Like many others, Mises anticipated the outbreak of World War I years in advance. Unlike many others, he dreaded it.
He was a Lieutenant of the Austro-Hungarian Army and dearly loved his country, but he was no chauvinist and despised the militarism and statism that were about to drag an entire continent into catastrophe. A number of eminent men and women in all countries—most notably, Bertha von Suttner in Austria and Bertrand Russell in England—felt the same way and dedicated themselves to making the case for peaceful cooperation among nations and to fighting the frenzy of nationalism.
These private initiatives proved insufficient to tame the war party. The ruling philosophy of government glorification under the guise of patriotism had made its cause irresistible.
After the war, Mises would write on these subjects in detail. He explained how the war had resulted from state worship, in this case, from worship of the nation-state. But for now he thought that he—the agnostic Jew, cultural German, political individualist, scientific cosmopolitan, and Austrian patriot—had to fight the nationalists’ war.
The Austro-Hungarian state was the sole bulwark against the Russian hordes standing ready to invade the land and destroy its Western liberties. Maybe this attitude toward politics was contradictory and anachronistic, but Mises believed he had no choice in the matter, and he continued to believe that all his life. As a contemporary friend and admirer would observe:
A champion of individualism, you cherish strikingly collectivistic orientations. In fact, even under severe duress for your body and total lack of individual comfort, you never lose sight of the whole picture.
First Year in Battle
Early on a Saturday morning, Mises stood ready for departure at Vienna’s crowded Nordbahnhof station. He took the eight o’clock express to the city of Przemysl in his native Galicia, where he would join his unit, the field cannon regiment n° 30. The train had special compartments for officers, which made the long journey more comfortable, and thus he spent the day in the company of Ewald Pribram and Count O’Donell, who were both cavalry officers, and the physician Erwin Stransky, a fellow private lecturer at the University of Vienna. None of the young men would ever forget this journey. Stransky later recalled that Mises spoke about his native Galicia, its history, the peculiarities of its church architecture, etc. The time passed somehow and in the evening, around seven o’clock, Mises left the train in Przemysl, wishing his fellow travelers farewell. It was August 1, 1914.
The fighting did not start immediately. Austria-Hungary did not declare war until August 5, after the war between Russia and Germany had broken out. Even then there was no significant fighting for another two weeks. Both camps needed time to mobilize their forces. This should have been easier for Austro-Hungarian and German troops because of the shorter distances, but the Russians had apparently begun preparations much earlier—shortly after the assassination of the Austrian Archduke on June 28.
The fundamental military problem for the Austro-Hungarian and German alliance was a three-front war with numerically superior enemies on all sides—in particular the sheer overwhelming numbers of the Russian army. In 1914, Russia counted a population of roughly 173 million, as opposed to 68 million Germans and 50 million inhabitants of the Austro-Hungarian Empire. Because of the immensity of the Russian Empire, its 250 potential divisions could not be mobilized quickly. Still the Russian generals managed to throw eighty divisions into battle in the first few months. These troops confronted only ten German divisions and thirty-eight Austrian divisions, ninety out of 100 German divisions being bound up on the Western Front and eleven out of forty-nine Austro-Hungarian divisions stuck on the Southern Front in Serbia.
The mission of the Austro-Hungarian troops on the Northern Front was to block the Russians in order to avoid a Russian invasion of the German plains, which lay almost defenseless. They could not retreat into the Carpathian Mountains, which were easier to defend, because the Russians could trap them there with only a small number of their troops and throw their main force into Germany. Hence, in spite of their numerical inferiority, the k.u.k. armies had not merely to resist, but to attack the Russians in an attempt to keep them in the Galician plains. The k.u.k. strategy was to wear the Russians down in a long series of battles. This strategy counted on the Austro-Hungarian Empire’s comparative advantages of morale, training, education, and fighting spirit. After the war, Mises said of these relentless Austrian offensives that “the flower of the Austrian army was uselessly sacrificed.” He considered them “goalless and purposeless” and yet they did have a goal: to keep the Russians in Galicia as long as possible. In this, they succeeded. The human cost included many of Mises’s relatives, friends, colleagues, and students.
The battles that followed brought death and destruction on an unheard-of scale. Modern science and technology had profoundly changed all aspects of war, from coordination, to equipment, to tactics and strategy, giving a central place to the use of high-powered and highly mobile artillery. Although the k.u.k. Army was better equipped than its enemy, it was numerically inferior and in almost constant retreat. By the end of September, more than 10,000 civilian refugees from Galicia had poured into Vienna and the k.u.k. Army had been thrown far back behind Przemysl and now stood with its back to the Carpathian Mountains. In the first few weeks and months of the war, almost no day went by that did not see entire k.u.k. batteries (about 100 men each) and even regiments (about 500) being wiped out.
Artillery was not only the main agent of destruction, but also one of the prime targets. Mises’s battery constantly had to change position, often under fire. Heavy rainfall set in, hampered their movements, and proved that k.u.k. uniforms were not waterproof. There was no hope of relief any time soon from the military bureaucracy, so Mises resorted to private initiative: he had his mother send clothes for his men.
He was himself the special object of motherly care through the army postal system. Adele von Mises sent her son: furred leather gloves, several electric lamps, matches, shoelaces, woolen clothes, camelhair pants and camelhair undergloves, aspirin, cigarettes, glasses and journals, Ludwig’s favorite brand of suspenders, eau de toilette, soap, cognac, and tuna cans. Like an accountant, she kept lists of the things she sent and thus controlled both the punctual delivery and the consumption of her son, with a keen eye on his cigarette consumption. She also kept him informed about various events in Vienna, although she could not be too frank or go into too much detail because of the censor. Mises himself probably had access only to official or semi-official journals and newspapers. At the end of August 1914, he read that his beloved teacher, Eugen von Böhm-Bawerk had died in Tyrol on a journey to Switzerland.
