Return to Foreign-Exchange Controls

After his return from the ICC meeting in Washington, Mises spent two busy months trying to limit the political damage of the Credit-Anstalt crisis. When he left Vienna at the end of July, he had helped beat back attempts to officially establish a system of foreign-exchange controls that would have thrown Austria back to 1922. He returned to Vienna in mid-September—just in time to learn that the Bank of England had abandoned the gold standard, refusing to redeem its notes in gold.⁶⁶ Mises was shocked and feared the worst. He surprised the members of his seminar, but especially his English student Ursula Webb with the announcement that “In one week, England will be in a hyper-inflation!”⁶⁷ He still did not fully anticipate the political landslide that soon set in. A week later he left Vienna again, this time for lectures in London and Frankfurt.⁶⁸ When he returned to Vienna on October 6, the government had officially reintroduced foreign exchange controls, instituting a return to the bad old days he had thought were gone forever. As he wrote to one of his friends:

Events in Austria are taking a turn that causes me to fear the worst. We have found ourselves in a controlled economy once again. Foreign currency stocks are being “managed,” a kind of Central Economic Agency, albeit under a different name, is being set up for each of the various branches of industry... usury laws and seizures lie just ahead. People have learned nothing and have forgotten everything. You can imagine my disposition under such circumstances.⁶⁹

The collapse of the brief period of free trade that had blossomed in the second half of the 1920s was now at hand. More bad news poured in. Some of Mises's former allies were now advocating inflation using theories that had been refuted countless times.⁷⁰

One incident epitomized the entire situation: In July 1930, Mises had been invited by the League of Nations to write a memorandum for the League's Gold Delegation. The mission of the delegation was “to examine into and report upon the causes of fluctuations in the purchasing power of gold and their effect on the economic life of the nations.” Among its members were Keynes, Cassel, Sprague, and Janssen—certainly a bad sign. Still Mises complied and in early October 1930 sent his paper to Alexander Loveday, the head of the League's (Rockefellersponsored) economic intelligence unit.⁷¹ Publication was delayed, however, and a year later Mises was notified that none of the memoranda that had been solicited for the Gold Delegation would be published, ostensibly for budgetary reasons.⁷²

Mises was invited to sit on the new Foreign Exchange Board, whose job was to do everything of which he disapproved. He probably accepted the position in order not to hurt Austrian credit abroad: his absence from the Board would have disquieted foreign investors.

In a letter to Robbins he described the new system and his function within it:

Just when I returned to Vienna, the crazy foreign-exchange control was introduced. At the top of this unfortunate system is a Foreign Exchange Board, which decides everything pertaining to our foreign commerce and thus is some sort of a general director of the national economy. I am the only non-interventionist member of this body, into which I fit as well as into the executive council of the 3rd International in Moscow....

There is a general enthusiasm for new interventionist measures and for “state capitalism” and “hyper-interventionism.” Any resistance against this policy is peremptorily opposed... by pointing out that England too is now going to adopt a policy of high protective tariffs.⁷³

The power of the Board was soon cut back quite drastically, possibly as a consequence of Mises's agitation from within. Only two weeks after Mises had presented it as a central planning bureau in a letter to Robbins, he wrote to Hayek that the Board was “a totally superfluous institution since it has no power” and that he regretted having agreed to spend his time there.⁷⁴

Still, a Board position seems to have been powerful enough to influence the allocation of foreign currency to individual firms, giving Mises the unwanted power to grant favors to special interests. In January 1932, for example, he received a letter from Abraham Frowein, an important German industrialist and vice-president of the International Chamber of Commerce. Frowein owned a silk factory in Vienna. The firm's activities depended crucially on access to foreign currency to pay for imported raw materials. Mises ignored the offer to “return any services as a matter of course” and instead referred Frowein's representative to a colleague on the Board who was responsible for the silk industry.⁷⁵

Since no Austrian could buy foreign currency or take schillings out of the country, traveling was almost impossible for ordinary citizens—a considerable problem for Mises, who often went abroad for lectures.⁷⁶ But he had just concluded a new contract with Gustav Fischer for a new edition of Socialism, and Fischer agreed to become Mises's unofficial banker. He did not pay royalties to Mises's account in Vienna, but kept the money and sent it piecemeal to the hotels where Mises stayed on his trips in Germany.⁷⁷ This is how Mises was able to participate, for example, in board and committee meetings of the Verein für Sozialpolitik in Berlin in early January 1932, and in the Verein's annual convention in September of the same year.

