New Battlefields

In the years preceding the war, the social democratic party had sunk into political insignificance. By 1911, it had splintered into various national organizations and suffered a terrible setback at the Reichstag elections.⁵ But the war and eventual defeat had discredited the political establishment to such an extent that the social democrats by virtue of their “outsider” status now seemed to be the most important political force in the country, though elections could not yet be held to confirm the fact. Their hour of glory came at the very moment when they lost their eminent leader. Victor Adler died on November 11 and Otto Bauer—the Austro-Marxist who had debated Böhm-Bawerk as a student in his seminar—became the number one party official. But while Bauer had the strongest backing within the party, he lacked support in the general population, because of his youth and his radicalism. Leadership of the government therefore remained in the hands of the moderate Karl Renner until June 1920.

The radicals under Bauer tried to push Renner to turn the political revolution into a social and economic revolution as well. They sought fully to nationalize the Austrian economy and to incorporate Austria into the German Reich, which was already under firm social-democratic rule. When these attempts failed (largely because of Ludwig von Mises's personal impact on Bauer, as we shall see) the political climate in German-Austria slowly reversed. Elections in February 1919 gave rise to a constitutional convention, and showed the social democrats to be far less powerful than so many had believed. Renner was forced to admit the Christian Social Party's charismatic leader, Monsignor Ignaz Seipel, into his government, and Seipel's party would come to rule German-Austria for most of the 1920s.

Otto Bauer

In the dramatic winter before the elections, nobody saw those changes coming. People had more immediate concerns. The economic situation in the new Austrian Republic was even worse than in Germany. The average citizen lacked access to basic goods, especially potatoes, sugar, and coal. Traditionally, the Austrians bought these supplies from other parts of the former empire—from their Czech neighbors in the north, from the Hungarian and Galician plains in the east. But now these regions had gained political independence and their new leadership brought international trade to a standstill. The war was lost, stomachs were empty, people were freezing to death, and there was no relief in sight. From a purely financial point of view, the German-Austrians were the great losers of the war among all nations.⁶

In the winter of 1918–1919, most Austrians were optimistic that the new government, composed as it was of an enlightened elite, would eventually overcome the political and economic chaos that was the aftermath of the war. Yet the new men in charge set out to continue and complete the policies of the previous Imperial governments, which had already put in place a system of war socialism. A contemporary observer and personal acquaintance of many of the country's new leaders, Mises explained:

From the beginning the intention prevailed in all socialist groups of dropping none of the measures adopted during the war after the war but rather of advancing on the way toward the completion of socialism. If one heard differently in public... this had only the purpose of dissipating possible doubts about the rapid tempo of socialization and about individual measures and of stifling opposition to them. The slogan had already been found, however, under which further socializing measures should sail; it was called transitional economy.⁷

During the first year of its existence, the national parliament dedicated its sessions to deliberation on “social legislation” and voted the latest socialist wisdom into law. Within a few months, the new government imposed eight-hour workdays, compulsory vacation for workers, compulsory co-management of firms through worker representatives, coercively financed unemployment insurance, and many other such schemes. The educated public looked on Austria as Americans of 1950 would have looked on a U.S. government run by Milton Friedman, Alvin Hansen, and Paul Samuelson. Power and intellect finally united—felix Austria! But the socialists failed, despite their undeniable personal brilliance and economic training.

The cornerstone of the new economic system was the printing press of the Austro-Hungarian Bank. Tax revenue was far too low to pay for the various government handouts and increasing the tax rate was both politically impossible and likely to be inadequate to increase the revenue sufficiently in any case. New debts could not be incurred because there was not enough money left over to lend, and the government's credit was terrible: no one expected it to pay back the pile of debts it had amassed during the war. There was therefore only one way for the new government to establish a large-scale welfare state: print more money.

Nineteen-nineteen was a year of crisis. Serious economic and political problems were compounded through a catastrophic policy of inflation-financed socialism. It was a crisis that brought the young republic to the verge of collapse. Civilization prevailed and the specter of anarchy faded only because a few men stood ready to confront all difficulties to make their country safe for liberty and entrepreneurship.