Mail could take weeks to reach the soldiers, especially when troop movements were quick and frequent. In September 1914, correspondence was interrupted for three entire weeks and, most unusually, the press no longer ran any reports on Mises’s regiment. When, to the great relief of his family and friends his name was eventually mentioned in the Neue Freie Presse, Martin Nirenstein wrote him immediately: “this time too victory will be on the side of liberty.”
Meanwhile, his brother Richard was stationed in Baden near Vienna. He was experimenting with aircraft motors, commanding a research unit comprised of several soldiers and a lieutenant. A professor of applied mathematics at the Prussian University of Strasbourg since 1909, his interests had centered on aviation. He had become a pilot himself and taught a university course on powered flight in 1913. With his army research unit, he constructed a 600-horsepower plane, which was put to use in 1915. The military research led to the publication of Fluglehre, which established Richard as one of the world’s foremost aviation pioneers. But the young professor was impatient to get to the front, where the battles continued to be fierce and numerous.
In the first half of October, the united German and Austro-Hungarian armies had driven the Russians back, gaining about 60 miles, only to be driven back again after two weeks of Russian counterattacks. But time was running out for the Russians. The Austrian economy had retained a comparatively large degree of liberty that now increasingly weighed in on the side of the Austro-Hungarian army. The huge profits deriving from the production of war materials were not initially subject to excessive taxation and thus could quickly be reinvested to convert the structure of production to war needs. Many businessmen and industrialists had already started adjusting their plans and their investments to the new situation, and as usual these private ventures reacted quickly and efficiently to subsequent developments on the front. For example, in October 1914, some Austrian businessmen set up a factory to produce ammunition for captured cannons. But long-standing prewar government control of war-related industries did cause problems. Mises later explained:
Austrian industry not only had to deliver what the war required beyond peacetime provisions; it also had to catch up on what had been neglected in peacetime. The guns with which the Austro-Hungarian field artillery went to war were far inferior; the heavy and light field howitzers and the mountain cannons were already out of date at the time of their introduction and scarcely satisfied the most modest demands. These guns came from state factories; and now private industry, which in peacetime had been excluded from supplying field and mountain guns and could supply such material only to China and Turkey, not only had to produce the material for expanding the artillery; in addition, it also still had to replace the unusable models of the old batteries with better ones. Things were not much different with the clothing and shoeing of the Austro-Hungarian troops.
The higher productivity of private enterprise increasingly came into play and helped bring about an important Austrian victory that ended a month-long battle near the Polish city of Lodz on December 6, 1914. A few days later, the Austro-Hungarian army won another significant victory at Limanova-Lapanow, about fifteen miles from Carl Menger’s birthplace in Neu-Sandec. On December 12, the Russians were driven back more than thirty miles, in the course of which 30,000 Russian prisoners were taken. These events marked a decisive turning point on the Eastern war theater. After almost four months of intense fighting, the German and k.u.k. troops had balanced the initial numerical superiority of the Russians and in the coming months would drive them further back east. Richard wrote to Ludwig, in characteristic Mises-family understatement, that he was happy that “it goes better with the Russians.”
Apparently, Ludwig even found time now to study the Ruthenian language, possibly to prepare for the establishment of a new local administration. He also wrote frequently to Richard inquiring about the health of their mother, who had been suffering for some months from a foot injury. Richard reported that all cures had failed so far, and that he had also tried in vain to engage the world-famous physician, Professor Adler, with whom the Mises family had personal contact. The better news came from the front: Three days before Christmas, Richard and his old friends, Martin and Hugo Nirenstein, read in the Vienna press that Ludwig had been promoted to the rank of a k.u.k. Oberleutnant (First Lieutenant). Only two months later, Ludwig was again mentioned as the beneficiary of an “allerhöchste Belobigung”—the emperor had praised his achievements in battle.
There followed a brief period of stasis on the battlefield, and public attention turned to the decay the war was causing in the social fabric of the empire. In Vienna, the food supply shrank noticeably and the lines in front of the shops grew longer every day. Ludwig received desperate letters from his mother describing her struggles with Therese, the family cook, who had difficulties with the concept of wartime economizing. And on the front, treason showed its ugly face when, on April 3 and 4, 1915, the infantry regiment n° 28 from Prague was captured without resistance.
Starting early May 1915, however, the German and Austro-Hungarian troops finally began their long march east. Not even Italy’s May 23 entry into the war on the side of the Triple Entente (Britain, France, and Russia) could slow down the Central Powers’ irresistible drive on the Northern Front. Within a month, they regained Przemysl and continued on, fighting the enemy forces far back into Russia. The causes of this complete reversal of the balance of power in the east were mainly economic in nature. Mises later explained:
The great technical superiority that the armies of the Central Powers had achieved in the spring and summer of 1915 in the eastern theater of the war and that formed the chief basis of the victorious campaign from Tarnów and Gorlice to deep into Volhynia was … the work of free industry, as were the astonishing achievements of German and also of Austrian labor in the delivery of war material of all kinds…. The army administrations of Germany and Austro-Hungary knew very well why they did not give in to the pressure for state ownership of the war-supplying enterprises. They put aside their outspoken preference for state enterprises, which would have better suited their worldview, oriented toward power policy and state omnipotence, because they knew quite well that the great industrial tasks to be accomplished in this area could be accomplished only by entrepreneurs operating on their own responsibility and with their own resources. War socialism knew very well why it had not been entrusted with the armaments enterprises right in the first years of the war.
In early August, Lemberg was retaken, much to Mises’s relief, and he was finally granted a two-week leave. On August 16, he went from the front to Krakow and took the next train to Vienna. He had spent more than a year on the front, survived against the odds, but looked as fresh and vigorous as ever, though a hip injury had plagued him for months. He helped himself with considerable quantities of Salicyl, the fever and pain reliever his mother sent him. When he started asking for higher doses, she refused to send more, demanding that he return home and stay in bed. The family had already lost his cousin, the physician Max Landau, who died of infection from examining so many typhus cadavers.
Mises did not yet know that he had finished the hardest and most dangerous phase of his military service. After the leave, he would return to the front for about six weeks, and then again from December 1916 to December 1917. But none of these expeditions brought him even close to the chaos he had known in the first months on the Northern Front.
