Postwar Socialism and the Specter of Anarchy

Official positions in the new government did not always reflect actual power. For instance, because of the support of the most militant groups within Austrian social democracy, Otto Bauer (who headed the Ministry of Foreign Affairs) was even more influential than Karl Renner, the chancellor. The situation changed only in 1927, when a social-democratic insurrection was defeated with unexpected ease.

The Ministry of Foreign Affairs had a Trade Policy Department that was responsible for the preparation of the traderelated aspects of the forthcoming peace negotiations. The department hired several external consultants strongly affiliated with the Austrian School of economics: Schüller, Mises, Somary, and Steiner.⁸ Mises's longstanding personal acquaintance with Bauer, Lederer, and Schumpeter—former fellow-students and colleagues from the War Economics department of the War Ministry—was certainly one of the motives behind the decision to involve him in the new government. Another was that Bauer knew Mises was loyal to the Austrian state. Yet a third motive was the time-honored strategy of containing the most knowledgeable opponent of socialist schemes. But Mises's involvement was a double-edged sword. Had the war not taken place, or the empire not disintegrated, the government and the wider Austrian public would certainly have noticed his views on monetary affairs; after all, he had acquired a solid reputation as an expert on money and banking, and was also the spokesman for the Kammer on these questions. But now his views bore the stamp of political authority. While he could not say everything that he knew and believed, what he did say gained immediate and widespread attention: Still his impact on actual government policy remained moderate. Mises's main mission was to lead tedious negotiations on prewar and wartime financial obligations with foreign businessmen, bankers, and government representatives. Within the government, his colleagues sought his advice, but usually did not heed it.⁹

In the case of Bauer, Mises's influence proved to be shortlived. It was limited to one decision, but it was a critical decision of over-arching importance:

It was solely 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 and against the will of the Party leadership were so inexperienced, incapable, and torn by mutual rivalry that they could not even form a half-way 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.¹⁰

Until that fateful winter of 1918–1919, when Mises persuaded Bauer to stop Bolshevism in Vienna, the relationship between the two men was based on mutual esteem. Mises knew personally almost all Marxian theorists of Western and Central Europe, but in his eyes only Bauer “surpassed modest mediocrity.” He recognized that Bauer had great knowledge of philosophy, classical economics, history, and the natural sciences, and that he was an excellent speaker who could quickly master the most difficult problems—“he could have been a statesman, if he had not been a Marxist.” The problem, then, which eventually corrupted Bauer's intellectual, moral, and personal integrity, was that all his learning and all his activities were based on an a priori commitment to Marxism.

Otto Bauer arrived at the University of Vienna as a devout Marxist.... [He] had made up his mind never to betray his Marxian conviction, never to yield to reformism or Socialist revisionism, never to become a Millerand¹¹ or Miquel.¹² No one was to surpass him in Marxian zeal. His wife, Helene Gumplowicz, later strengthened him in this resolve to which he remained faithful until the winter of 1918–1919. At that time I succeeded in convincing the couple that a Bolshevist experiment in Austria would have to collapse in short order, perhaps in a few days. Austria depended on the importation of food from abroad, which was made possible only through relief assistance from former enemies. At no time during the first nine months after the Armistice did Vienna have a supply of food for more than eight or nine days. Without lifting a finger, the allies could have forced the surrender of a Bolshevist regime in Vienna. Few people clearly recognized this state of affairs. 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, that is, the Christian-Social Party, were ready to welcome Bolshevism with the same ardor archbishops and bishops twenty years later welcomed Nazism. Bank directors and big industrialists hoped to earn a good living as “managers” under Bolshevism....

I knew what was at stake. In a few days Bolshevism in Vienna would have created starvation and terror. Plundering hordes would soon have roamed the streets of Vienna and, in a second blood bath, would have destroyed the remnants of Viennese culture and civilization. Throughout many nights I discussed these problems with the Bauers until I finally succeeded in convincing them. The resulting restraint of Bauer determined the course of events in Vienna.

He went on:

[Bauer] could never forgive me for having made him take the position of a Millerand. The attacks of his fellow Bolsheviks especially hurt him. 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.¹³

Bauer and his consorts were subsequently confined to indirect means for achieving their beloved communist state. Rather than copying the Russian model of political revolution they now sought to bring about communism in a piecemeal fashion.¹⁴ This involved three major strategies: (1) partial expropriations, (2) supplanting the free market with a system of artificial “prices” for labor and consumers' goods, and (3) eradication of any remnants of old authority.

Karl Renner

On this last front, the Viennese socialists achieved at least one lasting victory. On April 3, 1919, a law was enacted prohibiting the use of all titles of nobility and honors. The imposing “von”—concise designation of nobility—was verboten in any printed document. And the same order was given in respect to the honorific “Edler,” the noble predicates “Erlaucht,” “Durchlaucht,” and “Hoheit,” and the noble class designations “Ritter,” “Freiherr,” “Graf,” “Fürst,” and “Herzog.” As far as business cards, books, and other printed documents were concerned, the prohibition has remained effective to the present day. In interwar Austria, however, the old ways were maintained in personal encounters and oral communications. Mises's name was rendered as “Ludwig Mises” on his book publications and correspondence, but in daily business he would still be addressed as “Professor von Mises.”

