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CHAPTER 12: On Paying for the Costs of War and War Loans 1 - Ludwig von Mises, Selected Writings of Ludwig von Mises, vol. 1: Monetary and Economic Problems Before, During, and After the Great War 
Selected Writings of Ludwig von Mises, vol. 1: Monetary and Economic Problems Before, During, and After the Great War, edited and with an Introduction by Richard M. Ebeling (Indianapolis: Liberty Fund, 2012).
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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.
[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,  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.]