Some time late in 1915, Mises was relieved from active duty and sent to the city of Sopron, in Hungary, where he stayed for about two months, trying unsuccessfully to recover from his hip injury, but happy to be alive. He had survived the worst and finally enjoyed the gratitude and admiration of the civilian population, who celebrated the returning troops as heroes. When he received another medal for outstanding performance before the enemy—the signum laudis in silver—the imperial praise for the unpretentious “Reserve Lieutenant whom everybody knows and loves” was enthusiastically reported in the press. The reason for his popularity was his reputation as an officer who cared for and took care of his comrades-in-arms.
The Home Front
If Mises could have gotten away earlier, in any honorable manner, he would have welcomed the opportunity. He tried, in the fall of 1914, to use his Kammer affiliation to be transferred to some other duty. The Kammer had had to give up forty-five men for military service, five of whom came like Mises from Tayenthal’s think tank. But some others were allowed to remain in their prewar functions or were transferred to the War Ministry, which cooperated very closely with the Kammer. Mises was not among the lucky few who never had to expose themselves to harm. He had many talents, but he never mastered the art of maneuvering the hallways and offices of the various war administrations, making oneself indispensable to the bureaucrats and thus unavailable for dangerous missions. The great transformation of all forms of modern leadership toward bureaucratic management, which Max Weber so brilliantly described, was epitomized in many of Mises’s former colleagues and fellow students, most notably in the cases of Schumpeter, Lederer, and Karl Pribram.
After the Northern Front had calmed down, Mises was finally considered suitable for bureaucratic employment, and the Kammer connections now proved to be effective. During his Christmas holidays in Vienna, on December 22, 1915 he received orders from the War Ministry to join its department n° 13 in Vienna.
The most immediate benefit of being stationed in Vienna was the availability of superior medical attention, but curing his hip pain proved slower and more wearying than anticipated. At the end of December, Mises was examined in the k.u.k. army hospital of the town of Baden, a base near Vienna. Dr. Hackmüller found that Mises had typhus and ordered a sulfur-based treatment. This did not bring the hoped-for results. In the following months, Mises was sent to two Vienna experts for special hip treatments, which involved massages, hot-air applications, and walking exercises under supervision.
During this period, he officially resided at a Villa Keller in Baden, but probably spent most nights at the family apartment in downtown Vienna. Thus he came to experience the profound transformations of daily life that his friends in the state bureaucracies had orchestrated to meet the challenges of the war economy. Following the intellectual fashion of the day, in early 1916 these experts had set out to introduce central planning of production and consumption on an increasing scale. Because the existing government apparatus was unable to handle such a task, they turned to the already existing cartel organizations, made them compulsory, and subordinated them to the different k.u.k. ministries. These Kriegszentralen or War Centrals controlled the distribution of industrial products and the allocation of raw materials to the firms. Their large-scale activities were financed through the k.u.k. banking establishment in Vienna and Budapest. Götz Briefs later described the step-by-step process, which led wartime Austria-Hungary on the road to the Big Brother state:
Commercial advice to the civil administration, import business first in competition with private importers and then on a monopolistic basis, economization and distribution of the stocks—this was the increasing extension of their tasks, which made them assume ever more control functions within their organizations.
These efforts at top-down management of all society did not reach the proportions or intensity attained in the German Reich (Austrians were famous for Schlamperei, a jovial carelessness—even sloppiness—that effectively prevented a full-blown, German-style command-economy) but they were effective enough, at least in Mises’s eyes, to demonstrate what applied socialism is all about—mass misery—and to confirm every single prejudice he might by then have acquired about the idiocy of government meddling with the free market. “They ‘organized’ and did not notice that what they were doing was organizing defeat.”
With retail markets all but eradicated, huge crowds of people lined up in front of a few select food shops that had benefited from official allocations. Butterstehen, Eierstehen, Milchstehen—standing in line for butter, eggs, milk, and virtually everything else, often for hours—this was one of the new sad realities of daily life. How to cope with all this without losing one’s mind? Mises commended the example of his uncle Marcus, who somehow managed savings under these conditions—truly a model for living at the existential minimum. But he also offered more substantial support, buying additional food on the black market to supply his mother and other needy ladies. His basic salary in 1916 was 183 kronen—enough to buy some additional potatoes or flour. When he had to leave again for the Eastern Front in December 1916, he asked Emil Perels, a Kammer colleague and friend from Böhm-Bawerk’s seminar, to take care of these women.
The Mises and Perels circle included one Valerie Adler, who worked as advisor in the Ernährungsamt (Bureau of Nutrition), the brothers Karl and Ewald Pribram, one Olly Schwarz, and one Emil Schr. They would often attend opera or theater performances, or just meet at cafés to discuss politics, economics, and literature. Occasionally, these meetings would also take place in a more extended and official setting. For example, on November 16, 1916, Mises took part in a function of the Österreichische Politische Gesellschaft (Austrian Society for Politics) on current monetary problems. Schumpeter, who had come from Graz to chair the discussion, had urged Mises to debate his old opponent Walter Federn. Schumpeter opened the session, stating the currency problem was manifest as a high price level and low krone exchange rates. He argued that the high prices were the cause of the low krone, and that prices were high because of a shortage of commodities and because of bank note inflation. Normalcy could only be restored through a reduction of the quantity of money; this was the crucial point: the krone had to be restored to its former purchasing power. Mises had few things to add, and limited himself to discussing the inefficiency of foreign-exchange control through the Devisenzentrale, whereas Federn gave a balance-of-payments explanation of the present situation, blaming import surpluses for the weak krone. Significantly, most speakers—not only Herr von Landesberger, the head of the Devisenzentrale—followed in the same vein.
Mises also resumed his activities as a private lecturer at the University of Vienna, where he discussed in detail the differences between his own theory of money and the various competing views that dominated the scene in German-language universities, in particular the theories of Knapp, Schumpeter, Wieser, and Philippovich. His experience on the frontlines had changed his conduct and appearance, adding a war veteran’s personal weight to his exposition. Young Heinrich Treichl, who met him in those years at the dinner table of his parents, was especially impressed by his dark red mustache. So must have been his army comrades: Mises occasionally had the nickname Rotwild.
