Popular Fronts

Meanwhile the enemies of civilization made further inroads. By the mid-1930s, Stalin had launched a new offensive both in national politics and in the international theater. Through a series of show trials he effected the wholesale execution of his most important rivals as well as their constituencies within the Communist Party. In Geneva, his foreign minister, Litvinov, forged an “anti-fascist” alliance that for the first time brought the democratic western states into coalition with the internationalist socialists in Moscow.⁵⁴ The common ground of the alliance was, of course, opposition to the nationalist socialists in Rome and Berlin. As things turned out, Litvinov's move proved to be successful. In retrospect it seems to have been by far the most effective strategy in the twentieth century for undermining western resistance to statism of the Russian variety.⁵⁵

At first western diplomats in Geneva resisted the Russian advances. But this reluctance crumbled under the impact of the Spanish Civil War (1936–1939). In Western Europe, all attention was thenceforth focused on nationalist socialism. The presence of fascist governments in Berlin, Rome, and Madrid posed an immediate threat to the security of France and the United Kingdom, while the menace of internationalist socialism seemed remote. None of the diplomats in Geneva could yet imagine the Red Army standing on the Elbe and in Vienna. This lack of imagination was reinforced by the Communist infiltration of the Roosevelt administration in the United States. Mrs. Roosevelt in particular entertained an entire coterie of Communist intellectuals.⁵⁶

Roosevelt had swept the States with a panoply of new laws and bureaus that made the country increasingly resemble Old Europe.⁵⁷ The New Deal was new for America, but old for Europeans. Mises recognized in the American events the very follies he and others had denounced ever since the war socialism of World War I. He wrote:

President Roosevelt's New Deal has been greeted with enthusiasm, not only in its country of origin, but also throughout the world. The reason for this general affinity is that the essential idea of the New Deal conformed exactly to public opinion. Everyone believed that it was necessary to replace capitalism and private enterprise with more government intervention. Although certain isolated measures were criticized, the new policy as a whole was received favorably⁵⁸

Most economists believed that American capitalism was now effectively doomed. Schumpeter, who in the year of Roosevelt's election had moved from Bonn to Harvard, was widely quoted as complaining that he could just as well have stayed in Germany.⁵⁹

One of the remaining differences between the new American policies and the new policies in Germany concerned Communism. It quickly became obvious that the new American administration was pursuing a policy of rapprochement in its relations with Soviet Russia. One of Roosevelt's very first actions was to establish a bank to channel funds to the Bolsheviks. Though not a member of the League of Nations, the United States had nevertheless joined the anti-fascist alliance.

In the spring of 1936, Communist-initiated “popular fronts” won elections in France and Spain. Although the Communists stayed in the background, ostensibly to fend off any concerns about secret ambitions for Bolshevik-style coups d'état, the fact remains that for the first time ever, these countries had socialist governments. The French socialists now did what their Austrian and German comrades had done eighteen years earlier. Léon Blum and his government nationalized the arms industries, outlawed right-wing political organizations, increased compulsory education, outlawed resistance against labor-union violence, imposed a mandatory increase of wage rates, coercively increased minimum wage rates even further by reducing the labor time to forty hours per week without reducing weekly salaries, imposed a minimum annual vacation of two weeks for every employee (along with subsidized train tickets courtesy of the taxpayer), and forced each firm with more than ten employees to pay for worker “delegates” to supervise the application of the new policies.

Not surprisingly, a great number of small and medium-sized firms had to cease operations under this wave of regulations, and many of the workers who lost their jobs in this process could not find employment elsewhere because the surviving firms could not afford to hire them at the new minimum wage rates. Capitalists fled the country, and Léon Blum soon had to rely on public debt and inflation to keep his government functioning at all. In June 1937, he resigned after little more than a year in power. In April 1938, the new Daladier government took over, reversing virtually all the new socialist laws and crushing labor-union power in short but violent confrontations.

In Spain, the correction was far less swift and far more violent. Mises traveled to Madrid in May 1936 to attend a conference for the promotion of international studies. In a press interview he said that the conference was a step forward in improving international relations.⁶⁰ But Spain's relations with other nations made no further progress before the country imploded. Mises reported to Machlup: “The anarcho-syndicalists are preparing the takeover, and the people on the ‘right’ sharpen their long knives.”⁶¹

In July 1936, the new Popular Front government had hardly taken office when civil war erupted. After more than two years of extremely bloody fighting, in the course of which more than one million Spaniards lost their lives, the authoritarian insurrectionists under General Franco marched victoriously into Madrid.

The Spanish translation of The Theory of Money and Credit had appeared just a couple of weeks before the outbreak of the war.⁶² Now it was condemned to oblivion until, decades later, a group of determined economists resuscitated this work. Outside Spain, the case for laissez-faire fell on deaf ears too while the opponents of the free society found a growing audience—especially if the rhetoric for more government control was flexible enough to accommodate a wide variety of political regimes. Thus John Maynard Keynes made a splash in Germany, where the translation of his General Theory appeared the very same year as the original. In the preface to the German edition, Keynes boasted that his theory was particularly well suited for totalitarian regimes and lamented that it was less fit for the conditions prevailing in freer societies.⁶³

Mises did not comment on Keynes's General Theory when it appeared in 1936. He reacted only when the Keynesian movement came into full swing and elevated the British economist to the status of a guru of the profession. In Mises's eyes, the Keynesian revolution was insignificant from the point of view of the history of ideas. Keynes had not brought forth a single new doctrine.⁶⁴ Even his major fallacies were old and had been refuted hundreds of times. The proper way to deal with Keynesianism, therefore, was to consider it from a sociological point of view. In 1948, Mises wrote:

For a correct appraisal of the success which Keynes' General Theory found in academic circles, one must consider the conditions prevailing in university economics during the period between the two world wars.

Among the men who occupied the chairs of economics in the last few decades, there have been only a few genuine economists, i.e., men fully conversant with the theories developed by modern subjective economics. The ideas of the old classical economists, as well as those of the modern economists, were caricatured in the textbooks and in the classrooms; they were called such names as old-fashioned, orthodox, reactionary, bourgeois, or Wall Street economics. The teachers prided themselves on having refuted for all times the abstract doctrines of Manchesterism and laissez-faire.⁶⁵

Two years later, he added:

The great [classical] economists were harbingers of new ideas. The economic policies they recommend were at variance with the policies practiced by contemporary governments and political parties. As a rule many years, even decades, passed before public opinion accepted the new ideas as propagated by the economists, and before the required corresponding changes in policies were effected.

It was different with the “new economics” of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his “General Theory” was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced.⁶⁶