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, entadelt von Karl Renner—ennobled by Karl the Great, denobled by Karl Renner.

As for the expropriation of private property, the government's policies had a far less lasting impact, but they did do considerable damage for the few months they were in effect. A major agent of this destruction was a new government office headed by Emil Lederer, called the Staatskommission für Sozialisierung (State Commission for Socialization), which worked closely with its sister organization in Germany. The German agency had convened a group of experts to examine the question of whether the socialization of coal mining was possible.¹⁵ On February 15, 1919 these experts—with the cooperation of Joseph Schumpeter—published a report in which they argued that socialization was not only possible, but necessary to avoid a mere “governmentization” (Verstaatlichung). They made no attempt to explain the distinction.¹⁶

Emil Lederer

The Staatskommission epitomized the embarrassment of a government that was supposed to instigate a socialist revolution, but had no idea how to do so. The members of the commission knew they had to come up with a justification for its existence. Lederer presented it at the first postwar plenary meeting of the Verein für Socialpolitik, which took place in September 1919 in Regensburg. He criticized the present state of socialization in Russia, ridiculing it as a mere “consumers' socialism.” The great goal of the German-Austrian government must be the complete socialist transformation of the economy, for which Lederer discussed two strategies. One was to put control of each individual firm in the hands of its workers; this, Lederer claimed, was liable to establish “economic democracy” and was therefore a first step toward democratic socialism in the whole society. The second strategy was to levy a huge one-time capital tax to pay back the war debts.¹⁷ This by itself would immediately put the state in control of industrial capital. The only remaining problem would be to make sure that this “governmentization” would be followed by a true “socialization.” But again, this distinction was not explained.¹⁸

The only concrete proposal on the table seemed to be the onetime capital levy, a measure that had the backing of ostensibly reasonable people such as Schumpeter. Mises tried to lead the Kammer into steadfast opposition to this measure.¹⁹ He argued that the imposition of the capital levy would force Austrian entrepreneurs into debt, making them dependent on financial capitalists. Mises also revealed what he perceived to be the long-term political goals behind the innocuous “one-time” measure. He pointed out that the socialists talked only of sharing the profits, but that this left out the actual structure of enterprise:

If, however, the state owns shares in all enterprises, it will also share in losses; moreover, it will even be forced to concern itself with the administration of individual businesses, just that, however, is what the socialists want.²⁰

The socialist government's impact was most devastating, however, in its perpetuation and extension of the wartime system of price controls. The previous imperial governments had started supplanting the free market by a system of administered “prices” for labor and consumers' goods. Right or wrong, the purpose of this approach was to concentrate all economic energies on the war efforts. When the socialists came to power, they made this system even more encompassing; in their hands, they believed, it would become a means of transforming bourgeois and capitalist Austria into a paradise of the proletariat. Thus government agencies administered higher-than-world-market prices for labor services, and lower-than-world-market prices for agricultural products.

The socialist beggar-thy-neighbor model had set an example for the entire country in ways that had not been anticipated by the rulers in Vienna. The provinces were not willing to comply with Vienna-style socialism. They had their own, homegrown schemes in mind. Each province now sought to loot their local rich, rather than share the booty with Vienna. These conflicts of interest, a natural consequence of the government's socialist agenda, had already made themselves felt under wartime socialism.²¹ Now they had broken out full-scale and precipitated town and country into economic warefare. This left Vienna without any resources but the monetary printing press. Rapid political and economic disintegration was accompanied by a deterioration of the krone. Mises wrote to Lederer:

Here the condition of the currency is hopeless—a hopelessness that results from the pitiable state of public finance. Only the farmers can still pay taxes, and they openly declare that they will not pay anything. On the other hand, the government deems it necessary to spend millions per month to feed an urban population that does not work.²²

Unlike the Russian Bolsheviks, Vienna socialists were unwilling to coerce the provinces into obedience. They perceived the crisis as constitutional, and hoped to remedy it by legal means. They failed to see that the real issue was a profound conflict between Vienna and the provinces that was sparked by their own economic policies.

Mises analyzed the situation in a December 2, 1919 lecture to the Association of Austrian Economists on “the political relations between Vienna and the provinces from the overall economic standpoint.”²³ He argued that Vienna could only thrive by a continued participation in the international division of labor. Austria's harvest could never suffice to feed Vienna's workers; only foreign food supplies could, and these had to be bought in exchange for industrial exports. Even the proposed annexation to Germany could not change this state of affairs. The present policy of funding government by printing new money was a typical short-run device that survived only by depleting the capital accumulated in pre-socialist decades. It was bound to wreak havoc on the currency and the economy.