One of the greatest admirers of the straight and sharp young lecturer was a certain Louise Sommer, who read all of his writings and would soon want to know all his views on everything. Apparently they even met for extended evening discussions, in the course of which Fräulein Sommer became a friend—perhaps more. The otherwise unapproachable Mises shared his thoughts and feelings with her, including depressive moods. When he had returned to the front, he mailed her the first flowers of spring. After the war, Louise Sommer became an ardent proponent of Mises’s views on liberalism and politics.
On May 5, 1916, Mises received orders to join the Scientific Committee for War Economics, a new committee of the War Ministry.
Like many such wartime institutions, the Committee provided privileged employment for the upper class of the intelligentsia. It brought together established senior scholars and bright young students, including Mises, Broda, Karl Pribram, Brockhausen, Adler, Perels, and Bartsch, and possibly also Schumpeter and Alfred Amonn. The whole idea was to establish a forum for in-depth analysis of the economic problems of the war and its strategic “economic goals.”
It was clear from the outset—at least for anyone even faintly acquainted with Mises’s views—that he would disagree with some very influential people within the k.u.k. political and military leadership, and also with many Committee members, on the prospective economic benefits of military victory. He definitely did not believe that conquests in the East would convey any economic advantages for the future Austro-Hungarian economy. And in distinct contrast to other committee members, who also knew the rationale for this classical-liberal position, Mises was ready to speak up even to those who were higher in the wartime pecking order and could make his life very unpleasant.
Montesquieu once said that although one had to die for one’s country, one was not obliged to lie for it. This seems to have been Mises’s maxim too. He had already demonstrated his readiness to give his life for his country. Now he showed his will to honor the truth even if it brought him in conflict with powerful opponents. Committee meetings and presentations featured Mises arguing for the economic irrelevance of political borders. He also worked on an article restating the scientific case for this view. His article was published in December 1916 under the innocent title “Vom Ziel der Handelspolitik” (On the Goal of Trade Policy) in Max Weber’s Archiv.
Mises argued that, “from a purely economic standpoint,” the case for free trade and against protectionism was unassailable. It was true that classical free-trade theory, the theory refined and perfected by Ricardo, had been developed under the assumption that capital and labor were mobile only within national borders, but Mises proceeded to show that the case for free trade stood firm even if these conditions were no longer applicable. In a Ricardian world of free trade, there would be rich and poor countries, and tariffs and import quotas could not change this. In a Misesian world of free international migration, there would be more densely populated countries and less densely populated countries, in all of which the wage rates and interest rates would tend to be equal; and, again, protectionism could not do anything to improve this state of affairs.
Mises pointed out that no “economic” case could be made against cross-border movements of people and capital, and then spent most of his paper discussing the paramount “non-economic” rationale, which was nationalism. He stated that international migrations conflict with the “principle of nationality,” that is, with the policy goal of promoting the numerical number and the welfare of co-nationals. Emigration leads to the assimilation of the emigrants to the foreign nation. They are then “lost” to their original nation, and this loss presents a prima facie “non-economic” case against free trade. But Mises showed that this anti-free trade conclusion is unwarranted. It is true that emigration to foreign countries weakens the nation, but protectionism cannot correct the problem—at least, Mises contended, it “cannot reach this goal in a manner beneficial to the nation” (p. 567). He observed that even the champions of protectionism had to notice that their proposed policies could not accomplish “those goals that they had set themselves” (p. 570).
By contrast, the anti-German immigration laws of other countries were rational responses to the threat of national alienation resulting from mass immigration. In short, Germany could not change its calamities through protectionism, and was helpless in the face of other countries’ policies that further aggravated its problems. Mises soberly summarized this state of affairs, despairing from the point of view of German nationalism:
The foundations of a global empire [Weltreich] are a population that multiplies approximately at the same rate as the population of the other global empires, and a settlement area that offers this population space for its development. Trade policy cannot contribute anything to establish a global empire for a nation if these conditions are not given.
The isolation of Germany in international politics, Mises surmised, was a result of the fact that it lacked sufficient territories to host its rapidly increasing population. The other nations, which controlled territories suitable to satisfy German expansionism, were united through common interests in defending their possessions and rightly “sensed that Germany must be their natural enemy” (p. 578).
Mises then criticized the plans of the social-democratic leader, Karl Renner, to establish an all-encompassing system of protective tariffs as the foundation of the future relations between the Austro-Germans and the other nations of Austria-Hungary. Renner argued that political unity between the various nations was based on common economic interests, and he thought to create this common basis artificially through protectionism. But Mises objected that, in the present age of nationalism, protectionism actually reinforces the antagonisms between the various nations because it privileges the already industrialized nations. He illustrated this point with the prewar antagonism between Austria’s ethnic Germans and the Hungarians, which had made Austria-Hungary’s political order so tenuous.
The power of the argument and the place of publication made it impossible for the war party to ignore Mises. Trouble lay ahead.
Back to the Front
At the end of August 1916, Romania entered the war on the side of the Entente powers. With new vigor, the united Russian and Romanian forces pushed forward into Transylvania and started making their way into the Hungarian plains. But their success was short-lived. Within two months, the German armies of Falkenhayn and Mackensen halted the enemy, regained the lost territory, drove the Entente forces back into the Transylvanian Alps, and from there into the Romanian heartland around Bucharest. When the Entente abandoned its positions in the mountains, it was clear that they would not be able to hold the Romanian plains either. Within another month, all of Romania had been conquered and the Russian and Romanian troops were driven back into Ukraine.
