The Online Library of Liberty

A project of Liberty Fund, Inc.

• Titles In the Liberty Fund Library of the Works of Ludwig Von Mises
• Acknowledgments
• Preface
• Introduction
• Monetary and Economic Policy Problems Before, During, and After the Great War
• Part 1: Austro-hungarian Monetary and Fiscal Policy Issues Before the First World War
• Chapter 1: The Political-economic Motives of the Austrian Currency Reform 1
• Chapter 2: The Problem of Legal Resumption of Specie Payments In Austria-hungary 1
• Chapter 3: The Foreign Exchange Policy of the Austro-hungarian Bank 1
• Chapter 4: On the Problem of Legal Resumption of Specie Payments In Austria-hungary
• Chapter 5: The Fourth Issuing Right of the Austro-hungarian Bank 1
• Chapter 6: Financial Reform In Austria 1
• Chapter 7: The General Rise In Prices In the Light of Economic Theory 1
• Chapter 8: On Rising Prices and Purchasing Power Policies 1
• Chapter 9: Disturbances In the Economic Life of the Austro-hungarian Monarchy During the Years 1912-1913 1
• Part 2: Economic Policy Issues In the Midst of the Great War
• Chapter 10: On the Goals of Trade Policy 1
• Chapter 11: Inflation 1
• Chapter 12: On Paying For the Costs of War and War Loans 1
• Chapter 13: Remarks Concerning the Problem of Emigration 1
• Part 3: Austrian Fiscal and Monetary Problems In the Postwar Period
• Chapter 14: Monetary Devaluation and the National Budget 1
• Chapter 15: For the Reintroduction of Normal Stock Market Practices In Foreign Exchange Dealings 1
• Chapter 16: On Carl Menger’s Eightieth Birthday 1
• Chapter 17: How Can Austria Be Saved?
• Chapter 18: The Claims of Note Holders Upon Liquidation of the Bank 1
• Chapter 19: The Austrian Currency Problem Thirty Years Ago and Today 1
• Chapter 20: The Restoration of Austria’s Economic Situation 1
• Chapter 21: The Austrian Problem 1
• Chapter 22: The Gold-exchange Standard 1
• Chapter 23: The Social Democratic Agrarian Program 1
• Chapter 24: America and the Reconstruction of the European Economy 1
• Chapter 25: The Currency and Finances of the Federal State of Austria 1
• Chapter 26: The Economic Crisis and Lessons For Banking Policy 1
• Part 4: Interventionism, Collectivism, and Their Ideological Roots
• Chapter 27: The Economic System of Interventionism 1
• Chapter 28: Economic Order and the Political System 1
• Chapter 29: Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923 1
• Appendixes
• Appendix A: Maxims For the Discussion of Methodological Problems In the Social Sciences: Paper Delivered At the Private Seminar 1
• Appendix B: Short Curriculum Vitae of Mayer Rachmiel Mises of Lemberg 1

PART 2

Economic Policy Issues in the Midst of the Great War

CHAPTER 10

On the Goals of Trade Policy1

I

The elements of a foreign trade policy can be designed based only on an understanding of what emerges from the free play of economic activity: a regional division of labor that results in the greatest supply of goods at the least cost. From this point of view, protectionist policies can never be justified on economic grounds. All theoretical attempts to do so have failed. The arguments of the advocates of free trade, which culminated in Ricardo’s formulation, cannot be shaken, let alone refuted.2 If completely free trade prevails, then each country specializes in that branch of production for which its domestic conditions are relatively most favorable. Every artificial influence that disturbs this arrangement must, in the end, result in a deterioration in the quality and a decline in the quantity of goods.

The free trade argument has not been refuted by Friedrich List’s3 claim that otherwise idle productive resources are employed under a system of protective tariffs. The fact that without the protective tariffs they would not be utilized shows that they are less productive than other resources that can be employed instead.

A tariff to support infant industries also cannot be justified on economic grounds. Older industries have an advantage in many ways over younger ones. The emergence of new industries can be considered economically worthwhile, in general, if their lower productivity in the short run is compensated by their greater productivity in the longer run. If the new enterprises promise to be economically profitable, the private sector will create them without any “aid” from a tariff. With every newly started enterprise it is anticipated that various initial outlays will be recouped later on. It is not a challenge to this argument to point out that almost all countries have supported the development of industries through protective tariffs and other protectionist measures. It remains an open question whether healthy industries would have developed even without such aid. Within a country’s borders similar differences in productive conditions are solved without any such “external” support. In areas within a country that previously were not industrially developed, we see industries emerge that not only successfully compete against older industrial areas of that country, but also often drive them completely out of the market.4

Schüller argued against the idea that unrestricted freedom of trade was advantageous from the international point of view. Generating the largest possible total production, he said, was not only dependent upon taking advantage of the most productive opportunities, but also exploiting the unutilized productive opportunities as well.5 The weakness of this argument is already apparent in the fact to which Schüller refers with particular emphasis: that the conditions under which various producers operate are dissimilar, not only in different countries, but also within the individual countries themselves. Less advantageous production opportunities are exploited only insofar as more advantageous ones are no longer available. The only influence from the protective tariff would be in that less advantageous opportunities are exploited while more advantageous ones elsewhere within that same country remain unutilized. However, that no increase in total productive output can be achieved by this method requires no further explanation.

II

Ricardo’s theory of foreign trade starts with the assumption that the free movement of capital and labor operate solely within a country’s boundaries. Domestically, any regional difference in rates of profits and in employment is equalized through movements in capital and labor. This is not true for differences between several countries. If there was free mobility between countries as well, this would lead to the following result: capital and labor would flow out of the country that offered less advantageous production opportunities and into the country with more advantageous opportunities. A series of emotional factors “which I should be sorry to see weakened” (which Ricardo, the patriot and politician, inserts into the theoretician’s exposition) are raised in opposition to this. Capital and labor remain, in spite of the fact that they suffer from a lower level of income, in their own countries and turn to those branches of production for which they are, if not absolutely more favorably, then at least relatively more favorably qualified.6

The premise for the theory of free trade, therefore, is the fact that capital and labor do not move across national boundaries due to non-economic reasons, even when this would be advantageous from an economic point of view. This may have applied, in general, during Ricardo’s day; however, it has not been true for quite some time now. The obstacles that inhibit the generally free mobility of capital and labor become smaller every day; even the World War will only temporarily hinder this development. When peace returns, those circumstances also will gradually return that, in the decades before the war, cultivated the free mobility of capital and labor between nations. These developments were not random; rather, it was the necessary result of the ever-closer economic ties between the individual countries of the world, that is, the transition from individual national economies to a global economy.

If, however, the basic assumption of Ricardo’s theory disappears due to the effects of free trade, then the theory would disappear with it. There would no longer exist a reason to search out a basic difference between the effects of freedom of trade in domestic trade and foreign trade. If the mobility of capital and labor domestically and their mobility between countries differs only as a matter of the degree, then economic theory cannot make a fundamental distinction between them. The theory must, instead, necessarily arrive at the conclusion that the inherent tendency under free trade is to draw labor and capital into the locations having the most favorable natural production conditions, regardless of political and national boundaries. In the end, unlimited free trade must therefore lead to a change in the conditions under which the entire world is settled; capital and labor will flow out from the countries with less favorable production conditions into those countries with more favorable production conditions.

Even if a theory of free trade like Ricardo’s is modified in this manner, nothing from a purely economic viewpoint would speak against free trade, and everything would warn against protectionism. However, because the theory leads to completely different results in terms of the effect of free trade on the regional distribution of capital and labor, it offers a completely different starting point for examining the economic case for and against a tariff system.

III

The natural conditions for production are unequally distributed among individual countries: there are countries with more favorable and others with less favorable production conditions. This relationship is immutable. Over the course of history, the importance of this fact has often been reduced due to intense metamorphoses resulting from the exhaustion of the soil, through the clearing and utilization of new fertile areas, by changes in the climate, and so on. Of greater importance are those changes that have their origin in advances in production technology, which enable the use of previously worthless or less utilizable natural resources.

If one adheres to Ricardo’s assumption that capital and labor are not disposed to emigration abroad, even when more favorable production conditions are present elsewhere, then the result is that the same expenditures of capital and labor lead to different results within individual countries. There are wealthier and poorer nations. Commercial policy interventions cannot alter this circumstance. Such interventions cannot make the poor nations any wealthier. On the other hand, protectionism in the wealthy nations appears completely preposterous.

If one drops Ricardo’s assumption, however, then a tendency toward an equalization of profits and wage rates would prevail across the globe. Thus there are, in the end, not poorer and wealthier nations, but rather more and less densely populated countries.

This is the developmental tendency that the world today is facing. From a purely economic point of view, this outcome cannot be described as harmful. However, this tendency does come into conflict with the principle that reigns over modern politics, that is, the nationalist principle. The nation-state would correspond with the nationalist ideal only if it has an area under its control in which the quantity and quality of the natural conditions for production are such that it can offer its people space for the natural increase in population within its national boundaries without the danger of overpopulation.

A growing population must be able to find employment within the national boundaries without becoming more densely settled than corresponds with its natural production capabilities. The nation ought to be able to develop unimpeded within its national territory; however, the population should not increase within the nation’s borders beyond that level that would be achieved by the complete and free international mobility of capital and labor.

This stipulation, which is derived with obligatory logic from the nationalist principles of the nineteenth century, is contrary to neither the primarily or purely industrial state, nor the primarily or purely agricultural state, nor even the monocultural state. If a country’s economic potential is determined by its natural production possibilities, then in this country the most favorable exploitation of the land and, ceteris paribus, its greatest possibility for supplying goods for the population, will result from the free play of economic forces. A country’s economic potential is negatively affected only if labor increases beyond the level indicated by its natural production possibilities. However, until a country reaches such a situation, its economic possibilities remain “positive,” whether viewed from a global or a national economic point of view.7 If the production conditions were not exceedingly different within individual national economies,8 then these extremely differentiated types would be the norm.

In its commercial application, the nationalist principle does not demand self-sufficiency in the sense of complete isolation from foreign trade. It is in no way intrinsically opposed to an increase in the general welfare by means of an international division of labor. The nationalist principle has nothing in common with the demand, which is increasing due to certain ethical and political outlooks, for maintaining the current status quo in the division of labor, the intensity of international trade, and impediments to the broader expansion of the global economy.

A country’s national character is not endangered by the use of products made by foreign labor. That the German wears American cotton and Australian wool in his clothing, that he drinks Brazilian coffee and eats Italian lemons, remains of no concern to the nation insofar as there exist German products which serve as the means by which such imports may be paid.

The point of conflict must be found elsewhere.

The surface of the globe is divided among the nations. This division is the result of historical processes in the past and does not correspond to the production possibilities and population patterns of the present. Therefore, there are nations whose area would be more densely populated and others that would be less densely populated, if unfettered movement of people and goods were a reality. The problem of relatively over- and underpopulated areas has to be solved by migration, the movement of people.

