however, fought on bravely and it must have been almost a relief to him when the Austrian banks met their inevitable doom in 1931.5

Mises's words apply every bit as much to his fight against inflation as they explicitly do to his long, losing struggle against the eventual Nazi takeover of Austria:

For sixteen years I fought a battle in the Chamber in which I won nothing more than a mere delay of the catastrophe. I made heavy personal sacrifices although I always foresaw that success would be denied me. But I do not regret that I attempted the impossible. I could not act otherwise. I fought because I could do no other.6

Mises was often accused of being intransigent and uncompromising. In a moving passage in his memoirs, Mises looked back on his career as government adviser and reproached himself for the opposite error — of compromising too much:

Occasionally I was reproached because I made my point too bluntly and intransigently, and I was told that I could have achieved more if I had shown more willingness to compromise…. I felt the criticism was unjustified; I could be effective only if I presented the situation truthfully as I saw it. As I look back today at my activity with the Chamber I regret only my willingness to compromise, not my intransigence. I was always ready to yield in unimportant matters if I could save other more important issues. Occasionally I even made intellectual compromises by signing reports which included statements that did not represent my position. This was the only possible way to gain acceptance by the General Assembly of the Chamber or approval by the public of matters I considered important.7

1. See Ludwig von Mises, Notes and Recollection (Grove City, Penn.: Libertarian Press, 1978), p. 73.
2. Hayek, in Mises, My Years, pp. 219–20.
3. For three years before the outbreak of war, Mises, in his work for the Chamber, had investigated trade relations with Hungary, and so was highly qualified for the post. Mises, Notes, pp. 75–76.
4. Mises notes that the man reputed to be the best industrial manager in Austria, and an industrial consultant to a leading bank, the Bodenkreditanstalt, assured Otto Bauer in Mises’s presence that he really preferred serving “the people” to serving stockhold-ers. Mises, Notes, p. 18, see also pp. 16–19, 77. The collapse of the Bodenkreditanstalt in 1931 was to precipitate the European banking crisis and Great Depression.
5. Mises, Notes, pp. 77–83. Mises writes that, given his reputation in money and banking, several big banks offered him a position on their boards. He adds that “until 1921 I always declined for the reason that they refused to give assurance that my advice would be followed: after 1921 I declined because I considered all banks insolvent and irretrievably lost. Events bore me out.” Ibid., p. 73.
6. Mises, Notes, pp. 91–92.
7. Mises, Notes, p. 74.

The above was excerpted from The Essential von Mises and first appeared online at Mises.org