The entire campaign took place in the midst of a deep crisis in Austrian politics. On October 21, 1916, Friedrich Adler, the radical son of social-democratic leader Viktor Adler, gunned down Prime Minister Count Karl Stürgkh in a Vienna restaurant, ostensibly in protest against the government’s longstanding refusal to convene the parliament. Exactly one month later, eighty-six year old Emperor Francis Joseph died. The only man who had successfully held the reluctant nations of the empire together had gone the way of all flesh. His grandnephew, twenty-nine year old Karl, ascended the throne and appointed a new government under Count Clam-Martinic.
In the wake of this regime change, Mises was ordered to leave Department 13. The order came on very short notice. He might have expected a transfer from one part of the War Ministry to another, but it became clear that he had been picked out for another mission on the frontlines.
As details came forward, the picture darkened. Initially he thought he would lead a battery of a regular field cannon regiment, as he had done before, but the last-minute order made it clear that he would be sent on a mountain mission, which implied even greater physical duress. To top it all, his new mountain artillery battery was in terrible shape. It had been created during the February 1916 Italian campaign and had been involved in the bloodiest encounters ever since. They had suffered many losses of men, horses, and material. Just before Mises took over, Romanian forces had destroyed their supply line for ammunition. It looked as if someone in Vienna was bent on getting rid of Mises forever, and as things stood, the chances looked good that this someone would succeed.
On December 5, he joined his new unit, the Cannon Battery n° 1 of the Mountain Artillery Regiment n° 22 in the Romanian town of Rammcul Valcery (today Râmnicu Vâlcea). There he obtained a motor vehicle from the German army and moved on to Bucharest. He arrived in the Romanian capital on December 11, received his orders at the headquarters of the Prussian Army, and continued with his regiment to a summit position in the Carpathian Mountains, between Transylvania and the Bukovina.
It took three weeks to receive the first mail from Vienna. His mother’s parcels did not reach him at all, and she eventually had Franz Weiss, who held a position with the war administration, send them for her. Meanwhile Mises discovered that the human body can endure amazingly low temperatures without fainting, and he renewed the painful acquaintance with his hip.
The news from Vienna did not help his morale. In mid-February, his uncle Marcus had had a complete mental and physical breakdown, proving that Ludwig had grossly underestimated minimum living standards. He also received a letter from Karl Pribram who had taken Mises’s place at the Scientific Committee. Worried what Mises would think, Pribram wrote to give assurances that he had not pushed for his own nomination.
Mises did not suffer from envy and was ready for continued sacrifice even in the face of such injustice. He was a good sport throughout his life. Yet one wonders what he must have felt in March 1917 when, freezing behind a cannon in the Carpathian Mountains, he received news from Perels that Karl Pribram had received the Ritterkreuz (Knight’s Cross) and had moved on to a position as ministerial secretary in the Trade Ministry’s department for social policies.
* * *
While the climatic conditions in the Carpathian Mountains were severe, the new mission was actually less dangerous and certainly less exciting than the first months of war on the Northern Front. The enemy troops were tired and hardly posed a threat, while there was increasing political resistance within Russia against the Tsar, and against continuing the war in particular. The Eastern Front was relatively quiet, and Mises had time to spend with his fellow officers discussing literature and economics.
On March 14, 1917, the Russian monarchy was overthrown, soon followed by a provisional government under Alexander Kerensky. Three weeks later, Woodrow Wilson, who had been reluctant to ally the United States to the ostensibly autocratic Russian Tsar, led his country into war on the side of the Entente. The old balances on the fronts were disrupted and the troops were repositioned.
In early April, Mises’s battery moved to a new strategic position further north. It was also higher in altitude: they set up cannons at 6,000 feet. The front remained quiet, however, and the men on both sides were increasingly difficult to motivate. Peace resolutions of the powerful social-democratic parties in Russia, Germany, and Austria had reinforced the general mood of increasing skepticism about the continuation of hostilities.
There were also other distractions, such as handling their new German neighbors. The problem was that the German Army was at least as arrogant as it was efficient. Even its regular soldiers had the tendency to treat foreign allies as incompetent junior partners. On at least one occasion, Mises himself had to confront pretentious German officers claiming jurisdiction over k.u.k. troops; and after the war, when in a high-profile paper he analyzed the problems of the proposed Austro-German monetary unification, he mentioned the “the tendency of the North Germans to consider anything South German and in particular anything Austrian to be inferior and alien.”
At the end of May and in early June 1917, Mises was in Vienna, probably on a two-week leave. Here he could see first-hand the changes introduced under the new emperor. Karl was about to place his cronies in positions of military and political leadership. Displacing the old elite would have a political cost, but he tried to compensate by attempting to win greater popularity among the general public. Under Francis Joseph, nobody could get in touch with the emperor to discuss political matters except through His Majesty’s ministers, but Karl opened his antechamber to anyone who wished to offer advice. It turned out that many of his subjects felt such a calling. Just among Mises’s friends, Hans Kelsen and Joseph Schumpeter each wrote several memoranda in which they made detailed policy recommendations. Another witness of the events, Rudolf Sieghart, recalls: “There was a plethora of memoranda and audiences. Everybody gave counsel: Arch-Duchesses and priests, lower skirts and soutanes, profiteers and chats.” The new government also convened the upper and lower chamber of the Austrian parliament for the first time in more than three years, on May 30. This too was part of the emperor’s strategy to strengthen his bonds with the population—a necessity given the dramatic deterioration of living conditions in the past few months.
Mises was shocked to see how the food supply had collapsed during his six-month absence. He predicted that very soon no more food would be found at the markets, even after hours of standing in line. At one point his grandfather’s cook stood three hours in line for meat. His mother had to dismiss her cook, Therese, because she could barely afford to feed her. Sadder news was the loss of his old teacher, Eugen von Philippovich, who died on June 4 from a long illness.
With these impressions he left Vienna on June 9 to return to his battery. He was back in time to prepare the last great action on the Eastern Front. Starting July 1, 1917 the united German and k.u.k. troops completed the re-conquest of the Bukovina in the wake of the so-called Kerensky offensive. At the end of July, Mises and his regiment reached their new permanent field of operations about 60 miles east of their initial position, in the area of Brusztury and Czardaki. One month later, the war on the Eastern Front was virtually over and his regiment would receive recognition for its performance at the attack on Czardaki.