Back home in the fall of 1931, Mises organized a meeting of the Nationalökonomische Gesellschaft and in a passionate speech attacked the notion that the current crisis resulted from shortcomings of capitalism and required the remedy of more government intervention. The only rational response to the present calamity was finally to stand against the labor unions, which were the root cause of the inflationary policies behind the crisis. The lecture drew international attention.⁷⁸

Some reacted with hysteria, especially after Mises published his position as “Die Krise und der Kapitalismus” (Crisis and Capitalism).⁷⁹ His former student Hedwig Lemberger claimed that economic science was bankrupt if it had no other solution for unemployment than to allow the unhampered market to reduce wage rates. She argued that Mises's Manchester-liberal analysis applied only to the conditions of the nineteenth century, while in the present crisis unemployment resulted from unmanageably fast technological progress, as Emil Lederer had explained.⁸⁰ Mises replied:

I cannot understand why it is a declaration of bankruptcy for economic science to see one of the causes of disruptions of economic life in the labor-union policy of keeping wage rates above the level that would be established on the unhampered market, and in the fact that government supports this policy through unemployment relief and the refusal to protect job-seekers.... Streamlining has nothing to do with unemployment. There was streamlining also in the nineteenth century, maybe even to a relatively greater extent than today. But because at the time there were no interventions in the formation of wage rates, the fired workers found employment in new and extended industries. They would even have been absorbed far quicker but for a number of government regulations that hampered their freedom of migration and change of profession. My assumptions do not merely rely, as you believe, on the experience of times long past, but especially on irrefutable theoretical considerations.⁸¹

Eventually the crisis was settled the same way as the post-war crisis ten years earlier: more foreign debt. In July 1932, Austria secured a foreign credit of 300 million schillings from the League of Nations. The road was free for a new beginning.

The crisis prompted a renewed interest in business-cycle research, and in seeking the means for government to steer the economy away from the increasingly dramatic swings between boom and bust. The Vienna Institute for Business Cycle Research published two monographs that were to become classics in the literature of economic science: Hayek's Preise und Produktion, and Fritz Machlup's Börsenkredit, Industriekredit und Kapitalbildung. Mises was very proud of these works, especially of Machlup's book, which he called a masterpiece. Austrian analyses of the fundamental practical issues of the day were much needed to counter prevailing anti-capitalist views. Mises's educational mission over the past ten years now paid off. Many years later, a member of the Mises orbit recalled in correspondence the “die-hard [kdmpferische] group of Mises, Hayek, Strigl, Morgenstern, and Meinl”⁸² that used all available media and institutions to plead the case for economic liberty and against government interventionism.⁸³

These activities had their impact on public policy. In distinct contrast to the massive proto-Keynesian deficit-spending policies that in the early 1930s came to be applied in other western countries, the Austrian government pursued a program of comparative austerity—with some very positive results. From 1932 to 1937, national production dramatically increased in industry and agriculture, the government's budget was balanced, foreign public debt was cut in half, central-bank reserves doubled, and unemployment shrank from 310,000 to 220,000.⁸⁴

One ally of this group, Fritz Wolfrum proposed a radical remedy to the situation: total liberalization of the monetary sector. Wolfrum not only recommended rescinding foreign-exchange controls. He also called for the abolition of all impediments to private minting and the private issue of banknotes. This reform, he argued, would not only be a way out of the present calamity and prevent similar crises in the future, it would also lead to monetary liberalization in other countries. This in turn would raise the price of precious metals, further rewarding the early adopters:

It is certain that the country that first liberates the monetary economy will benefit most from its fructifying benefits; and it is obvious that, once the process is set in motion, each country must follow the others.⁸⁵

As Wolfrum's case demonstrates, the crisis divided the wheat from the chaff within the classical-liberal movement. Some abandoned liberalism and returned to interventionism, while others became more radical in their defense of liberty. Lionel Robbins wrote to Mises:

Every day reveals fresh incursions of the system of free exchange and private property and it becomes clear that the number of persons capable of putting up an intelligent defense of capitalist institutions is very small. Behind the scenes we do what we can but there are not many of us to carry on the battle.... The sad thing about this crisis is that it seems to be driving so many who at one time were good liberals over to the other side. With me it has been just the opposite: all sorts of doubts and mental reservations have been cleared up and I am conscious of being much more “streng” than in the past.... Certainly to judge from the quality of the argument on the other side, it ought not to be difficult to defeat it on that plane.⁸⁶

Mises agreed. At the end of December, he wrote a two-part article for the Neue Freie Presse on the gold standard and its enemies. He argued it was impossible to replace gold in international exchanges. And even in domestic exchanges, the position of this metal would only grow stronger the more the national governments followed their inflationary policies.⁸⁷

Mises accepted a proposal of the journalist Robert Scheu who, in February 1932, had invited him to take part in what was then an entirely new format: the talk show.⁸⁸ Scheu's idea was to conduct live interviews with prominent experts on the pressing economic issues of the day. The interviews would be held in a public auditorium and broadcast to a radio audience. The first interviewee, in early March 1932, was Othmar Spann. The evening was apparently a great success despite the fact that Spann had rarely given public lectures. Still Mises hesitated. From previous correspondence Mises knew Scheu to be a money crank, so he sought to establish a list of questions to which he would reply. Mises eventually appeared on the talk show, on Thursday, March 17, to discuss the gold standard compared to other monetary systems, the regulation of the monetary circulation of a national economy, the role of central banks in monetary policy, the creation of national currencies, and the theories of Silvio Gesell—Germany's most popular money crank who advocated new laws to encourage the spending of money by a special tax on “hoarding,” that is, on savings.⁸⁹

In early April 1932, then, Mises eventually got the Kammer to adopt a resolution against the artificial exchange rate of the schilling. Albert Hahn wrote from Frankfurt, asking Mises to what extent he was responsible for the contents of the Kammer report, to which Mises replied:

The resolution has resulted from a first draft that I wrote, but after difficult and lengthy negotiations it has been revised to obtain unanimity through compromise. Hence, I myself cannot of course take public responsibility. I would have stated things less ambiguously.⁹⁰

The Austrian government did not change its course, and by June a return to the old gold parity was no longer possible without upsetting the price system, which had adjusted to the circumstances. The economic situation had considerably deteriorated and Mises was furious, fulminating in a letter to his Dutch colleague and friend G.M. Verrijn Stuart:

In Austria we stand on the debris of the interventionist and state-socialist system. All of the public firms have passive balances... and considerable sums of tax money must be used to compensate for these deficits. Unemployment grows and unemployment relief devastates public finance.... But the peak of the madness is the foreign-exchange controls.

He who seeks to study the consequences of thoroughgoing state socialism, city socialism, and interventionism should pursue these studies in Austria, where we enjoy government interventionism “without gaps.” We have reached the point where those who “merely” argue in favor of protective tariffs and against the prohibition of imports are decried as free traders.⁹¹

It was probably in these days that Mises became a “metallist”— having supported the gold exchange standard, he now advocated a metallic currency as a way to keep government out of monetary policy altogether.⁹² More than twenty years earlier, in the first edition of his Theory of Money and Credit, he had come close to poking fun at the simpletons who believed coins of precious metal were money in some stronger sense than banknotes were.⁹³ As a young man, he had come across gold and silver coins only as collector's items (his father had a famous collection). He had always understood the merit of a metallic standard to keep the quantity of money independent of political manipulation, but he had never advocated the actual circulation of gold or silver coins. But now the evidence was undeniable: governments could not be trusted even with the production of money.

He remained a monetary metallist for the rest of his life. In a roundtable discussion on the gold standard that took place in January 1948 Mises spoke only once, and only to underline a point made by another speaker:

Under present conditions no return to the gold standard is possible without a return to an effectual circulation of gold coins.... If gold coins are employed in daily transactions, if everybody is used to receiving and giving away gold pieces, if people are accustomed to carrying gold coins for retail purposes, the public becomes aware of the fact that gold is the nation's standard money and that the country is under a gold standard. This cognizance has not merely pedagogic value. It enables the average citizen to realize in time whether his government is clinging to sound monetary policies or whether it is tampering with the currency system. The weakness of a gold standard without effectual circulation of gold coins consists precisely in the fact that it makes it extremely difficult for the average citizen to discern inflation in its early stages.... An effectual gold coin circulation makes the voter the guardian of the gold standard. This is its main function.⁹⁴