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CHAPTER 29: Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923 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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Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 19231
The ideas that shape the policies of nations do not drop from the sky. They are conceived by thinkers. Whoever wants to write the history of an age must first study the writings that have shaped public opinion. The ideas that guided German policies in the twentieth century were those created by German political philosophy and economists during the Second Reich.2 That is no less true of monetary policy. In the writings of Lexis,3 Knapp,4 and Bendixen5 one finds all the ideas whose practical application led to the collapse of 1923.
The future historian of these events will be forced to ask a question for which he will not easily find an answer. The age of Gustav Schmoller,6 Adolf Wagner,7 and Lujo Brentano8 was also the age of Helmholtz,9 Hertz,10 Frege,11 Georg Cantor,12 and Planck.13 How can we explain the fact that the flourishing of mathematics and physics coincided with a nadir in the sciences of human action? How was it that out of a population of seventy million people no one came forward to oppose the dogmas that reigned over monetary policy?
To understand this we must refer back to that “ethical pathos” out of which there emerged the exhortations leading to the founding of the Verein für Sozialpolitik (Society for Social Policy) in 1872.14 Economic questions were to be treated as moral problems, and not as logical ones. It was all a matter of good intentions, not of knowledge and ability. The pursuit of truth was not considered to be of ethical or practical value in and of itself. It was morally suspect to deviate from the doctrines espoused by the state-appointed university professors. It was considered unnecessary to go into the philosophical foundations of their ideas or to make any attempt to refute them. In this regard Imperial Germany already contained the ideas to which not much later communism and nationalism tried to give international respectability.
It was to Max Weber’s15 credit that he took up the fight against the politically biased dogmas that at that time passed for economics and sociology in Germany. The Verein für Sozialpolitik was certainly not the most appropriate place for discussing the problems of “value freedom.” However, in the German-speaking world, there was no other organization at whose meetings questions of economics could be discussed. Since what Schmoller and his friends talked about they called “science,” they could not object when the question was raised whether or not science was expected to make value judgments.16
In those years I did not yet belong to the board of directors of the Verein für Sozialpolitik, and therefore I did not participate in the closed board meeting of January 5, 1914, at which the question of value judgments was discussed, but from which the public was excluded. However, I did have exhaustive discussions with several prominent members of the society about this issue.
Before the publication of my book The Theory of Money and Credit in the spring of 1912,17 the discussions were mainly about the theories of Carl Menger and Böhm-Bawerk,18 as well as my own contributions. I was in the habit of taking notes about these conversations, in which I tried to record the ideas of my conversation partners. I preserved these notes in my Vienna apartment, which I kept after my move to Geneva (1934). In March 1938 they disappeared with everything else in my apartment when the National Socialists plundered it.19 What I have on hand is only a summary of the objections raised against Böhm-Bawerk and myself, which I wrote down at Böhm-Bawerk’s request in the spring of 1914. Since in this manuscript I omitted the names of the individuals who made specific comments, and my memory could easily deceive me after more than 45 years, I will also omit mentioning any names in what follows.
Böhm-Bawerk, my conversation partners remarked, is without a doubt an honorable man searching after truth. Nevertheless, his dreadful mistakes resulted in an unacceptable justification of the worst form of unearned income—interest on capital. According to them, it was the moral duty of the state to use governmental measures to bring down any high market rates of interest. The most absurd book in economic literature, they said, is Bentham’s Defense of Usury.20 An unbiased scholar, Wilhelm Lexis, they said, had clearly proven that the employers’ income should be viewed as being in the same economic category as the income received by a slave owner.21 They claimed that Böhm-Bawerk’s arguments against Marx’s exploitation theory were foolish.22 No matter how much Marx may have been mistaken in his criticisms of modern society, he nevertheless had the merit of having revealed the motives behind the ideas of the British economists. Compared with the contributions of the German Historical School, Böhm-Bawerk was a stubborn reactionary.
The same thing was claimed to be true about my theory of money. The regular appearance of economic crises was a phenomenon inherent in the nature of capitalism, they said. Marx was, of course, wrong when he assumed that only the destruction of capitalism and the establishment of socialism could prevent the recurrence of these crises. Strict oversight and skillful regulation of market activities by a super-party government would free the economy from economic crises. It was pointless, they thought, to try to explain economic fluctuations on the basis of monetary and credit policies. The real causes had to be found at a deeper level, they said.
