15. Crises

THE MELTDOWN OF THE New York Stock Exchange in October 1929 sent shockwaves through the world economy. Central Europe was particularly affected. Corporate profits in Austria had been squeezed under the combined impact of increased taxation and labor-union power. As a consequence, private entrepreneurs were increasingly unable to attract the capital needed to cope with the changes. Moreover, the economy of Germany and Austria had come to rely increasingly on public expenditure, which in turn was financed through a steady stream of U.S. and French credit. The main players in this process were not the federal governments, but second-level authorities and municipalities. Loyal to the prevailing socialist ideology of the time, city mayors had used postwar foreign loans as a means to communalize firms, especially in the fields of transport and public utilities. The performance of these companies plummeted under the new public management, but this was compensated for by ever more credit from abroad. Until 1928, the inflationary policies of the capitalist West could be relied on for promoting the growth and perseverance of the Central European welfare states. Then the June 1928 stabilization of the franc stopped capital exports from France and the volume of new foreign loans floated in the United States dropped by some 50 percent when the Federal Reserve started increasing its interest rates. The party was over.

One of Mises's professional duties was to help attract capital to Austria. In the international meetings for the semi-public Kammer, he represented his country and sought to protect its interests by promoting Austria's reputation as a good credit risk.¹ For example, in late March and early April 1930, Mises went on a mission to London to promote an English-language brochure that Hayek's Institute for Business Cycle Research had prepared for the Kammer's propaganda department (what we would now call a public relations office) in London.²

He also was on a private mission: he had to see Margit again. She had never written after leaving Vienna the year before. He somehow learned her address and they met on his very first evening. She recalled: “From the first look—from the first moment—everything was as it had been before. We both knew it never would change.”³ A few months later, she returned to Vienna—private mission accomplished.

Mises's official mission was one of his less successful undertakings. After the Wall Street crash in October 1929, U.S. loans quickly became unavailable for Austria and Germany. Even Mises's persuasiveness could not prevent the crisis from spilling over to Austria. It soon turned out that the Austrian entrepreneurs, crippled by a decade of communal socialism, labor unions, and soaring taxes, were unable to provide relief. Stock markets plummeted all over Europe and within a year reached an all-time low.

As usually happens in a financial crisis, all sorts of real and self-appointed experts advertised their plans to solve the problem. These plans invariably involved increased government intervention. The great panacea was meddling with the gold standard. Several well-intentioned amateurs sent their reform proposals to Mises. Not one of them had actually studied any of his writings. They just sought a renowned monetary expert to give leverage to their ideas. One of them actually proposed a currency based on electricity! Mises usually replied, and in one case even said he would welcome a publication of the gentleman's proposal; a public discussion of these views would be instructive and help to bring about a solution to the present monetary problems.⁴ This was no idle talk; he sometimes arranged such discussions himself. A case in point was Charlotte von Reichmann, a young economist from the University of Frankfurt. Unlike the cranks, she had actually read Mises's monetary theory. In fact, she had devoured all of his books and admired them very much. Still, in her doctoral dissertation she had advocated a substantially different (inflationary) point of view on the nature of credit, claiming that even paper-money credit was true capital. When she sent her dissertation to Mises in December 1931 and solicited his comments, she was quite surprised to receive a very appreciative response, plus an invitation to give a talk to the Nationalökonomische Gesellschaft.⁵

In 1930, the Austrian government asked Mises to join an ad hoc Economic Commission to study the causes of the difficulties that plagued the country: permanent high unemployment (in 1929, some 200,000 or 14 percent of the workers in industry and commerce were without jobs), numerous bankruptcies, idle production facilities, and the lack of profitability for a large number of Austrian businesses. Mises was one of the three members of the anonymous Editorial Committee that eventually issued the final report of December 1930.⁶ The other two members were Edmund Palla, a labor-union leader and Secretary of the Chamber of Labor, and Engelbert Dollfuss, a rising leader of the Christian-Socialist Party who would later become Austrian chancellor.

The report detailed the factors that weakened the competitiveness of the Austrian economy. It pointed out that the inflation years (1914–1925) had produced an inflationist mentality in the Austrian population. Continual increases of prices and incomes were now considered to be the normal state of affairs.⁷ This mentality conflicted with stable or declining selling prices on world markets, to which Austria was exposed after the introduction of the gold-exchange standard in 1925. Once on the standard, wholesale prices could be increased only for local products and only to a limited extent, while production costs continued their increase. Taxation had risen by more than 30 percent, payments for the public social-security systems by more than 50 percent, and the wage rates of the 1.3 million industrial workers by some 24 percent. The increase of production costs had squeezed corporate profits, which in turn made it impossible to attract the foreign capital direly needed for a quicker adjustment of Austrian industry. The committee therefore recommended a reduction of public expenditure and of public revenues, as well as a renegotiation of wage contracts in order to reduce total labor costs.

Mises was not happy with the report.⁸ He thought it failed to identify the main culprits—the welfare state and the labor unions. He used his next opportunity to set the record straight, writing under his own name. He also put the discussion of crisisrelated topics on the agenda of his private seminar, which in the academic year 1930–1931 dealt for the first time in many years exclusively with economic problems.⁹ Similarly, in the winter semester, the university seminar dealt with the formation, maintenance, and consumption of capital.¹⁰ The summer semester was to deal with methodological problems, but it was unexpectedly cancelled because Mises had to travel to the United States for a meeting of the International Chamber of Commerce.

These sessions were far more satisfying for Mises than were the public debates into which he had been drawn by his reputation as Austria's greatest monetary theorist. During the crisis, he confronted some of the more influential money cranks in public debate. He argued that the Great Depression was more lengthy and severe than any former bust because it resulted from the combined effect of inflation and the regimentation of businesses.

In one of his public appearances, in late October 1930, Mises debated Robert Eisler, an Austrian economic historian affiliated with the Paris office of the League of Nations.¹¹ Eisler had written a book on the history of money and taught courses on his monetary policy schemes at the Sorbonne in Paris and the prestigious private Institut Universitaire des Hautes Études Internationales in Geneva. He advocated the entire program of anti-crisis policies that later became known as Keynesianism. Eisler claimed that the post-1929 crisis had resulted from previous deflationary policies and in particular from the deflationary gold standard. In his view, the crisis could be overcome by a simple change in the technique of international currency management: the abolition of any form of gold standard and the creation of an international fiat money system. This would solve various problems in the labor market, agriculture, housing and other fields. It would finance huge public works, give sufficient wages and old-age pensions to workers, and guarantee extraordinary bull markets for entrepreneurs and bankers. It would even appease social antagonisms within society.

No written account of the Mises-Eisler debate remains, but Mises's argument can be inferred from a public lecture that he delivered a few months later to the plenary meeting of the Deutsche Hauptverband der Industrie, the association of German industrialists in Czechoslovakia. The title of the lecture was “The Causes of the World Economic Crisis.”¹² He delivered it on February 28, 1931, and it was soon published under a slightly different title in a major economics series that also featured many socialist and interventionist analyses of the crisis.¹³