These migrations have resulted in the citizens of various nations moving from countries where less favorable production conditions prevail to those countries where there are currently more favorable conditions, with population densities adapting to the more or less attractive natural production possibilities around the globe. In a similar manner, capital goods move to where more favorable returns can be earned. The country from which they move loses both capital and labor. The exported capital assists the importing country in exploiting its productive capabilities. The emigrated labor assimilates itself to its new home.

Emigrants who settle in previously uninhabited areas can retain and foster their culture in their new home. They are not lost to their nation, even if they politically separate themselves from their native country. The Canadians, Australians, and the residents of Cape Province in South Africa are not the only members of the English national culture, which spans the globe, but so are the Yankees.

Circumstances unfold differently when the emigration is directed toward an already populated country and the colonists, due to their numbers or their military inferiority, are not successful in driving out the previous inhabitants, such as successfully happened in North America with the European colonists. These numerically inferior emigrants must then, sooner or later, lose their mother tongue, national culture, customs, and manners. They learn the language of their new country, and they soon adapt to it in all other characteristics. Whether the assimilation is completed quickly or slowly depends upon a series of particular circumstances; however, it remains unavoidable. We are not interested here in the origins of this occurrence; the fact that it occurs is sufficient for us.

We now perceive the meaning and the goal of trade policies. Insofar as they do not unnecessarily encourage an already existing developmental tendency, such as industrialization, or are not solely directed against the trade policies of foreign countries, a country’s trade policies are to be guided by the idea of increasing or retaining its territory in defiance of the relative unfavorability of the production possibilities within its national borders.

This goal cannot be achieved, however, at least not in a manner beneficial to that nation. The country with the relatively less favorable production conditions must, as one says, export either citizens or goods. This is true. However, one ignores the fact that the export of goods is possible only if that country enters into competition with nations that have more advantageous production conditions, that is, if, in spite of higher production costs, that country can sell goods just as inexpensively as countries that produce at lower costs of production. This, however, must depress wages and profits on capital within that country. Unless the emigration of capital and labor is legally impeded or forbidden, this will actually boost emigration; this also completely ignores the fact that the cultural level of the citizens is also depressed by such competitive actions.

Over the long term, an overpopulated country (in the sense characterized above) does not have the means to impede the emigration of the superfluous citizenry. Ultimately, the population must decrease to whatever level corresponds to the utilization of that country’s domestic production conditions. As long as the emigrant can find work in the exploitation of possible production that is more advantageous than the least advantageous utilization at home, and insofar as his emigration has not been impeded, the emigrant will improve his economic life through leaving his country. The fact that agricultural tariffs and also industrial protective duties (which offer industry the possibility of retaining high domestic prices through cartels and trusts while marketing underpriced goods abroad) increase the costs of living, requires no more detailed explanation here.

The fact that these developmental tendencies could be misunderstood, not only by the political leaders but also by parts of the media, can be traced back to the circumstance that it was previously possible to compensate for market losses in one area that was progressively industrializing, by developing new markets in other areas. By this method, English industry was able to stay ahead of the Germans, as could the French and the Belgians. Soon, however, the time will come when this ability to get ahead of others in a new market will fail. If all of the agricultural countries (insofar as it is possible for them to do so in accordance with their natural production conditions) were to develop industries, then the primarily industrial country would be capable of exporting its goods only insofar as its natural production conditions were superior to these others.

A number of writers have constantly stressed with the greatest emphasis9 the grave peril to the economic future of the “primarily industrialized countries” that will emerge with “industrialization” in agricultural countries. Yet the correctness of our conclusions cannot be questioned by anything that has been offered in opposition to them.

The scientific treatment of the subject has suffered from the fact that it has been merged with the political-economic battle over protective tariffs versus free trade. In fact, the use of protective tariffs has suggested itself to those who have perceived a future danger facing the industrialized countries from the progressive industrialization of agriculture nations. However, as we have seen above, this possibility is not available.

The industrialized countries are not in a position to prevent the agricultural countries from transitioning into being industrial nations, which would have been an effective means of retaining the status quo in the international economy, if it had only been possible to do so. From the national point of view, another method is available: the annexation of colonies that have a primarily agricultural character to the extent that the home country and the colonies together form an area that appears to be, in relation to the quality of its natural production conditions, no more densely populated than the territory of other nations. This is the path that England has followed and which Germany ought to have followed, had it not degenerated into the misery of provincial factionalism while the Russians and the Anglo-Saxons conquered the world.

What can a protective tariff achieve here? It cannot prevent the agricultural countries from closing their own borders through protective tariffs and other administrative measures. Quite the contrary, it actually incites them to do so, because it hampers the marketing of their own agricultural products and challenges them to protect themselves with tariffs against the “dumping” of industrial goods by the already industrially developed country. The industrial exporting country ought to function as a free trading partner in order to convert the agricultural countries to free trade by setting a good example; however, England’s situation demonstrates how little can be achieved by this method.

Thus, the proponents of protective tariffs must ultimately arrive at the conclusion that salvation lies in the limitation of the population. What, then, is the need for a protective tariff? No type of political intervention, however well developed, is necessary in order for German lands to nurture as many citizens as would correspond to the conditions compatible with their natural production possibilities. That is, indeed, the goal of trade policies: to ensure the existence of a larger population within a limited area. To relinquish the achievement of this goal is to absolutely reject the justification for trade policies. Trade policies are, then, left with only small tasks of transient importance; they are no longer ranked among the important tasks in a nation’s global-historical battle for existence.

Ever since humans have lived upon the earth, there has been only one effective and enduring means to battle overpopulation: emigration. Séfur’s statement, that the history of humankind reflects the people’s efforts to continually move from poorer living conditions to better ones, is also true for the present.

IV

The supporters of protectionist policies have not failed to understand that their goals cannot be achieved through this method.10 And, yet, they still do not admit defeat. Indeed, they cry out ever more loudly for the protection of national labor. The history of recent decades demonstrates that they have been quite successful in this: almost all countries in the world currently practice protectionism.

To make an appraisal of modern tariff policies, a distinction has to be made between the policies of overpopulated countries and those of underpopulated countries. In the underpopulated countries (those that are less densely populated than favorably corresponds to their production possibilities), agricultural production almost always outweighs manufacturing in terms of the number of those employed in the farming sector, and more or less in terms of the value of the products produced. These countries are usually characterized as agricultural countries because they are primarily considered to be exporters of agricultural products and consumers of industrial goods. There are two separate types of agricultural countries in which modern protectionism has developed in terms of motives behind the policy.

The first type includes the long-established cultural areas. Even if these countries are primarily agricultural, this does not mean that they are lacking in manufacturing production. Prior to the development of modern, global economic relationships, they already had a manufacturing base that supplied the needs of that country’s domestic market. Now that the country is being gradually drawn into the global market, the old autarky is disappearing. Agricultural products are exported and industrial goods enter the country from abroad. In this way, the larger, foreign industries on the global market meet local autochthonic manufacturing, which mostly operates in the form of less efficient handcrafting and cottage industries, or at most in medium-sized enterprises.

The foreigner, with his economic and technical superiority in manufacturing, initially is “victorious” in this battle. As a result, small manufacturers and workers in the vanquished industries become unemployed. When looked at from a purely economic perspective, there appear to be two options for the workers who have been let go: either to emigrate to more industrially advanced countries and find employment in their larger industries, or to remain in their home country and return to working in agriculture or in one of the other older forms of domestic production.

The second option seems to be almost impossible, because of the practical difficulty for manufacturing workers to transition back into agricultural labor. The first option is a viable one, though it involves certain disadvantages for the first generation of such workers as they transition from small-scale to large-scale factory employment. However, those workers are, then, “lost” by their native country due to their emigration. Rather than patiently wait until increasing economic difficulties force handicraftsmen and journeymen to make this final step, national protectionist policies intervene to limit the “losses” that would result from emigration.

Protectionism fights against this undesired trend before this happens by trying to prevent the misery of the workers. A nation’s protective tariffs accelerate domestic industrial development to hinder the imminent emigration of some of its citizens. Again, this policy cannot be defended from a purely economic perspective, though it is understandable from the point of view of national policy.

The second group of agricultural countries was created out of areas that were more recently colonized. The colonists were primarily farmers, and their demands for manufactured goods were satisfied through imports from their native country. Originally, import tariffs in these colonial areas were introduced for budgetary reasons and evolved into extremely significant sources of revenue. It is also the case that these tariffs encouraged the emergence of colonial industries. Eliminating these tariffs would have negatively affected the citizens of these colonies, the more so because one of the effects was to stimulate immigration for employment in the industries created under the protection of the tariffs. A point was reached when a decision was made to reform the import tariffs into protective tariffs. This occurred, for instance, during the development of the United States and Australia.

The industrial protective tariff is popular in agricultural countries, in spite of the fact that from a purely economic perspective it cannot be justified in terms of the interests of the citizens of those countries. Even the farmers, who are primarily harmed by these tariffs, came to consider them to be beneficial. National and political interests increasingly prevailed over purely economic interests.

The industrial protectionist policies in these agricultural countries were justified through the use of an “exploitation theory” in contrast to the teachings of those who spoke of a “harmony of interests” among nations, similar to the way labor unions in the industrialized countries attempted to use a vulgar, socialist theory of exploitation to give an ethical justification to their fight against the individualistic social order.

The patriot of the agricultural country sees the industrial exporter as the exploiter who unfairly enriches himself through his trading with the agricultural country. He casts a disdainful eye on the wealth of the industrial countries and compares it with the simpler and poorer circumstances of his homeland. The animosity that he bears toward the citizens of the industrial world is the same that the nobles felt toward the burghers and that the squires held for the barons of industry, only aggravated and embittered, now, by national antagonism.

Friedrich List, a German, contributed the most in creating this “neomercantilist” ideology, which has ended up being turned against the German people. The Russian sees an enemy in the German, who upsets the productive development of the Slavic peoples with his superior industry. The name of the originating country, the “made in Germany” stamped on German export goods, has a provocative effect on those who are critical of these imports.

A completely different orientation is found in the protective policies of the overpopulated countries, that is, those that would become the targets of emigrants if there existed full freedom of movement. These are generally industrialized countries. Protectionism does not emerge from one single source in these countries: it does not view development as something undesirable, nor does it wish to either halt or delay the tendency toward development. Two types of protectionism are to be found in these countries. The first type of tariff is meant to foster development in less favorable areas of production, or to maintain production in areas of the economy that have become less favorable due to changes in trading patterns or technology. This type of tariff may be characterized as primarily an agricultural tariff that is justified due to differences in costs of production in the home country compared to abroad. Tariffs of the second type are imposed to support the exporting sectors of the economy. They are supposed to foster the formation of cartels that raise domestic prices so goods may be exported at lower prices. They are cartel tariffs.11

Whether they are “production cost” tariffs or cartel tariffs, their ultimate effects are absolutely identical to all protective tariffs: they reduce national income. They reduce the availability of economic resources in relation to consumption demands, and thus completely fail in terms of the goal they were meant to attain. They can only bring about transitory effects.