What was especially and violently attacked was what I said about the development of “fiduciary media” and the efforts to concentrate the entire gold reserves of the country in the central bank. The monetary system, they said, is not an end in itself. Its purpose is to serve the state and the people. Financial preparations for war must continue to be the ultimate and highest goal of monetary policy, as of all policy. How could the state conduct war, after all, if every self-interested citizen possessed the right to demand redemption of banknotes into gold? It was blindness not to recognize that only full preparedness for war—not only in the military sense but also with regard to the economy—could ensure the maintenance of peace. It was admitted that the Historical School has long neglected the treatment of monetary problems. Yet with Knapp’s State Theory of Money, they said, the German spirit has finally rejected the destructive theories of the English economists.
The gold standard, they alleged, made Germany permanently dependent on the gold-producing countries. The merit of having first recognized this belonged to the German Agrarians. It was a vital necessity for the German nation to have a monetary system independent of foreign powers, they claimed.
There was only one excuse for my “errors,” namely, that they were the logical outcome of the subversive ideas that the “Austrian School” had taken over from the doctrines of the Manchester men. Thinking in a vacuum was characteristic of Menger, Wieser, and Böhm-Bawerk, and this was my mistake, too. What would the monetary system be like if the state did not put all of its power behind it? It was fortunate, they alleged, that even in Austria only a small group of naïve authors shared the views of the “Austrian School.”
Such were the opinions of my interlocutors during the five years that preceded the outbreak of the First World War. They were willing to grant me that I wrote in good faith. But they were convinced that my book only served the interests of unpatriotic and subversive speculators. They never entered into any kind of theoretical discussion. The quantity theory of money and the theories of the Currency School23 were, in their eyes, nothing but curiosities in the historical literature. One of these gentlemen remarked that a colleague of his had asked whether I was not also an adherent of the phlogiston theory.24 Another gentleman suggested that he considered my “Austrianness” to be a mitigating circumstance; with a citizen of Germany he wouldn’t even discuss such questions.
Much later, at the time of the Regensburg meeting of the Verein für Sozialpolitik (1919), several of the participants said in conversation that they considered “simply ridiculous” and “not discussible” the view that the increase in the quantity of banknotes had brought about the devaluation of the mark.25
Errors have always been made and also will be made in the future. Men are not infallible. The historian’s task is not to point out errors, an undertaking that in retrospect is never difficult. It is his duty to identify the causal connections between things. Perhaps the foregoing remarks will be of some use in this regard.
When Max Weber was teaching at the University of Vienna in the summer of 1918, he said to me one day, “You do not like the Verein für Sozialpolitik ; I don’t like it much either. But the only remedy is for us to take an active part in the work of the society.” I followed his advice. Beginning in 1919, I was on the board of directors, and from 1930 I also served on the board of governors. I promoted the discussion of problems relating to the theory of value; in cooperation with Arthur Spiethoff, I prepared and published the volume of the society’s writings devoted to this topic; and I opened the discussion of this subject at the Dresden meeting (autumn 1932),26 which the old guard of the society allowed to be called only a working committee report, an “epilog”27 of the meeting. As was soon to be seen, it was the “epilog” of the Verein für Sozialpolitik, its last report.28 A new age containing the worst economic policies had begun.
[1. ][This essay was originally published in German in Freundesgabe zum 12. Oktober 1959 für Albert Hahn [Homage by Friends for Albert Hahn on October 12, 1959] (Frankfurt am Main: Fritz Knapp, 1959).—Ed.]
[2. ][The “Second Reich” refers to the German Empire from its formal founding in 1871, under Prussian leadership during the Franco-Prussian War (1870-71), until the abdication of Kaiser Wilhelm II at the end of the First World War in 1918.—Ed.]
[3. ][Wilhelm Lexis (1837-1914) was a German statistician, economist, and social scientist, as well as a founder of the interdisciplinary study of insurance. He is primarily known today as a statistician due to his creation of the Lexis ratio.—Ed.]
[4. ][See Chapter 2, “The Problem of Legal Resumption of Specie Payments in Austria-Hungary,” footnote 10.—Ed.]
[5. ][Friedrich Bendixen (1864-1920) was a leading follower of Knapp’s state theory of money. He served as director of the Hythekenbank in Hamburg until his death in 1920.—Ed.]
[6. ][Gustav von Schmoller (1838-1917) was a prominent University of Berlin economist in Imperial Germany who led the “Socialists of the Chair” and who defended and glorified Prussian military power. He was a leading member of the German Historical School, which rejected abstract deductive theorizing in economics in favor of detailed historical studies from which it was hoped empirical laws of economics might be discovered. He was also a strong advocate of the German welfare state and regulation of industry and trade in the name of the national interest. He was a founding member of the Verein für Sozialpolitik .—Ed.]
[7. ][Adolph Wagner (1859-1917) was another well-known University of Berlin economist in Imperial Germany. He was an advocate of “state socialism,” which called for the transformation of liberal capitalism into a state interventionist welfare state.—Ed.]