Meanwhile, his colleagues from the Scientific Committee experienced the war under safer conditions. Mises knew it was the fate of political opponents to become marginalized within the state apparatus—and the ruling war party had an especially successful means of marginalization: it could send its opponents to the front. Still, it was exasperating to see how much the threat of combat intimidated the would-be intellectual leaders of the country. With the opposition to its expansionary plans silenced, and a technocratic elite composed of corrupt cowards, the Austrian war party had carte blanche within the government.
Mises did not capitulate. In the midst of the July battles, with biting pain in his hip, he somehow found the time to write for the Neue Freie Presse on public policy. His friends back in Vienna were grateful and amazed. Louise Sommer wrote him:
How I envy your proficiency in using the method of isolation to suppress disturbing personal problems…. I almost envy you your life of narrowly circumscribed activities. Surely you have time to work—you find time even in a shower of bullets.
Fortunately, Mises was not showered by bullets in the next two months—the regiment’s July and early August battles were the last in the Bukovina. But this did not mean that Mises’s frontline mission was over. His battery had orders to join the 1st Corps of the Austrian army on the Southern Front.
With additional troops newly available from the now-quiet Eastern Front, the k.u.k. Army prepared a new offensive against the Italians. The 12th Isonzo Battle in October and November 1917 would be Mises’s last engagement in this war, and the last battle he would ever fight with guns. He spent six exhausting weeks on the Southern Front, under fire, enduring cold weather in the Alps, and still suffering a biting pain in his hip. On one of those days, his regiment was stationed on Hoch Rombon, a major peak in the area. Mises reported: “thick fog and snow storm, 50 cm new snow, all ways are stuck, many electric cables are damaged and can be repaired only under life danger.” He also mentioned that his men had no more wood to burn and suffered from colds and rheumatism. Fortunately for him and his troops, this was just three days before the decisive breakthrough of the united German and Austro-Hungarian forces in a frontal attack against the better-equipped Italians, pushing them far back into the planes of Frioul and the Veneto. One historian speculates that the “attackers would have moved even faster had they not paused to gorge their rumbling stomachs with the undreamt-of quantities of good Italian food and wine.” What a way to escape, once more, the jaws of death.
By mid-November, Mises had left both the front and the Scientific Committee. The details of his departure from the latter are unknown, but it appears to have been part of a general improvement in his situation. From this point on, in fact, his life would continue to improve for quite a while. A few days after quitting the Committee he was promoted to the rank of Captain, and on December 3, 1917 (he had just started an eighteen-day leave in Vienna) he was ordered to join Department 10 of the War Ministry, the department for war economy. The head of the department was one Colonel Linoch with whom Mises enjoyed very good relations. Linoch left him at liberty to engage in academic pursuits. Mises devoted as much time as possible to a new book with the working title of Imperialismus, which would summarize his reflections on the war. He also resumed his teaching activities.
The winter semester had already started, so it was too late to set up a seminar, but Mises probably held Sunday lectures at the Volks-Bildungs-Verein. If so, the experience dealt a heavy blow to his views about educating the masses. He said in his Notes and Recollections (1940), he now realized that the classical liberals had over-estimated the ability of the common people to form independent judgments.
In the spring and summer of 1918, he directed a university course on banking theory and advised several students on what to read and which subjects to study. Women would not be admitted to the department of law and government science for another year, but most participants of Mises’s course were young ladies. Because of the war, there were few male students left in Vienna. His female students were probably from the department of philosophy, which had admitted women since 1897.
Among the few male students was Dr. Richard von Strigl, who had been a fellow student in Böhm-Bawerk’s seminar. Strigl would become one of the most important and influential Austrian economists in the interwar period. The presence of Strigl and of Helene Dub, wife of the economics editor of the Neue Freie Presse, highlighted a particular feature of university seminars in those days. The seminars were not mere schooling functions, but also provided a forum for discussions among senior members who were often on a par with the lecturer. Each session began with a presentation on the subject of the day, usually delivered by one of the students. Then Mises commented on both the presentation and the subject itself, and answered questions from other participants.
On May 18, Mises was promoted from an unpaid private lecturer’s position to the rank of professor extraordinarius. This position does not have an equivalent in the American university system. An extraordinarius position is not a titled full professorship and is unpaid, but it does include tenure and enjoys greater social prestige than does an associate professorship.
Another welcome event for Mises was his new personal acquaintance with Max Weber. The German scholar was already a living legend, but he had not lectured for more than ten years, pursuing his studies in private at the University of Heidelberg. Weber now celebrated an unexpected and spectacular comeback in Vienna, and attracted huge crowds of students and professors. His encounters with Mises produced mutual admiration. Much of what Mises wrote in the late 1920s on the logical and epistemological problems of economic science was in reaction to Weber’s position. And in his university courses and private seminar, Mises relentlessly encouraged the study of Weber’s work. Weber in turn praised Mises’s theory of money as the “most acceptable” in print. And he seemed to have learned a few things from his young colleague in Vienna. During Weber’s 1918 stay in Vienna, Mises convinced him that there was in the social sciences a discipline separate and distinct from history. Economic theory was a truly scientific discipline. Its subject matter was the analysis of the relationships between means and ends, an analysis that could be performed without making value judgments. Moreover, Mises persuaded Weber that economic rationality—that is, economic calculation—would be absent in a socialist commonwealth.
As the wartime welfare state continued to grow, Mises continued to prefer private alternatives, not just in theory, but in the actions he took in his own life, from the improvement of his family’s food supply (even the black market was deteriorating) to the professional placement of friends and colleagues eager to get away from the front. Mises was known to be responsive to calls for getting people out of the death zone and into an administrative position in Vienna or elsewhere. He was often helped in these missions of mercy by his friends Victor Graetz and Ludwig Bettelheim-Gabillon.