The superficial view that sees nothing in the system of protective tariffs other than one-sided class politics advantageous to commercial producers goes far astray in its criticisms of the motives for and effects from protectionism. This much may be conceded: that it is fruitless in the attempt to delay the development of the global economy.

V

In recent years, there have been changes in the lives of people that cannot leave unaffected the assumptions underlying trade policies.

The development of and price reductions in the methods for transportation have offered an unforeseen expansion in the seasonal movement of labor. It is not impossible that emigration will lag behind the international Sachsengängerei12 in extent and importance,13 at which point the businessmen and the laborers will oppose each other. With this alteration in the character of labor migrations, the disadvantages resulting from people being limited to areas with less favorable production conditions will be more strongly felt than they are today. Countries that occupy land less well endowed by nature will not have to fear falling behind other, happier countries in terms of numbers of citizens; however, they will continue to be handicapped in terms of affluence and culture. The nationalist incentives trying to eliminate these factors, however, will not become weaker, but grow in intensity.

Continuing emigration to foreign countries will, predictably, encounter ever more difficulties in the future. Previously and still today, emigrants generally remain at a lower rung of the cultural ladder. They brought little or nothing of their national culture with them on their trip abroad; social climbing in the new country brought them closer to the national culture of the host country. As a consequence, there are no great barriers to assimilation. Schools, libraries, and newspapers, which are founded by well-intentioned groups and supported by the émigrés’ home government, can do nothing to change this. However, it can be altered by an improvement in the education of the emigrants and through increased participation of the lower classes in the national culture. The European emigrant today already takes with him something more than memories of misery and subjugation. Still, this cultural dowry is not enough to prevent assimilation; however, even today it already impedes and retards it.

The problem of immigration, therefore, takes on a new quality. The special interests of industrial workers who are threatened by immigration, and who previously had to acquiesce in the face of the greater national interest of the benefits from immigration, now are able to raise the threat to “national unity” whenever they wish to hold back the arrival of more immigrants. No one can have any doubts that all countries whose national composition is threatened by immigration will effectively close their borders, just as the countries settled by Caucasians have for a long time now closed their borders to Asian immigrants.14

The drop in the birth rate ultimately must also influence the problems that constitute the starting point for economic policies. Indeed, the causes behind migrations cannot be mitigated by a gradual increase, cessation, or decrease in the birth rate, if this were to happen uniformly across the entire globe. If, over a certain period of time, there would occur a similar reduction in the population of every individual country, this by itself would not alleviate the overpopulation of one country relative to the underpopulation of another. Just as previously, there would still be areas too densely populated relative to the favorableness of the conditions of production, and other areas would remain too sparsely populated. The tendency would remain unchanged to bring about an equivalent distribution of people across the surface of the world.

Assuming that the decrease in population does not exceed a certain rate, the total amount produced by a smaller number of workers need not be equal to the decline in the number of workers; rather, due to the law of diminishing returns, the average amount of per capita income might increase with a declining national income. It is abundantly clear that trade policies are able to exercise a greater effect on this type of income pattern than with the case of an increasing population and, ceteris paribus, a declining per capita income.

VI

The experiences of the World War allow arguments in favor of economic self-sufficiency to appear particularly relevant. Only those countries would be in a position to victoriously survive a war that are independent of foreign imports for the supply of goods needed to wage war and maintain the existence of their populations during the conflict. Where issues of national defense are concerned, all other considerations fall by the wayside. The trade policies of the future, therefore, would aim at bringing about an equivalent distribution of labor between all branches of domestic agriculture and industry.

The advocates of extreme collectivism will not be persuaded in any way concerning the unattainability of these goals of trade policy. They will argue that emigration can be forbidden in order to impede the drop in the number of citizens. They will claim that emigration has nothing to do with the fact that a nation to whom history has granted a narrow, limited area upon the earth (an area poorly endowed by Nature) will have to live more humbly than other, happier nations. They will say that moral and bellicose virtues flourish more widely in poverty than in affluence. The new, national ideal is created, under which all things are judged in terms of making of primary economic importance the possibility of waging a war of starvation.

Yet there is a substantial error in this line of reasoning. It overlooks the fact that in war it is not the mere existence of equipment and weapons that is important, but also their quality. The nation that has to produce the material means for waging war under less favorable conditions of production will be more poorly equipped and armed than its opponents in the field. Up to a certain point, personal bravery can compensate for these material inferiorities; however, there is a limit beyond which all the valor and self-sacrifice in the world can no longer suffice.15

VII

A country can gaze tranquilly upon its future that controls settled areas of such a size and quality of natural conditions of production that any increase in population need not cause a danger of overpopulation. We consider a country to be overpopulated whenever it is more densely populated than would be the case if there were freedom of movement around the entire world. This is true in the same way for both large and small countries. For larger nations, however, the political implications of this situation are admittedly different than they are for smaller nations. If a larger nation’s future is secure, then its position as a world power is also secured.

At the beginning of the twentieth century, we see three large, global empires that have risen far beyond other nations in the size of their territories and the numbers of their citizens: England, the United States, and Russia. In each of these empires, the attempt has been made to employ trade policy in order to influence the regional divisions of labor in favor of their own countries. In each, the concept of national economic self-sufficiency as a national ideal is growing, and events from distant history (the division of the world’s surface as completed during the seventeenth and eighteenth centuries) offer the possibility of their realizations.

The problem appears simplest in Russia. A generation ago, Russia was an enormous agricultural country with almost no industry and few industrial characteristics, although there was a strongly increasing demand for industrial goods. High protective tariffs enabled the creation of industry in many sectors, and in others it merely accelerated this process. The Russian people are in the fortunate position of controlling a large expanse of the world’s surface that is provided with favorable production conditions. The Russians need not fear being removed from the list of great nations within the foreseeable future. Their sons can remain in the country, which offers room for an increasing population due to a multiple of factors.

The situation is similarly favorable for the English people. Great Britain became an industrialized nation one hundred years ago: the world became its sales market and granary. When, at the end of the nineteenth century, the increasing industrialization of these overseas markets appeared to place the future of British manufactured exports in doubt, the British politicians turned their attention to their large colonial settlements. Thus, there is room for an increasing population within the English empire. Not only India, but also Canada, Australia, and South Africa appear as the foundation for the global position of the English people.

The United States is also large enough and wealthy enough in natural resources to be able to feed its current population several times over.

It is possible that others will join these three great global empires of the present. The external indicators appear favorable for China and India. In any case, the following nations have developed into global powers of the second rank: Japan; Spain, in connection with formerly Spanish South America; and perhaps Portugal in connection with Brazil; and Italy due to its expansion in North Africa. For the French nation as well, the political and economic prerequisites are favorable for an expansion along the northern coast of Africa if a different birth rate resulted in an increase in their population.

The foundations of a global empire are its population, which must increase at approximately the same rate as in other global empires, along with the territory under its control so it can offer the room for its expanding population. Trade policies can add nothing to the foundation of a nation as a global empire if these conditions are lacking.

The German people currently lack these foundations. Germany can only provide for the population within its territory by manufacturing goods made with foreign-supplied raw materials that are then sold to foreign buyers, in order to acquire those raw materials required for its own consumption, and to pay wages and other industrial incomes. This situation cannot be sustained over the long term. For this reason, the German people need colonies for settlement if they do not wish to lose their global ranking.16

There are other nations that find themselves in a similar position. However, by far the largest and most powerful of the “unsatisfied” nations is Germany. When German men and women leave their homeland, they cannot find another country in which they can maintain their nationality. This is because all of the lands in which Caucasian people could prosper as farmers and laborers are in the hands of foreign countries, with the exception of a negligibly small amount of land offered in southwestern Africa.17 Everywhere in the world, wherever there is free space for white men, there Germans have settled over the last 150 years. Five million Germans (not including Austrians) immigrated to the United States alone during the years 1820 to 1906.18 They and all of their descendents are lost to the German people.19

Even though German foreign policy has hardly attempted, up to now, to acquire foreign areas for settlement, the fact is that all other peoples who control more land than they will need for their own future development consider Germany their natural opponent in this endeavor. Of all the reasons for the unfriendly attitude toward Germany (which the neutral foreign countries adopted during the World War), this one is more understandable due to the solidarity of interests of those people who, at the time when the world was politically divided up, did not arrive too late, unlike the poet who did.20

VIII

A widely held view argues that national antagonisms would eventually be removed by the economic solidarity of interests. Insofar as this idea claims to be an expression of the fact that the purely economic point of view speaks for free trade and against national isolation through protective policies, it may possibly be true.21 As was demonstrated earlier, protective policies can only find their justification in non-economic arguments. At least for the next few years, any expectation that purely economic considerations about the handling of trade policy problems could triumph over national-political ones must be rejected as unfounded. In contrast, the principle of nationality is politically gaining ever more momentum at present.22

In terms of the national problem in Austria-Hungary, this idea tends to be expressed in a particular sense. The economy is the unifying tie that holds together all of the people of the Austro-Hungarian Empire, who for nationalist reasons are otherwise striving to be free. This is primarily Karl Renner’s point of view.23

Renner views the modern state as an “economic community,” that is, as an “organized economic area.” Countries, nowadays, are “political units, because they are externally enclosed by the tariffs walls of other nations, and are internally connected by the blood, veins, and nerves of their transportation system that surrounds the fixed and powerful centers of their capital cities.” With the second statement, Renner actually indicates the geographic basis of state unity; we will not busy ourselves with that any further.

We are interested in the concept of the state as a tariff community. Renner reverses the situation: it is not the political unit, but instead the tariff community that appears as the constitutive characteristic of the state. “One can, for example,” Renner continues, “hardly conceive of an odder acquisition of hitherto existing statehood, than Austria’s acquisition of Galicia.24 The association, which lasted more than one hundred years, made this area organically part of the political body of the monarchy: its wood and grains, its petroleum, gasoline, and ethyl alcohol would be immediately lacking in every household, in every factory, if the territory were occupied by the enemy. Reciprocally, the entire paper, textile, and iron industries would feel the abrupt loss of the market area.”

Is it any less true, however, that wool, cotton, rubber, coffee, tea, hides, and so on are just as important for supplying the western Austrian markets, and would not the sugar industry feel the loss of its usual market territory no less heavily than any other sector of the economy? Would one not have to come to the conclusion that the United States, England and its colonies, and Brazil, in short, that the entire world is just as organically connected to western Austria as is Galicia? Had the Détente Powers25 succeeded in dividing Germany and Austria in the usual manner, then a proponent of Renner’s doctrine might have found, after around one hundred years of association, that Brandenburg was “organically” connected to Russia, Westphalia to France, Tyrol to Italy.