These public comments understated his real perceptions. He was after all a public figure and therefore obliged by law not to harm the nation. Only after World War II, when he no longer held appointed public office, did he become blunt in commenting on public policy. However, one can infer his real views on the state of Austria in late 1919 from a confidential memorandum that he wrote for Vienna's leading bankers and industrialists.²⁴

We are approaching the collapse of our currency. Our monetary policy presently knows only one means: printing banknotes, printing ever more new banknotes. There is hardly a prospect of change. One cannot legitimately ask the social-democratic party suddenly to acknowledge that the socialist idea has imploded and that all that it has proclaimed for decades has turned out to be wrong. One cannot expect that the Christian-Social party, whose ideal is a stationary economy of autarchic farmers and small craftsman longing for “subsistence,” which for decades has championed professional licenses and high tariffs, which along with the prince of Liechtenstein has advocated the program of an “Austria without factories” and has fought with Lueger and Schlesinger for the “Guilder of the Fathers” and for “people's money,” one cannot expect this party suddenly to become free-trade and liberal. Neither can one hope that experience will teach any economic and financial insights to the German Nationalists, who have always sought to top the social-reform radicalism of the other parties, who today have especially become the advocates of those broad layers of public employees whose syndicalism has knocked out our public finance, and who have learned nothing about foreign policy and have not forgotten anything despite the terrible defeat in the world war. It is the misfortune of this country, which can only exist on the basis of industrial exports, that the spirit of modern economic policy has remained alien to its population. Our policy moves entirely within the intellectual orbit of imperialism, of mercantilism, of socialism, and of fantasies about a “national” economy.²⁵

Mises pointed out that influential circles within the government believed inflation to be of secondary importance and of no direct pertinence to the political problems of the day. These men thought they could suppress the domestic consequences of inflation (price increases) through price controls, and that the international consequences (plummeting exchange rates) could be neglected because they did not directly affect the nation. As Mises explained, however, this benign neglect for the krone's plummeting exchange rate was extremely shortsighted. Most of the working classes' food supply came from abroad through contraband channels—in fact, these black markets were all that was keeping the Viennese population alive. If no end was expected for the decline of the krone exchange rate, the contraband merchants would eventually refuse to be paid in krone banknotes. The consequence would be immediate and impose dire hardship on the urban masses. Mises went on:

Given the mentality of our population, this will infallibly lead to excesses. People will first plunder retail businesses and then public buildings, bank palaces, and private apartments. The last feeble remnants of government authority will dwindle; armed bands will attempt to rob the country—an attempt that will everywhere but in the immediate surroundings of industrial centers end in their bloody defeat, because today the rural population is armed and is supported by well-armed and disciplined local police forces.

This anarchy within the country is the more dangerous because there are also great dangers threatening from abroad. Excesses perpetrated by the popular masses can easily lead to hurting foreign citizens, from which many a pretext may be derived for an invasion by foreign troops. It is true that the Entente does not care much for the state of our country and also that her present military weakness prevents her from intervening. But things are different in the cases of Hungary and Czechoslovakia. Both states control powerful and well-trained armies. In both countries, chauvinistic prestige considerations make for an eagerness to occupy parts of German-Austria and Vienna in particular. The Czechs are embarrassed by the fact that they did not gain their independence through glorious military achievements; not without reason, the Czech militarists consider the Czech Army's cowardly running away from Hungary's Bolshevist troops a dishonor that they want to make good for. The Magyar troops too are eager for “national” glory;... Both Czechs and Magyars will seize any opportunity to retaliate for the alleged injustice that “Vienna” has perpetrated on them. In truth the Czechs seek revenge for the heavy disappointments occasioned by their young Czech state, and the Magyars seek revenge for the plunder that the Romanians have carried out in Hungary²⁶

Mises knew what he was talking about when he mentioned Hungarian appetites for invading Vienna. In the early summer of 1919, he led negotiations with representatives of the new—and as it turned out, short-lived—Communist government of Hungary, concerning the property rights of Austrian citizens in Hungary. The official leader of the Hungarian delegation was the ambassador to Austria, but this man rarely took part in the meetings and thus the real leaders on the Hungarian side were one Dr. Görög and one Dr. Polanyi. Görög was a colorless bureaucrat without any strong political feelings, but Polanyi had a brilliant mind and was a convinced Communist who clashed at many meetings with Mises, often in long discussions of fundamental questions of social philosophy²⁷ One can guess that these clashes concerned not only socialism and capitalism, but also the injustices that Vienna had perpetrated on Hungary. Mises therefore knew that the slightest military weakness in truncated-Austria was likely to culminate in a Hungarian invasion. The present Austrian army was too weak to prevent it. The German army could be relied on, but the Entente probably would not allow its intervention; at any rate, precious time would be lost with diplomatic negotiations—enough for a plundering expedition to Vienna to escape unpunished.

Vienna was in fact invaded before the Treaty of Saint-Germain-en-Laye was signed in September 1919, but the invaders were not Czechs or Hungarians—they were Italian troops who forced their way to Vienna to plunder its art collections and libraries.²⁸ The Hungarian Communists certainly would have followed suit, but they were ousted by a counterrevolution. The Treaty then put some constraints on Czechoslovakia and Hungary. A foreign occupation had thus been ruled out, but the internal dangers could not be stopped. Continued funding of the government's socialist experiments by rampant inflation was likely to lead to complete social breakdown within the country, and possibly to a Communist-Bolshevist insurrection.