Mises’s success in placing others was at least in part due to his increased notoriety. His courageous public opposition to the war party and its claims for the economic benefits of military expansion had not changed policy, but it had attracted interest to him and his work. He had become a public figure when he was invited to lecture on Austrian public finance to the plenary meeting of the Advokatenwählerverein, an electoral association of lawyers. It is likely that Mises addressed the same themes he had two months earlier in an article for the Neues Wiener Tagblatt. In this piece, he characterized Austrian tax law as the patchwork product of 100 years of tax reforms, errors, and competing special interests. And he vigorously criticized the government’s plan to introduce a one-time emergency tax (Sonderabgabe), warning that the new tax would become permanent, and arguing that sound financial policies must consider both government revenue and government expenditures. His lecture was a great success. On Monday, March 11, 1918, Mises started a 15-year public career as the economist of Austria.
In May 1918, the Office for the Defense Against Enemy Propaganda invited him to lecture on the “Significance of the War Bond.” The lecture took place in the context of an “information course” for officers who were to offer patriotic instructions to the troops. The main purpose of the Office was to promote k.u.k. war bonds. But Mises was unwilling to be an instrument of propaganda and made instead a compelling case for free-market war finance. He especially emphasized the perils of financing the war through inflation. The speech was published from stenographic lecture notes without giving Mises the opportunity to review the transcript.
A Last Mission
After their overthrow of the Kerensky government in November 1917, the Bolsheviks called for an immediate end of the war on the Eastern Front on a status quo ante basis and without reparations for either side. Moreover, they began to make public highly secret prewar Entente plans for punishing Germany in case of victory. These revelations increased the political pressure on the Allies to seek an early peace as their reasons for going to war now appeared in a decidedly less saintly light. The stark contrast between the evil Germanic autocrats and the humane democracies of the West faded away and was slowly replaced by a more realistic picture of the situation. But most of all, the Bolshevik push for peace changed the military situation since it brought the prospect of relieving Austria and Germany from their awkward two-front struggle.
These prospects materialized very slowly, though, because the German side insisted on war reparations that the Bolsheviks would not accept. The peace negotiations started in Brest-Litovsk shortly before Christmas 1917 and were brought to an end only after an Austro-German ultimatum forced the Russian side to sign a treaty by which it ceded military control of the entire Ukraine to its enemies. Thus, what initially promised to be a great military and political success for the Austro-German side had turned into a disaster. Precious time had been lost to move troops to the Western Front. And the imposed “agreement” failed to pacify the Russians, so precious Mittelmächte forces were diverted to defend against a possible Russian backlash. In short, all political advantages had vanished. Lloyd George, Wilson, and the Western press immediately presented the treaty of Brest-Litovsk as evidence of the imperial expansionism of their enemies.
The official rationale for a military occupation of the Ukraine was the exploitation of its rich natural resources. Few people in Germany and Austria knew that this idea was flawed. Mises knew it. In his Archiv article “On the Goal of Trade Policy” he had pointed out that economic control over resources can be enjoyed even in the absence of political control. Access to Ukrainian resources would have been possible through regular trade channels and did not require military occupation of the entire country. Mises relentlessly insisted on this point with an intransigence that had almost cost him his life.
The real “economic” rationale for the occupation of the Ukraine was the usual one: it brought unearned riches to a select few. In the present case, the economic exploitation of the occupied zone was to be confided to an “Ostsyndikat“—a cartel of big industrialists and big bankers with good government connections. Each of them would have monopoly rights to certain Ukrainian products. A May 1918 meeting in Berlin brought all interested men together and determined the broad division of the loot, in particular, each party’s “trade contingent”—its exclusive trade domain.
One of the unsettled questions after the Berlin meeting was the future monetary constitution of the Ukraine. The Austrian side had a special interest in the question because Austrian war inflation had swept large quantities of kronen into the occupied zone. Decisions about Ukrainian money and currency would most certainly affect the demand for krone notes and thus could possibly break up the krone’s fiat exchange rate.
The fundamental problem was that Austria-Hungary, like all other warring states, had vastly inflated its currency, which consistently lowered its exchange rate with other, less-inflated currencies. The only thorough way to stop both the inflation and its symptoms (higher prices and depreciating exchange rates) was, of course, to stop producing additional krone notes, but many statists and money cranks sought schemes to get around this appalling measure. One of these tricks was to make payments in money titles issued on behalf of banks other than the Austro-Hungarian Central Bank in Vienna. The Austrians applied this measure in their occupied territories in Italy. They made payments to their Italian suppliers in Darlehenskassenscheinen (Loan Bureau Notes) denoted in lire to bolster the krone exchange rate against the lira.
Similar measures were taken on the Eastern Front. In August 1918, when the Germans had for some time already made ruble payments in the territories they controlled, the Bankstelle (bank office) of the East Army Command submitted a memorandum proposing similar measures for the territories occupied by Austrian forces. According to the economists of the Bankstelle, the krone surplus on the market resulted from large military payments that were not sufficiently compensated by kronen flowing out as payments for imports from Germany. The German authorities, selfishly concerned with the strength of the mark, were unwilling to cooperate to achieve stable exchange rates. Therefore, the Austrian army should also change its policies by (a) suppressing contraband imports from Austria and exports to Russia and (b) making payments in rubles. These policies would give the Bankstelle time to absorb krone surpluses in the Ukraine by offering interest-paying (2%) demand deposits with the local exchequer of the East Army, which would assume the function of a branch office of the Austro-Hungarian Central Bank. This would supposedly bring the millions of kronen now being hoarded in private wallets and strongboxes back into circulation where they could be used in the interest of the national economy and of the currency itself. The Bankstelle clearly had no idea that these measures were entirely unfit to attain the end that it sought. Few in Austria-Hungary could even comprehend, let alone solve such problems.