It is true that a long-term tariff association forges strong economic relationships. An alteration in these circumstances, whether it is due to the erection of new tariff boundaries, the removal of existing tariffs, or an increase or reduction in the tariff rates, brings with it, as a result of the new circumstances, a great rearrangement in production and sales relationships. However, similar rearrangements occur as a result of every other change in the conditions of production: every new invention, every discovery of new sources of raw materials may bring this about.

Renner finds the separation of a primarily agricultural country from an industrial economic area to be particularly ruinous, because it lowers the value of the land. However, the same effect would have been generated by the removal or lowering of agricultural tariffs; would Renner dispute this, as well? It is true that, from a purely economic point of view, the primary goal is to expand the economic community into a free trade area to the greatest extent possible, and the entire populated surface of the earth is the largest of these possible areas. However, as we have already seen, special interest groups in individual nations currently demand the establishment of economic autarky. On the other hand, the free trade idea makes the case for tariff reductions and always throws into question the rationale for protectionism; the undeniable power of the argument for free trade, sooner or later, will triumph over every tariff that is not justified by the principle of nationalism.

Naumann’s Mitteleuropa [Central Europe] also suffers from the complete misunderstanding of these facts.26 According to Naumann, it is particularly difficult for the smaller nations to maintain their independence next door to the larger nations of the world, that is, next to the Anglo-Saxons, the Russians, and the Asians. In Naumann’s words, nothing binds these smaller peoples more closely together than that they find in unity the power to resist; and nothing appears more natural than that the German people, as the greatest and most well endowed among the weaker peoples, should assume the leadership of this federation. However compelling this may seem in the name of national self-preservation, two circumstances currently hinder the path to this conclusion.

On the one hand, there is the authoritarian and authoritative state of mind and constitution of the Germans, which has surpassed for quite some time that of other peoples around the world.27 The fact that the future German federation is primarily planned as an economic federation is no less important. The Magyars, Romanians, Serbians, Bulgarians, and all of the other peoples between Berlin and Baghdad can and will not forgo creating their national industry. They do not want to remain merely agricultural countries, sales territories, and suppliers of raw materials to German industry. They will not passively observe as their surplus population eventually immigrates to Germany, and becomes Germanized as laborers in German factories. They may perhaps agree to a political federation with the German Reich, as a defensive and offensive alliance to guarantee their own national independence; however, they will never agree to an economic and tariff alliance. They would happily observe the market possibilities for their agricultural products expanded into Germany and Austria; however, they will not forgo the creation of their national industry and the gradual replacement of German imports.

The tariff and economic associations are claimed to be the ties that bind the individual members of a nation-state to an empire.

Let us first examine the relationship between Austria and Hungary. The two countries form a unified tariff area, though they are legally completely independent, with each entitled to direct its commercial relations with foreign countries without consideration of the other. This unity is advantageous to both countries. It offers the Austrian industry a profitable sales territory in which it does not have to fear competition from superior industrial countries; Hungarian agriculture can sell its products in Austria at a price that exceeds the global market price by the amount of the tariff. However, on the other hand, the tariff association does inhibit the development of a Magyar national industry. This makes the tariff association unbearable to Magyar nationalist feelings; it would have gone to pieces long ago if the Hungarian legislature and administration had not understood how to wage a decisive campaign against Austrian exports to Hungary, even without tariffs. Austria and Hungary are indeed part of a tariff and currency union; however, they do not associate in an economic relationship; rather, they exist in a state of permanent economic warfare. Thus, they have succeeded in starting up and protecting industry in Hungary without creating an intratariff zone. However, this was possible only through constant frictions, expansions, and controversies between the two halves of the monarchy, which have generated much bad blood. The coexistence of the two countries in this association was conceivably the worst possible situation, not in spite of, if not primarily because of, the tariff association.28

Let us now leave the Austrian situation. Germans and Czechs, the two strongest nations according to the number of their peoples, have the same interests in regard to Cisleithania [Austria and Crownlands] as do the Hungarians and other countries. Indeed, industry in the German-speaking area of the Sudetenland is more highly developed than in the Czech-speaking areas.29 Yet even the industrial development in the Czech lands (in comparison to what is common in Austria) is quite extraordinary. A large portion of the industry in the Czech-speaking lands still remains in the hands of German industrialists; however, even these facilities contribute to increasing and strengthening the Czech nation, and the Czechs additionally hope that sooner or later the leadership of these industries will become Slavified. Both nationalities making up the population of the Sudetenland have the same national interests regarding the parts of the monarchy that are still primarily agricultural. Both feel threatened by the increasing closeness of the Austro-Hungarian Monarchy’s common tariff area; both fear the industrialization of Hungary or Galicia. In comparison with these internal and powerful external common interests, the superficial observer overlooks the bitter economic battle that is constantly being waged domestically. There, every subsidiary, every business, every individual facility becomes a battleground. There is, admittedly, no conflict on the basis of purely economic reasons, nor is it led by the manufacturers, who are only concerned about the profitability of their operations. It is a national fight. Its proponents are primarily the politicians and literati, those whom Renner derisively calls the Wirtschaftlosen, those without access to capital.

However, behind these leaders stand not only all of those who might hope to gain an advantage from the expected changes; the entire nation stands solidly behind them, because the country strives for national greatness and national prosperity through industrialization. The autonomous administrations in the countryside, regions, and communities participate in this battle, as do also the powerful national banking institutions, savings banks, and confraternities, who also think about the “national advantage” along with profit opportunities in all their dealings.

It is not only Austria’s German manufacturers, against whom the Czechs have initiated economic warfare, who lament these circumstances; all do who feel themselves to be and call themselves Austrians. These are the circumstances that force Austria into the background in the competition with the Great Powers. Because, when the not very large and poorly endowed economic area of Austria is reduced in this fashion into a number of tiny economic regions, then any possibility is lost for developing specialized industries. One can lament these circumstances (and I will not line up to declare that I also lament them), but there would be no purpose in denying them.

Of the other nationalities that are included in the Austro-Hungarian tariff area, the Ruthenians, Romanians, and Slovenians still stand at such a low level of economic and political development that they cannot yet consider an industrial protective policy. Within their economic areas, their national political efforts are devoted to intensifying their agricultural operations. In this, they are supported by the monarchy’s agricultural trade policy. There can remain no doubt that in the foreseeable future even these nations will attempt to create a national industry, the rudiments of which are already present today.

CHAPTER 11

Inflation1

Inflation and Devaluation

There are two options for the government to meet its enormously increased financial demands to cover the costs of the war.

The first one is for the government to issue war bonds. Subscribers pay the specific amount for the bonds by drawing upon their own capital or borrowing the money from third parties who have the liquid assets to lend. A practical and important example of this is the major banks that use their customers’ deposits and savings to finance the war loan.

The second option is for the Treasury to issue debt to the Austro-Hungarian Bank. Since the Bank has no assets of its own to lend to the state, the only method at its disposal to meet the government’s request is by issuing banknotes. The Austro-Hungarian Bank is currently little more than a purely formal intermediary between the Treasury and the public. In practice, it would make little difference if this intermediary were to be removed and the two Treasury departments [of Austria and Hungary] were to directly put paper money into circulation.

Ample use has been made of this method for financing the war. The amount of currency issued by the Austro-Hungarian Bank has become something of an avalanche.

The figures are as follows:2

The increase in the quantity of paper money in circulation has resulted in a loss of purchasing power of the monetary unit, that is, the crown. This was neither a coincidence nor an unexpected and surprising consequence. The fact that an increase in the supply of money (also known as inflation) must necessarily lead to a decline in the value of the currency has long been taught by economic theory, and also has been confirmed over and over again by historical experience.

The devaluation that results from an increase in the supply of money manifests itself, on the one hand, in a general increase in the price of all goods and services, and, on the other, in the increased cost of foreign currency, that is, a rise in the exchange rate.3 Both of these phenomena, the increased cost of goods and the rise in the exchange rate, are inextricably linked to each other. One is inconceivable without the other; they are two aspects of one and the same phenomenon, and all economic policy tools are powerless to combat them as long as the inflation continues.

Imposing price controls or taxes on prices, or imposing penalties on profiteering and the like, have proven to be ineffective and unsuccessful measures, just as have the various attempts to reduce the exchange rate through the imposition of currency controls.4 This, too, does not come as any kind of surprise as a result of the war. It was already well known to those who have made a study of economic policy, and historical experience has taught us that there is no other remedy than to restore order to the nation’s finances. All attempts by the authorities to combat rising prices with the full force of the law have come to naught, from the “edictum de pretiis rerum venalium” issued by the Roman emperor, Diocletian,5 through the “Maximum” that was decreed during the French Revolution,6 down to the price controls imposed by the belligerent powers today.

The massive increase in the price of goods that we have witnessed cannot, however, be entirely attributed to the money side, as the supply of goods also plays a role. Goods of all kinds have become scarcer as a practical consequence of the war, with imports cut off from abroad and production crippled at home. But this explains only one part of the rise in the price of goods. The increased amount of paper money would necessarily have led to a rise in the prices of goods, even if there had been no inflationary factors on the supply side of goods.

A general increase in the prices of all goods can only arise as a result of an increase in the money supply. This is the situation in which we currently find ourselves. The reduction in the availability of goods has gone hand in hand with the enormous increase in the supply of money. We can trace the disruption in relative price relationships to the reduction in the availability of various individual goods; and we can trace the increase in the overall level of prices to the increased quantity of money. The former is the cause of the shortages from which we are suffering and will continue to endure as long as the current war situation persists, whereas the latter is the cause of the rise in the general price level.

It is true to say that part of the increased circulation of paper money reflects an increased demand for money. The setting up of military payment facilities for soldiers, the extended circulation of our currency in the occupied territories,7 the spreading of money at home, and, by no means less important, the hoarding of earnings that some sectors of society have been frightened into—these have all contributed to the increased demand for money; so a moderate increase in the amount of paper money in circulation has taken place without, at the same time, contributing to the rise in prices. However, the increase in the issue of banknotes has far exceeded the amount needed to cover the increased demand for money without causing a rise in prices.

Implications of Changes in the Value of Money for National Finances

For the Treasury, which has primary responsibility for all debts incurred by the state, devaluation offers financial relief. As the value of the currency falls, the burden carried by the debtor decreases; he still has only the same fixed amount of principle and interest to eventually pay back in crowns, regardless of whether or not the purchasing power of the crown has decreased in the meantime. On the other hand, as the currency is devalued, state revenues partly will increase. The revenues from various taxes will increase because real estate, dividends, and income expressed in money terms will also go up. This explains the favorable trends in income taxes, capital gains taxes, stamp duties, death duties, and various other taxes. So while state revenues as expressed nominally in money terms are largely on the increase, the greater part of the state’s debts, also expressed in money terms, remain unchanged.

However, it should not be overlooked that these favorable effects for the Treasury from devaluation apply to only a part, albeit the major part, of the national budget; but looked at from a different perspective, they are accompanied by unfavorable consequences for the exchequer. To the extent that the state has incurred debts expressed not only in crowns but also in a foreign currency or in gold, a devaluation of the crown means that, expressed nominally in money terms, the debt becomes more of a burden. The higher the foreign exchange rate and the more the price of gold rises against the currency, the greater the required expenditure in crowns in order to obtain the same amount of marks or gold coin to pay the interest on the foreign loan.

On the other hand, not all state revenues rise as a result of the de-valuation. Some taxes, such as property taxes and some business taxes, and fixed duties, remain unchanged, as they have been set at certain amounts. Devaluation thus results in relief for these taxpayers, expressed in real terms. If they are to be brought into line with current conditions, these taxes and duties in particular need to be increased. Tax increases such as these, however, only can be gradually introduced and involve great political difficulties because the population, having been hit hard by the rise in prices, will regard any such increase in taxation as an additional and unbearable imposition, rather than as an attempt to adjust the tax burden to the changed circumstances.

The extent of the Treasury’s financial relief from devaluation is, therefore, undoubtedly far less than is often claimed. But even this presumed benefit is, to a great extent, offset by the disadvantages arising from the decrease in the value of the currency, including the threat to the creditworthiness of the state. It is fear of a further decline in the value of the currency, more than any other consideration, which deters potential creditors from investing in war bonds. This is why, in spite of the central bank’s interventions, there has been such an unfavorable trend in the interest rates paid by the state on war bonds and its debt in general, and why subscriptions to the war bonds have been so disappointing. Certainly there would be no greater incentive for subscription to these bonds than an end to any further borrowing from the Austro-Hungarian Bank and an end to any further inflation.

Side Effects from Devaluation and Their Social Consequences

As the currency is devalued, all pension payments are reduced in real terms. There has been a decrease in the number of those holding government bonds, as well as in the number of creditors and mortgagers, together with holders of railway bonds and creditors of any other kind who may only claim interest on and final repayment of principle in terms of the original nominal amount lent, regardless of whether or not the purchasing power of this sum of money has diminished in the meantime. They continue to earn only the same nominal payment, even though they can now only purchase and consume less with this amount than they were previously able to.

In general, a debtor’s loss is a creditor’s gain. Seen against this background, a superficial view might suggest that a shift in the relationship between creditor and debtor in favor of the latter is always a positive development. It is a popularly held belief that the debtor is always the poor, needy person while the creditor is the rich capitalist. This view is very wide of the mark. The vast majority of debt is not owed by poor individuals; it has not accumulated from consumer credit being extended to the poor, but, instead, consists of loans extended to industrialists to finance production. It is a credit supplied for capital investment and to cover operating costs that have been taken out by landowners, entrepreneurs, and the public sector. The creditors are by no means always “rich” and the debtors by no means always “poor.” The major part of all outstanding debt is owed by the richer portions of society to the poorer ones. The less well-off classes of society are disproportionately represented among the creditors. They make up the majority among savings bank members and savings account holders at banks and with cooperatives. Therefore, anyone who regards as an unquestionable “social good” the disadvantage for the creditor and the accompanying advantage for the debtor from devaluation is deluding himself. The greatest amount of wealth rarely exists in monetary form, but, instead, exists in land and property values, in industrial enterprises and in shares, all of which remain immune from inflation; the money value of these assets tends to rise in proportion to the rate of inflation.

It is the middle classes, above all others, who have their assets invested in receiving interest payments from the public purse. Civil servants, army officers, and other professions rely on salaries from the public purse. As a result of the general liquidation of commercial enterprises caused by the war, we can now add to the list of state dependents practically all members of the middle class previously engaged in commerce and retail business. During the course of the war, these shopkeepers and tradesmen have had to sell their stocks and inventories; the sums of money that they received in exchange for them, together with the sums that would have been earmarked for maintenance and repair of their business enterprises, have long since been invested in loans, primarily into war bonds.

Thus the lost purchasing power of the currency has deprived the middle classes of their standards of living and the means of earning a living, as well as depriving the thrifty factory worker or farmhand of the fruits of his labor. The bourgeois is dragged down into the proletariat and the aspiring proletariat is dragged down to the level of the “Lumpenproletariat”8 subclass. These classes seethe with rage, even though their adherence to social norms previously would have withstood all temptation or sedition.

Nothing contributes more to political upheaval than the economic destruction of those strata of society that are most responsible for its maintenance.

CHAPTER 12

On Paying for the Costs of War and War Loans1

The favorable outcome of a war is not solely dependent on the number of soldiers, or the valor and brilliance of their military commanders. An equally important factor is the capacity to provide the army with supporting material, arms, and military equipment of every kind. Military commanders are thus faced with additional tasks besides recruiting, training, and deploying troops. They must prepare the supporting material needed for the actual fighting, as has become particularly obvious during the present conflict, which our enemies have turned into a war of attrition. They have accomplished this by cutting off our and our allies’ economies from access to foreign raw materials and industrial products, thus forcing us in wartime to rely on our own resources for all military materiel and civilian food requirements without any help from outside the country.2

Up until now we have withstood the test. We have succeeded in supplying whatever is needed to wage war—weapons and ammunition, soldiers’ clothing and equipment, food for the army and the entire domestic population. Our economy has demonstrated that it can bear the burdens of four years of war on land, at sea, and in the air in Europe and Asia. Our people have provided not only the manpower and their blood for fighting the war, but also all the required military supplies.

It has been observed that three things are needed to wage war: money, money, and more money. However paradoxical and exaggerated this remark may sound, it contains a kernel of truth. And the truth is that the supporting material for waging war decisively influences the outcome of a military conflict. However, from an economic perspective, what counts is not money but necessary material, because money is everywhere in the economy merely a medium for obtaining commodities. What matters in war, therefore, is not whether a people has more or less money but whether it has more or less commodities available for waging war. Had the Austro-Hungarian economy spent several billions more in money than it actually possessed, it would hardly have made any difference, since these billions could not have been used to procure goods from other countries.

For four years we have been able to stand up against the enemy and have not only liberated our country’s territory from hostile invasion but have also penetrated deep into enemy territory with our arms.3 This outcome must be credited as much to the efforts of our entrepreneurs, workers, and farmers as to our brave soldiers.

The war has imposed very substantial material sacrifices on our economy. Many formerly flourishing areas are devastated, long stretches of railroad tracks have been destroyed, the stock of cattle has been decimated, and agricultural productivity has been reduced by inadequate replacement of worn-out equipment. The whole economy has been depleted by the exhaustion of preexisting supplies. The enterprising among us will be doubly spurred to work hard when peace returns, while weaker natures will view the future of the economy with alarm. Personality traits alone decide into which of these two categories one belongs. But no one needs to worry about our capacity to pay for what the war has already consumed.

It is our economy that supplied the material means to wage war. It is the hard work of our people that created these means and put them at the disposal of the combatants. Our economy, which has been almost completely cut off from other countries, has supplied our armies with what they needed and all by itself bore the costs of war—a proof of its strength and capacity.

That is what really counts. How to distribute among the individual members of the population the war burdens and losses that the economy as a whole has had to endure is a different matter. It is this aspect that people have in mind when they talk about “paying” for the cost of war.

It is misleading to speak of the national economy. What we really mean is not the unified management of the economy as a whole, but the sum of all the individual economic activities of each citizen. In this light, the state treasury is only one among many economic entities, albeit the largest and most important of such entities. The treasury engages in economic exchanges with individual citizens. When it needs work to be done, it pays employees and workers; when it needs commodities, it buys them from their owners. The means for these transactions are acquired by taxation, if we disregard the state’s relatively insignificant amount of productive wealth. The treasury bears the greatest part, by far, of the economic costs of war. The state is responsible not only for the entire cost of armaments, equipment, and the provisioning of our troops, but also for the cost of compensating individuals for wartime losses. It is critical for the outcome of the conflict that commodities be available for waging war. The question of how the treasury transfers these items from the possession of its citizens to itself, that is, the fiscal aspect of waging war, is simply a matter of the state’s internal organization. Important as it is, it is a secondary matter. When there is a fire, it is paramount to utilize firemen, hoses, and water; how to pay the fire brigade is a secondary consideration at that point.

If we leave aside the payment of war damages by the defeated enemy, there are three options for the treasury in acquiring the means to pay for the war. The first option is to take possession of the required goods without compensation. This would seem to be the simplest approach. From the point of view of equity one could justify it by saying that taking commodities away from their owners, while a serious encroachment on the personal rights of individuals, is far less serious and onerous than universal conscription. The readiness to give one’s life for one’s country calls for a far greater sacrifice than to give up a large part of one’s property.

There are strong reasons, however, why states avoid this option in wartime and generally pay compensation for property that is taken. States were unwilling and unable not to take advantage of that strongest of incentives for maximizing economic activity, namely self-interest. If goods that were available at the beginning of the conflict had been sufficient for the pursuit of the war, it would have been a different matter. These goods could then have been confiscated and used for the war. But a sufficient quantity of such goods was in fact non-existent or inadequate at the beginning of the war. Production had to be converted to meet military demands. Factories making sewing machines and typewriters had to be converted to the production of machine guns, factories making agricultural implements had to be converted to ammunition production, and so on. Maximizing the production of military goods was the ultimate objective, which could be achieved only by giving entrepreneurs a free hand and letting their material interests serve as their incentive. If factories had been taken over by the state, individual initiative would have been stymied.

The system that we deployed unquestionably proved its effectiveness. It allowed us not only to maximize the production of manufactured goods already produced in peacetime, without a marked reduction in their quality, but also to start the production of entirely new goods. We not only replaced the weapons and equipment used up during the war, but also put into use new weapons and new equipment. Our artillery now has far better guns than at the beginning of the war, the ammunition has become much more effective, our infantry now disposes of weapons for hand-to-hand fighting that were unknown at the beginning of the war. Airplanes and submarines, which were not far along four years ago, have attained increasing importance in the course of the war. Our industry has met all these demands.4

To realize the importance of this achievement, one need only look at Russia. The Russian army entered the war with fine weapons, good and abundant ammunition, and durable, ready-to-use clothing and equipment. Yet Russia was incapable of replacing the items that were used up or lost in the course of the war, since Russia received inadequate supplies from its allies, whose first priority it was to equip their own armies. The Russian army was so poorly supplied with weapons and equipment in the spring and summer of 1915 that this circumstance alone would have prevented its ability to resist our offensive. In the first months of the war, the Russian artillery units had more guns and more pieces of ammunition per gun than ours; by 1915 we surpassed them in the number of guns and the amount of ammunition.5 The same holds true for infantry weapons as well. The state was therefore in no position to expropriate what it needed without compensation. It could resort to this procedure only for supplies of goods not produced at home.