In June 1918, Otto Katz, director of the Union Bank in Vienna, approached Mises on behalf of a financial policy mission to solve the currency problems in the Ukraine. Mises would be charged with monetary policy in this important occupied territory. The head of the group would be Exzellenz Kraus, under whose leadership Mises had already fought the last battles of the Bukovina and the 12th Isonzo battle. The mission represented a great opportunity for Mises. A thirty-six-year-old captain, he still had one of the lower officer ranks, and his position in civilian life was not especially elevated either. His main capital was the solid reputation he had gained as an expert on money and banking. Katz’s offer was therefore a unique career opportunity. At the very least it promised exceptional exposure to high-profile policy-making. There was nothing to do but to thank God, fate, and Katz for the offer, and to accept it immediately and wholeheartedly.
Characteristically, however, Mises spelled out his conditions. He would offer his services for this venture only if he had full decision-making power, being the officer with exclusive responsibility for the financial and monetary policy of the Ukraine. This required in turn that he be transferred into the civil service and obtain a position corresponding to that of Bosnian secretary of state.
Most importantly, he demanded that his bureaucratic authority be completely clarified to avoid later frictions that could turn out to be harmful to the cause. He combined this demand with a hard-hitting attack on the bad habits of Austrian bureaucracy. Unlike their German cousins, he argued, the Austrians lacked the ability for detached commitment to a cause:
The usual words of appeasement offered in response to claims made about us—”they will get ahead based on character alone” or “things will sort themselves out in time”—are completely false. I am convinced that I could assert myself and secure a “comfortable” position. But what matters is objectivity; for such personal advantages are gained through a yielding of resolve when it comes to things in which one should have remained firm, and through needless caballing, which leaves no time for solid work. One must be capable of pure objectivity. That the Germans are objective is the basis of their success.
Mises had no illusions about the acceptability of his proposals. Setting clear terms of cooperation in the interest of the cause was simply not the style of the Austrian administration, and he therefore thought the negotiations at an end. But some days later, Lieutenant Colonel Maximilian Edler von Becher, a high officer from the Imperial General Staff in Vienna, asked him to name the concrete conditions under which he would be willing to join 2nd Army Command as a financial and monetary consultant. He answered in a letter dated June 26, 1918.
Mises suggested dividing the civil service of the 2nd Army Command into three departments: one for political affairs, one for financial and monetary affairs, and one for public finance. He would become director of the department for financial and monetary affairs. He had to be made a civil servant to have authority in dealing with the other representatives of the state, and he had to be an Imperial (k.u.k.) employee to reduce conflicts with Austrian, Hungarian, and local state agents. For the same reason, it would not be advisable for him to remain an officer of the Kammer. For in his capacity as monetary officer he would have to revise agreements between the Ukraine and the Austrian Trade Bureau, an appendix organization of the Kammer, which had a monopoly privilege in Ukrainian imports and exports. His negotiations with the Bureau would lack credibility because of the Bureau’s executives within the Kammer; and risked inciting nationalist resentments since they could be depicted as an inner-Austrian deal to the detriment of the other nations.
Becher seemed to endorse Mises’s arguments and restated them almost word-for-word in an official recommendation to his superiors. In this public paper, of which Mises received a copy, Becher suggested that Mises be invited to go to Odessa for an oral presentation and also to study conditions in Kiev and other large Ukrainian towns.
Behind the curtains of the General Staff, however, plans were made to induce the cooperation of the recalcitrant captain without giving in to his demands. In mid-July, the head of Department 10, Colonel Linoch, received an order to further reduce his staff. The order came from very high up, and it was specific about the staff members to be dismissed. Mises was among them. When he received the news from Linoch, he knew the only choice left to him was between the front and a Ukrainian mission without conditions. Linoch managed to extend Mises’s leave in Bad Gastein. Then the commander of the East Army, General Alfred Kraus, sent Mises on a two-week mission to Odessa and Kiev and ordered him to report about Ukrainian currency and finance.
Mises arrived in Odessa on September 7 and quickly learned that the Germans were pushing to establish a Ukrainian fractional-reserve central bank, whereas the Austrians—in particular Herr Pollak from the k.u.k. Ministry of Finance and the Vienna Association of Bankers—resisted this plan. As things stood, it was politically inevitable that any monetary constitution for the Ukraine would have to involve a central bank with a monopoly on the issuance of banknotes. The question was whether the new establishment could be limited to providing currency, or if it would also be drawn into attempts to solve the pressing financial problems of the country.
Such attempts would jeopardize the stability of the new currency, but how else could the financial burdens be shouldered? At a meeting with the local Austrian commander, Mises convinced the Austrian bankers to promote sales of Vienna stocks and bonds to the Ukrainian public. To avoid the monetary inflation the Germans advocated, the Misesian strategy was to seek a private-business solution through an increase of foreign holdings of Austrian stock and debt. In a later report to General Kraus he made comments and suggestions to improve this proposed institution as much as possible. In particular, he recommended that the future central bank be built on the model of the Bank of the Russian Empire. The Ukrainian central bank should be a pure government institution (as distinct, for example, from the formal set-up of the Bank of England or the German Reichsbank), and half of its endowment should be held as cash reserves. In its investment policies, the new bank should follow private banking principles: no risky investments and no long-term engagements. Mises also stressed that reserve ratios were “of crucial importance” to create trust and credit for the banknotes. The reserves had to be in cash. Anything else would
not offer any tangible security for the note owner [or] in any way prevent an unlimited note-issue that eventually results in the note’s complete devaluation. The history of the French assignats, which had been “covered” through liabilities on all of the State’s territories, serves here as a warning example.
Mises thus proposed a form of fractional-reserve central banking system better known as the gold exchange standard. He recommended keeping reserves for one third of all circulating banknotes, and these reserves should be either in cash (gold and silver), in foreign currency, or in bills of exchange on foreign currency. Moreover, the management of the bank should “of course” be subordinate to the government, preferably to the trade minister, since the finance minister would be tempted to abuse it for fiscal purposes.
Mises’s proposals were never put into practice. A week after his return to Vienna, the Bulgarian front crumbled and after another month, both Austria-Hungary and Germany were in a state of political and military dissolution. The war ended in sudden chaos, and the empire—a centuries-old order—vanished almost overnight.
This article is taken from the chapter 7 of Mises: The Last Knight of Liberalism.