Another option for the state treasury in securing the means needed for waging war is to impose new taxes and increase existing taxes, an option it has pursued to the fullest extent possible during the war. Some people took the view that the entire costs of war should be paid for by taxes while the war was in progress; they cited the fact that England had followed this policy in previous wars. It is certainly true that England largely covered the cost of its smaller wars by collecting taxes during these conflicts, but for such a wealthy country these costs were insignificant from a financial standpoint. When England was engaged in large-scale wars, however, this was not the case. It did not follow this path during the Napoleonic wars, nor is it doing so in the present war, the biggest the world has yet seen.

If the huge sums required for this war were to be collected entirely from taxation and therefore without incurring government debts, taxes would have to be imposed and collected without any regard for the fairness and uniformity of the distribution of the tax burden. One would have to take what one could at that moment. Owners of liquid capital (not only those with large amounts of capital but also owners of small amounts of capital, notably owners of postal saving books) would have to give up all they had, while owners of real property would be asked to contribute little or nothing.

That is, of course, unthinkable. If these high wartime taxes (and they inevitably would be very high to cover fully the annual cost for military expenditures) were to be levied equitably, those without cash on hand to pay taxes would have to go into debt to procure the means needed to pay them. Landowners and owners of business enterprises would then be forced to go heavily into debt or even to sell part of their property. In this case private individuals rather than the state would be forced into debt and would have to pay interest to the owners of capital. Private credit is generally more expensive to obtain than public credit. Landowners and property owners would have been forced to pay more interest on their private debts than they would have paid indirectly for interest on the state debt. If they were forced to sell a smaller or larger part of their property to pay their taxes, that sudden sale would have depressed most real estate prices. As a result, the owners would have suffered large losses and the capitalists with cash on hand at the moment would have made big gains by buying the property cheaply.

It is true that the state did not cover its entire war costs by means of taxes but largely relied on government bonds, on which interest has been paid from tax revenues. It is a mistake to believe, however, that the owners of capital are the beneficiaries from this situation. On the contrary, it is the interests of landowners and business owners that are safeguarded.

Some people claim that financing the war by state loans is tantamount to passing on the costs of war from the present generation to future generations. It is sometimes said that this transfer is fair because war is waged not only in the interest of the present generation, but also for that of our children and grandchildren. Nothing could be further from the truth. War can be waged only out of currently available goods. One can fight only with the weapons on hand; all military needs must be met out of existing wealth. It is the present generation that is waging war from an economic point of view, and it is this generation that must bear all the material costs of the war. Future generations are affected only insofar as they are our heirs. We will be leaving less behind for them than if war had not happened. This is an unavoidable fact, whether the state finances the war by indebtedness or by any other means.

The fact that the bulk of the war costs have been financed by state loans is not in the least an indication that the burdens of the war have been passed on to future generations. All it means, as explained above, is that war costs have been distributed according to certain principles. Let us assume that the state is obliged to extract half of each citizen’s wealth in order to finance the war. It would make no difference whether the state asked each citizen to pay half his wealth in taxes immediately or whether the state collected annually by way of taxes the amount corresponding to an interest payment on half his wealth. It makes no difference to citizens whether they pay 50,000 crowns all at once or whether they pay interest on these 50,000 crowns year after year.6

It does become a significant issue for those citizens who would be unable to raise these 50,000 crowns without going into debt and who would have to borrow to pay their taxes. For they would have to pay more interest on this loan as private persons than the government, which can borrow at the lowest rate from its creditors. Let us assume that this difference between the more expensive private credit and the cheaper government credit is only one percent. Taxpayers would then save 500 crowns a year in our example. They would save 500 crowns annually compared to what they would have to pay annually in interest for a private loan that would enable them to pay the high war taxes prevailing over a few years.

The term “war loan” is subject to a multitude of misinterpretations. The legal structure of the loan is in no way affected by the fact that the loan was assumed by the state to procure the means to wage war. War loans are loans of the Austro-Hungarian State. They do not differ from older loans assumed by the two states prior to the war. The layman’s view that these loans are less secure than other state loans because they are “war loans” is thus completely erroneous. All state loans taken together constitute the state debt. The only differences between the individual issuances of state indebtedness are those stipulated when they were issued, which anyone can read in the text of the loan document. The differences lie in the interest rate, conditions for redemption, and bundling. There is no difference in the legal status of the debtor. The owners of older state loans, for instance, the owners of a crown annuity emitted before the beginning of the war, have no greater legal guarantee that their interest payments and capital repayment will be met than the owners of war bonds. War bonds do not constitute a lien on the state, where creditors are ranked differently.

Some people who are not knowledgeable about economic affairs voice the fear that the state might refuse to redeem coupons and repay capital after the war, in the light of Russian experiences. They fail to note a highly significant difference between conditions in our country and in Russia. The Russian loans were foreign loans; that is, the owners of Russian obligations were largely non-Russians, for example, the English and the French. When the present Russian rulers declared the loans null and void and stopped interest payments, foreigners who were of no concern to them were victimized.7 At this juncture England and France are in no position to exert military pressure to make Russia fulfill its obligations toward its creditors. In their actions, Russia’s present rulers have disregarded later, more distant consequences.

There is no doubt that state bankruptcy will eventually weigh heavily upon the Russian state. It is obvious that Russia from here on out will either be unable to obtain foreign loans at all or able to only under very unfavorable terms. One of the terms will surely be prior payment to their creditors. Foreign loans are indispensable if Russia wishes to restore its economy to its former level. It will therefore have to agree to all the terms that its creditors will impose. But, as stated above, Russia’s present rulers have been oblivious to any of these considerations. Their only concern has been to extricate themselves in the short run from their financial difficulties, and at the same time to display their ideological hostility to private property.

Things are quite different in Austria-Hungary, which has no obligations abroad. The war loans are in the hands of domestic creditors, and so are most of the older Austrian and Hungarian government loans. It is erroneous to assume that only rich capitalists own state obligations. Our government securities were not issued solely to the rich and wealthy segments of the population. Directly or indirectly, their owners are largely the poor and poorest. The assets of savings banks and cooperatives are mainly invested in government securities, so that even the smallest savers have a stake, via the savings banks, in the continued servicing of the government’s debts. State bankruptcy would affect not wealthy foreign capitalists but small and very small domestic savers. Citizens, not foreigners, would be victimized. Any government, no matter what its political orientation or party affiliation, will have to bear this fact in mind. State bankruptcy might well have adverse political consequences. Interest payments would have to be maintained in order to avoid alienating all those for whom the stopping of interest payments would involve a substantial loss.

The Russian situation obviously doesn’t apply to us. Differences do not end there. The Russian armies have been defeated; the Russian state has collapsed. Our armies, on the contrary, have been victorious; they have chased the enemy from our country’s territory and have made deep incursions into enemy territory.

Although state loans are not threatened by cessation of interest payments, a more serious threat to them may be the debasement of the currency. All belligerent countries have been forced to cover at least part of their military expenditures by loans provided by their note-issuing central banks. Such loans are a highly questionable instrument of credit policy. The note-issuing bank can provide the requisite sums only by issuing notes. This increase in the number of banknotes in circulation reduces the purchasing power of the monetary unit. Prices rise. The depreciation of money induces significant shifts in income and wealth. It is not our object here to deal with this question. We will limit ourselves to exploring the consequences of the decline in the value of money on public loans. Anyone taking out a 100-ruble loan in 1913 with a promise to repay the final amount in 1918 fulfils his obligation by repaying 100 rubles in 1918, even if the purchasing power of the ruble has vastly declined in the meanwhile. Changes in the value of money must inevitably benefit the debtor and injure the creditor, whether private or public debts are involved. When the purchasing power of money declines, the debt-burden of the state is reduced. In view of this threat, misgivings about investing in public loans are not altogether unreasonable.

At the same time it should not be overlooked that the same risk applies to all capital investments. Anyone with monetary claims of any kind—lien holders and mortgage holders, for instance—will be at the same disadvantage as holders of public loans. They too have monetary claims and suffer equally from the decline in the value of money. It is an illusion to think that investment in liens and mortgages is a protection against the dangers of a decline in the value of money. The net outcome will be a lower interest rate than that offered for war loans without a commensurate increase in security.

It is true that assets invested in real estate and businesses will not face this threat. The price of land, buildings, and factories will rise at the same rate as the prices of other goods. As the value of money declines, the market value of these assets will increase in money terms. The owners of these items will therefore see a rise in the money value of their property. In the event, they will be neither richer nor poorer, as their property has remained the same; all that will have changed is its money value, because money now has a lower purchasing power. They will, however, not suffer from the devaluation of money. Real estate owners who acquired their land before the depreciation of money set in are thus at an advantage. For those who acquired their land later, the situation is different. Anyone who now wants to acquire a piece of land must pay a price that corresponds to the current lower purchasing power of money, and he has to pay an additional premium for the chance of avoiding further losses from his assets if the monetary depreciation progresses. These circumstances account for the exorbitant prices at which real estate now changes hands.

At these inflated prices, the return on invested capital is very low. No form of investment can save individuals from a catastrophe that engulfs the whole economy. Individuals are as powerless to protect themselves from the political consequences of their country’s defeat as they are to escape the economic consequences of this defeat.

So everyone has a great deal at stake in a favorable outcome for war loans. Anyone who invests in a war loan comes out ahead by securing a higher interest rate for his assets. He also enhances his economic interests indirectly by preventing a further decline in the purchasing power of money and a further rise in all commodity prices. Investing in war loans is not only a patriotic duty but also a prescription for economic survival.

Nobody would deny that the war has imposed heavy economic sacrifices on us and that we will be suffering from the consequences of the war for many years. We must take these sacrifices in our stride; war has taken an even heavier toll by taking the lives of thousands of the best among us. And yet we must not lose courage. The economic strength of our country has brilliantly withstood the test of war. Cut off as we were from all links to the outside world, we had to rely on our own resources to wage war. Though less prosperous than our enemies, we have outperformed them economically.

Our achievements have been unmatched with respect to fiscal policies. We outdid our enemies to the east [Russia] as well as to the west [Great Britain, France, Italy] in financing war costs through taxes and war loans.

While we have had to resort to the printing press at times to meet war needs, we did so in moderation. Today our monetary system is more intact and sounder than that of our former enemies to the east, and we can look forward to strengthening our situation, whereas our western enemies must anticipate a further deterioration in theirs.

We owe this success to our soldiers on the battlefront and to our businessmen, farmers, and workers on the home front.8 And everyone who signs up for the war loan will thereby be doing his share.

CHAPTER 13

Remarks Concerning the Problem of Emigration1

Harmful Effects of Emigration

Aside from its general political and economic harmful effects, emigration also involves military disadvantages as well. In the decade before the war the monarchy permanently lost at least 250,000 conscripts in this way.

Emigrants abroad give up the use of their mother tongue; they gradually forget their homeland; and little by little they become citizens of the country to which they emigrate. In the second or, at the latest, in the third generation they become completely assimilated and are no longer distinguishable from the other citizens of the country to which they have migrated.

Causes of Emigration

Emigration from Austria and Hungary is based exclusively on economic motives. The emigrants go forth because they can make their way in the world better in the country to which they immigrated rather than at home.

There has been no emigration from the monarchy due to political dissatisfaction or persecution of political opinions, or because of a person’s nationality or their religious beliefs.

Combating Emigration

Emigration can be effectively combated only by successfully eliminating its causes. Economic conditions need to be improved so the inducement to emigration disappears. Among the ways this can be done, the following might be considered:

1. Many of the emigrants are agricultural workers or small landholders who emigrate because of no prospects at home of acquiring the ownership of land or enlarging their holdings to the extent they would desire; any land they may have is insufficient to support a family. These emigrants are precisely the most valuable from the economic as well as from the military point of view. Broad areas in Canada have been splendidly settled and cultivated by Ruthenian and Slovakian farmers.2

To eliminate these causes for emigration it must be decided to repeal all those legal impediments that up to now have stood in the way of splitting up large estates. Entails3 must be abolished; de facto or juridical tax favoritism for large estates (e.g., special land taxes or brandy allotment taxes) must be done away with; the exercise of hunting rights must be unconditionally granted to the landowner; furthermore, the so-called peasant fiefdom, or the buying-up of farm properties for the purpose of converting them into hunting reserves, must be prohibited. Through such measures the historical position of the large landowners will not be damaged, yet they will bring about a number of positive changes that will result in some people remaining in the country who otherwise would have emigrated.

2. Our occupational legislation, which is unequaled in the entire world, with its certificates of competency and system of occupational licensing, makes it difficult for those attempting to better themselves to achieve economic independence. Here, too, a complete change must be brought about. If all other nations in the world can make do without the certificate of competency, then surely this would be possible in Austria also.4

3. Immigration to overseas colonies also exercised, in part, a certain attraction before the war, because there was no obligatory military service in those countries. A shortening of the term of military service will undoubtedly contribute to reducing the desire to emigrate.

Reduction of the Harmful Effects from Emigration

Introduction of these changes, in the best of cases, will slow down emigration, but it will not completely stop it. It is necessary, therefore, to take measures that reduce to a minimum the harmful effects from emigration. In this political, economic, and military interests all coincide.

However, it is necessary to distinguish between seasonal migration, on the one hand, and permanent emigration, on the other.

Measures relative to seasonal migration

From every possible point of view, seasonal migration is less of an evil than permanent emigration. Seasonal migrants always come back to their native land, and, in general, they return richer; and in many cases also return more professionally proficient and skilled than before they left. They learn a great deal while abroad that they can turn to good advantage when they return home, and they are not lost to the fatherland and the army.

The only disadvantage caused by seasonal migration from the military point of view is the danger that if a war breaks out a part of the seasonal migrants will not be able to return. This danger, however, is not very great in regard to European seasonal migration, since this [Austrian] migration is mostly to Germany and to countries that in the present war and presumably also in future wars will remain neutral (Scandinavian nations, Netherlands, Switzerland).

Again from the military point of view, it should be noted that fulfillment of mandatory military service, and in particular the completion of actual military training, could be regulated to minimize the economic sacrifice imposed on those required to serve; thus, as far as possible, military training should be in a part of the year during which these men cannot find employment abroad. Then they will come back willingly to fulfill their military service. However, if their training falls during the time when they are employed abroad, it can easily happen that they will neglect reporting for duty. (This is more of a temptation when the individual is abroad than when he is at home.) If an individual breaks the law by not reporting for duty and can count on being punished on his return home, the danger exists that he will simply remain abroad.

The state has a responsibility to look out for seasonal migrants. Consulates must see to the following: seasonal migrants are protected from exploitation; they get medical treatment in case of sickness, and financial support and transportation to get home; the consulates should guide the flow of migrant workers to those regions where the most favorable wage possibilities and working conditions are to be expected. All these governmental measures for the protection of seasonal migrants keep the emigrant conscious of the fact that he is the citizen of a great nation, and that the strong arm of his home country protects him whenever he is abroad. He will, then, be doubly attached to his homeland.

Special arrangements need to be made to keep current the military records of seasonal migrants. It is recommended not to transfer these records abroad, however, to avoid friction in countries where friendly relations are not a certainty; instead, it is better to carry out this supervision as far as possible at border crossings. Military concerns will be fully cared for through the use of records offices in migrants’ home-towns, customs stations on the borders, and the consulates and other governmental representatives abroad.

Many improvements can be made for the protection of our seasonal migrants through sympathetic cooperation between the civil authorities and voluntary organizations that often already exist or that can be recruited to start up. For public health and social policy reasons, the countries to which the seasonal migrants travel will support these endeavors since they have a strong interest in foreign workers being properly accounted for and reasonably fed and housed. The problem of seasonal migration can be handled in a satisfactory way with appropriate consideration for all these different factors.

Permanent emigration

No doubt permanent emigration will decline relative to seasonal migration in the first years after the war. Nevertheless, there will still be a very considerable permanent emigration even after the war.

The larger and much more difficult problem to solve will be how the losses suffered by the home country due to permanent migration can be avoided. An effort must be made to get emigrants to go to those regions in which they will have a more assured opportunity to maintain their national identity and preserve their loyalty to the home country.

The best way to achieve this end would be the establishment of an independent Austro-Hungarian colonial possession.

The acquisition of a settlement region

It would be most advantageous if we acquired a colony capable of accommodating a large number of settlers and which also could either partially or completely supply those raw materials not available at home, especially cotton, wool, produce, and certain metals. These two goals for a colonial possession, however, are difficult to achieve in one and the same territory, since these colonial products grow only in tropical or subtropical regions, but are areas not suitable for the settlement of white workers. Therefore, we must try to acquire both types of territories: those in which we can produce desired colonial goods and those in which we can accommodate truly large numbers of settlers.

When the time comes for peace negotiations, the opportunity will arise to deal with the question of acquiring colonial possessions.

[1. ][This article originally appeared in German in the Archiv für Sozialwissenschaft und Sozialpolitik, vol. 42, no. 2 (December 1916).—Ed.]

[2. ][David Ricardo (1772-1823) was one of the leading and most influential “Classical” economists of the nineteenth century. His formulation of the logic of division of labor and comparative advantage in The Principles of Political Economy and Taxation (1817) in Piero Sraffa, ed., The Works and Correspondence of David Ricardo, vol. 1 (Cambridge: Cambridge University Press, 1951), pp. 128-49, became the foundation and rationale for a system of free trade; see also Ludwig von Mises, Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 159-64; and Gottfried Haberler, The Theory of International Trade, with Its Applications to Commercial Policy (London: William Hodge and Co., 1936), pp. 125-208.—Ed.]

[3. ][Friedrich List (1789-1846) was a German political economist who formulated a five-stage theory of economic development in his 1841 book, The National System of Political Economy. He argued that, for an industrializing nation like Germany in the nineteenth century, economic protectionism was essential to national development.—Ed.]

[4. ][See Ludwig von Mises, “The Disintegration of the International Division of Labor” (1938) in Richard M. Ebeling, ed., Money, Method, and the Market Process, Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 113-36, especially pp. 114-15 on the infant industry argument.—Ed.]

[5. ]See Schüller, Schutzzoll und Freihandel [Protective Tariffs and Free Trade] (Vienna, 1905), p. 228.

[6. ][See Ricardo, The Principles of Political Economy and Taxation, p. 136: “Experience, however, shows, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than to seek a more advantageous employment for their wealth in foreign nations.”—Ed.]

[7. ][See also Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (Indianapolis: Liberty Fund, [1919] 2006), pp. 46-63; also Lionel Robbins, “The Optimum Theory of Population,” in T. E. Gregory and Hugh Dalton, eds., London Essays in Economics: In Honor of Edwin Cannan (London: George Routledge & Sons, 1927), pp. 103-34.—Ed.]

[8. ]See Schüller, op. cit., pp. 9ff.

[9. ]From the comprehensive literature, see especially Wagner, Agrar- und Industriestaat [Agricultural and Industrial States], 2nd ed. (Jena, 1903); Hildebrand, Die Erschütterung der Industrieherrschaft und des Industriesozialismus [The Shattering of the Rule of Industrialism and Industrial Socialism] (Jena, 1910).

[10. ]See especially Wagner, op. cit., pp. 81ff.

[11. ]For this article, which limits itself to the basics, there is no purpose in discussing the other means of protective policy (e.g., export premiums, railway duties), because these are similar in their effects to either the cartel tariffs or the tariffs on production costs.

[12. ][“Going to Saxony,” where the sugar beet harvest marked the annual beginning of the seasonal migration of agricultural workers.—Ed.]

[13. ]See Moritz J. Bonn, Die Idee der Selbstgenügsamkeit [The Idea of Self-Sufficiency], Festschrift für Lujo Brentano (Munich and Leipzig, 1916), p. 68.

[14. ][See Ludwig von Mises, “The Freedom to Move as an International Problem,” (1935) in Richard M. Ebeling and Jacob G. Hornberger, eds., The Case for Free Trade and Open Immigration (Fairfax, Va.: Future of Freedom Foundation, 1995), pp. 127-30.—Ed.]

[15. ][See Mises, Human Action, pp. 828-30, on “War and Autarky.”—Ed.]

[16. ]See Jentsch, Der Weltkrieg und die Zukunft [The World War and the Future] (Berlin, 1915), pp. 96ff.

[17. ][From 1884 to 1915, the present African nation of Namibia was a colony of Imperial Germany, under the name of German Southwest Africa. In the first decade of the twentieth century, several rebellions by the native African population led to a brutal German military response. By the time of the First World War, about 10,000 Germans had settled in the colony, in comparison to about 200,000 native African inhabitants. The German military forces surrendered to an invading British army from neighboring South Africa in 1915, which permanently ended German control.—Ed.]

[18. ][Between 1820 and 1914, an estimated 3.7 million people immigrated to the United States from Austria-Hungary.—Ed.]

[19. ]The German emigration statistics indicated a large decrease in the number of emigrants over the last two decades. This does not contradict that which appears above in the text. On the one hand, this decrease coincided with the complete development of German industrialism and with the fortification of the defense system, according to the efforts of the era of Chancellor Count Georg Leo von Caprivi, which had to lead to a temporary containment of emigration. However, it should be observed that for Germany, a particular characteristic is the emigration of highly skilled workers (technicians, commercial associates, etc.), which is not highlighted in the statistics.

[20. ][This refers to Johann Wolfgang von Goethe (1749-1832) and his presence at the Battle of Valmy when the Revolutionary Army of France defeated an invading German army under Duke Carl August of Saxe-Weimar on September 19, 1792, as recounted in Goethe’s Kampagne in Frankreich [Campaign in France]. See G. P. Gooch, “Goethe’s Political Background,” in Studies in German History (London: Longmans, Green, 1948), pp. 166-89, especially 172-74.—Ed.]

[21. ][See Mises, “The Clash of Group Interests,” (1945) in Ebeling, ed., Money, Method, and the Market Process, pp. 202-14.—Ed.]

[22. ][See Mises, “Economic Nationalism and Peaceful Economic Cooperation,” (1943) in Ebeling, ed., Money, Method, and the Market Process, pp. 155-65.—Ed.]

[23. ]See esp. Renner, Oesterreichs Erneuerung [Austria’s Renewal], 2nd ed. (Vienna, 1916), pp. 30-35. [Karl Renner (1870-1950) was a leading Austrian socialist who headed two coalition governments of the new Austrian Republic between November 1918 and the summer of 1920. In April 1945, at the end of the Second World War, he formed a provisional government under the supervision of the Soviet Union that proclaimed the reestablishment of Austria as a democratic republic; in November of that year, he was elected president of Austria, a position that he held until his death.—Ed.]

[24. ][Galicia was the easternmost area of the imperial Austrian domains under the Austro-Hungarian Empire, containing the city of Lemberg (now Lvov), the birthplace of Ludwig von Mises. It was annexed by Austria in 1772 as a result of the first partition of Poland. It was incorporated into the re-created state of Poland at the end of the First World War. Most of Galicia, including Lemberg, was annexed by the Soviet Union in September 1939 as a result of the military conquest and division of Poland between Nazi Germany and the U.S.S.R. Since 1991, it has been part of the Republic of Ukraine.—Ed.]

[25. ][The “Détente Powers” refers to the victorious nations in the war against Napoleon, who following the defeat of France reorganized the borders of the countries of Europe at the Congress of Vienna in 1815.—Ed.]

[26. ][Friedrich Naumann (1860-1919) was a social liberal reformer who attempted to organize programs to improve the conditions of the German working class as a counterbalance to the Marxian and Social Democratic appeal for more radical social change. He was also strongly nationalistic. His book Central Europe (New York: Alfred A. Knopf, 1917) made the case for unifying the small states of central and southeastern Europe under German leadership to form an “economic and protectionist community.”—Ed.]

[27. ]See Preuß, Das deutsche Volk und die Politik [The German People and Politics] (Jena, 1915).

[28. ][See Eugen von Philippovich, “Austrian-Hungarian Trade Policy and the New German Tariff,” Economic Journal (June 1902), pp. 177-81.—Ed.]

[29. ][The Sudetenland was the westernmost area of Bohemia bordering on Germany. It was incorporated into the new nation of Czechoslovakia at the end of the First World War, even though the vast majority of its population was German-speaking. In September 1938 the area was annexed by Nazi Germany as a result of the Munich agreement between Germany, Great Britain, France, and Italy. It was returned to Czechoslovakian control at the end of the Second World War, and the approximately 3.5 million German-speaking residents were expelled from the country as part of an Allied Powers agreement.—Ed.]

[1. ][This article was delivered as a lecture in German in Vienna in late summer 1918. It has not been previously published.—Ed.]

[2. ][After the war, the Austro-Hungarian Bank publicly released more complete data on the growth of the money supply during the war. In July 1914, before the start of the war, the quantity of money in circulation was 3.4 million crowns. By the end of 1916 it had increased to over 11 billion crowns. And at the end of October 1918, shortly before the conclusion of the war in November 1918, the currency had expanded to 33.5 billion crowns. From the beginning to the end of the war the Austro-Hungarian money supply in circulation had expanded by 977 percent. A cost-of-living index that stood at 100 in July 1914 had risen to 1,640 by November 1918.—Ed.]

[3. ][As an indication of the depreciated value of the Austro-Hungarian crown on the foreign exchange market during the First World War, in August 1914, 100 crowns traded for 97.5 Swiss francs. But in June 1918, shortly before Mises delivered this lecture, 100 crowns exchanged for only 43.01 Swiss francs, reflecting a 45 percent decline over this four-year period.—Ed.]

[4. ][On the extensive system of price and wage controls and production regulations and planning methods imposed on the Austrian economy during the First World War, and their many negative consequences on the functioning of the market, see Joseph Redlich, Austrian War Government (New Haven: Yale University Press, 1929), pp. 107-35.—Ed.]

[5. ][“Edictum de pretiis rerum venalium,” or the “Edict of Maximum Prices,” was issued in ad 301 by the Roman emperor Diocletian in the face of dramatically rising prices due to the debasement of the currency to finance the huge spending of the Roman government. The price controls failed abysmally, merely succeeding in creating massive shortages of food and an extensive black market. By ad 305, around the time of Diocletian’s abdication, the edict was virtually ignored throughout the empire because of its distortive effects on economic activity.—Ed.]

[6. ][Shortly after the start of the French Revolution in 1789, the revolutionary government resorted to the printing of a new paper currency, the assignat, to finance its expenditures, leading to a massive price inflation for the next several years. In 1793, the government began imposing price and wage controls throughout the French economy. The attempt to artificially regulate prices in the face of the monetary inflation merely created shortages of virtually all essentials. In spite of a vast bureaucracy to harshly stamp out violations of the price controls, black markets emerged everywhere in France. Finally, in December 1794, the price controls were lifted and food and other goods once again flowed into the market.—Ed.]

[7. ][In March 1918, the new Bolshevik government in Russia signed a separate peace with Imperial Germany and Austria-Hungary, taking Russia out of the First World War. A large area of western Russia at that time, which included what is today Estonia, Latvia, Lithuania, Belarus, Moldova, and Ukraine, came under German and Austro-Hungarian occupation as a result of the peace settlement. Most of southern and part of central Ukraine fell under Austrian occupation, with the Austrian crown widely used in this occupied territory.—Ed.]

[8. ][“Lumpenproletariat” often is used to refer to the lower and ignorant segment of the working class. The term seemingly was first used by Karl Marx in his 1845 work German Ideology, designating a portion of the working class lacking in proper “class consciousness” of their “true” class interests.—Ed.]

[1. ][This article was originally delivered as a lecture in German in Vienna in summer 1918 and was then published as a pamphlet.—Ed.]

[2. ][Shortly after the outbreak of the First World War in summer 1914, Great Britain undertook a naval blockade of the North Sea ports of Imperial Germany in an attempt to prevent the importation of war-related material and food supplies for the military and civilian populations of Germany and its allies, including the Austro-Hungarians. The blockade was extended to preventing Austria-Hungary from importing supplies from neutral nations through its ports on the Adriatic coastline, especially after Italy entered the war in 1915 on the British and French side. Because of the blockades, shortages of food and other necessities greatly affected the civilian German and Austro-Hungarian populations as the war progressed, contributing to the growing problem of famine and malnutrition at the end of the war. The blockade finally ended in summer 1919, more than half a year after the armistice of November 11, 1918, when Germany signed the Treaty of Versailles in June 1919.—Ed.]

[3. ][Mises is referring to the Austrian occupation of a large part of Ukraine as a result of the Treaty of Brest-Litovsk in March 1918, which ended the war between Bolshevik Russia and the Central Powers, including Austria-Hungary. On the Austrian occupation of Ukraine, see Gustav Gratz and Richard Schüller, The Economic Policy of Austria-Hungary During the War in Its External Relations (New Haven: Yale University Press, 1928), pp. 91-136.—Ed.]

[4. ][On the importance of relying upon the incentives of the price system even in wartime to effectively supply the material needed to win a war, see Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (Indianapolis: Liberty Fund, [1919] 2006), pp. 117-21; and Human Action, A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 825-28; also see F.A. Hayek, “Pricing and Rationing” (1939) and “The Economy of Capital,” (1939) in Bruce Caldwell, ed., The Collected Works of F. A. Hayek, vol. 10, Socialism and War: Essays, Documents, Reviews (Chicago: University of Chicago Press, 1997), pp. 151-56 and pp. 157-60, for Hayek’s discussion of the superiority of the market price system over government planning and rationing during time of war.—Ed.]

[5. ][During the first year of World War I, from August 1914 to May 1915, after an initial advance into Russian Poland, the Austro-Hungarian Army was forced back by Imperial Russian forces that occupied most of the Austrian province of Galicia. In the second year of the war, from May to September 1915, the Austrian Army in a coordinated attack with German forces successfully recaptured Galicia and advanced into Russian Ukraine. The battle line remained relatively static until December 1917 when, shortly after the Bolshevik seizure of power in Russia, an armistice was signed with Germany and Austria-Hungary. The Soviet government formally withdrew Russia from the Allied side in the First World War when it signed the Treaty of Brest-Litovsk on March 3, 1918, with Imperial Germany and Austria-Hungary. German and Austro-Hungarian military forces occupied Russian Poland, the Baltic provinces (Estonia, Latvia, and Lithuania), and Ukraine.—Ed.]

[6. ][This proposition is sometimes called the Ricardian equivalence theorem after British economist David Ricardo; see “Funding System,” (1820) in Piero Sraffa, ed., The Works and Correspondence of David Ricardo, vol. 4, Pamphlets and Papers, 1815-1823 (Cambridge: Cambridge University Press, 1951), pp. 149-200, especially pp. 186-87. Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back plus interest at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. However, Ricardo also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds. On Ricardo’s analysis of war financing and the issue of taxation versus debt, see also Carl S. Shoup, Ricardo on Taxation (New York: Columbia University Press, 1960), pp. 143-67.—Ed.]

[7. ][On February 10, 1918, the new Bolshevik government officially repudiated all foreign debts accumulated by both the former Imperial Russian government and the short-lived Provisional Government that came to power following the abdication of Czar Nicholas II in February 1917, and which was overthrown in the communist coup led by Lenin in November 1917.—Ed.]

[8. ][Austria-Hungary, of course, lost the war. The Austro-Hungarian Empire formally disappeared from the map of Europe as a result of the Treaty of Saint-Germain signed in September 1919, which officially ended the war between the Allied Powers and Austria. For Mises’s discussion of some of the financial and monetary difficulties facing the new Austrian Republic in the period immediately after the war, see Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), especially “The Austrian Currency Problem Prior to the Peace Conference,” pp. 30-46, and “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” pp. 47-64. Also see Richard M. Ebeling, “The Great Austrian Inflation,” The Freeman: Ideas on Liberty (April 2006), pp. 2-3, and “The Lasting Legacies of World War I: Big Government, Paper Money, and Inflation,” Economic Education Bulletin, vol. 48, no. 11.—Ed.]

[1. ][Mises prepared this memorandum while serving as an economic consultant with the Austrian General Staff in late summer 1918. It has not been previously published.—Ed.]

[2. ][See P. V. Rovnianek, “The Slovaks in America” and Ivan Ardan, “The Ruthenians in America,” Charities: A Review of Local and General Philanthropy, vol. XIII, no. 10 (December 3, 1904), pp. 239-52.—Ed.]

[3. ][Limitations on the inheritance of property due to a particular binding succession of heirs.—Ed.]

[4. ][On the occupational licensing and certificates of competency systems in Austria-Hungary as a carryover of the guild system of the Middle Ages, see Francis H. E. Palmer, Austro-Hungarian Life in Town and Country (New York: G. P. Putnam’s Sons, 1903), pp. 251-56.—Ed.]