[8. ][See Chapter 8, “On Rising Prices and Purchasing Power Policies,” footnote 8.—Ed.]
[9. ][Hermann Ludwig Ferdinand von Helmholtz (1821-94) was a prominent German medical doctor and physicist known for his theory of the eye and vision, and his work on electrodynamics and thermodynamics.—Ed.]
[10. ][Heinrich Rudolf Hertz (1857-94) was well known for his work on the electromagnetic theory of light, and for demonstrating the existence of electromagnetic waves in the form of VHF and UHF radio waves.—Ed.]
[11. ][Gottlob Frege (1848-1925) was a German mathematician who is often called the father of analytical philosophy. He attempted to develop a formally exact and unambiguous logic.—Ed.]
[12. ][Georg Ferdinand Ludwig Philipp Cantor (1845-1918) was a famous German mathematician best known for his development of set theory.—Ed.]
[13. ][Max Planck (1858-1947) was a leading German physicist who is considered to be the founder of quantum theory. He was awarded the Nobel Prize in Physics in 1918.—Ed.]
[14. ][The Verein für Sozialpolitik was founded in 1872 as an association of historians, economists, political scientists, and sociologists devoted to the reconstruction of the social sciences on historical-empirical lines, in opposition to the logical, deductive methods of the British Classical economists, and then later the Austrian School of economics. The society was also dedicated to an active governmental role in the areas of social welfare and regulation of private enterprise. It was the inspiration for like-minded American economists who established the American Economic Association in 1885. See Eugen von Philippovich, “The Verein für Sozialpolitik,” Quarterly Journal of Economics (January 1891), pp. 220-37, and “The Infusion of Socio-Political Ideas into the Literature of German Economics,” The American Journal of Sociology (September 1912), pp. 145-99.—Ed.]
[15. ][Max Weber (1864-1920) is considered one of the greatest contributors to sociological theory in the last one hundred years. He developed the concept of the “ideal type” for sociological and historical analysis, and emphasized the importance of subjective meaning—the meaning of an action from the individual actor’s point of view—in social theory. He also argued that professors in the social fields, including economics, history, and political science, should not take advantage of the influence that an academic position gave to their lectures and writings to infuse their normative values and beliefs in discussions of theory and fact. Weber’s essays on the importance of a value-free social science are contained in Max Weber, The Methodology of the Social Sciences (New York: The Free Press, 1949).—Ed.]
[16. ][See Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,  1996), pp. 19, 43-70, and Memoirs (Auburn, Ala.: Ludwig von Mises Institute,  2009), pp. 85-89, for Mises’s impressions of the political and economic ideas expressed at the professional associations in Germany during this time, and a discussion of Max Weber’s role in defending “value-freedom” in the social sciences. Mises adamantly insisted that economics was and should be a “value-free” science whose primary task at any policy level was to demonstrate whether the means chosen were or were not appropriate for attaining the end in mind. He once forcefully expressed this point about his own role as an economist; see Ludwig von Mises, “Interventionism as the Cause of the Economic Crisis,” (1932) in 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) p. 201:
[17. ][Ludwig von Mises, The Theory of Money and Credit (Indianapolis: Liberty Fund, 3rd rev. ed., [1924; 1951] 1981).—Ed.]
[18. ][See “On Carl Menger’s Eightieth Birthday,” Chapter 16 in the present volume, especially footnote 6 (on Menger) and footnote 11 (on Böhm-Bawerk).—Ed.]
[19. ][Mises’s papers were captured by the Soviet Army at the end of the Second World War from a Nazi repository of looted documents in Czechoslovakia, and kept in a secret Soviet archive in Moscow. For an account of how they were discovered in the 1990s, see Richard M. Ebeling, “Mission to Moscow: The Mystery of the ‘Lost Papers’ of Ludwig von Mises,” Notes from FEE (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, July 2004), http://www .fee.org/pdf/notes/NFF_0704.pdf. Also see my introduction to Selected Writings of Ludwig von Mises, vol. 2, pp. xvi-xx, for an account of Mises’s “lost papers” and their recovery.—Ed.]
[20. ][Jeremy Bentham, “Defense of Usury,” (1797) in Werner Stark, ed., Jeremy Bentham’s Economic Writings, vol. 1 (London: George Allan & Unwin, 1952), pp. 121-207. Bentham called for the end to all restrictions on market-determined rates of interest.—Ed.]
[21. ]For a criticism of Lexis’s theory, see my Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund,  1981), pp. 298-99.
[22. ][Eugen von Böhm-Bawerk, Capital and Interest, vol. 1, History and Critique of Interest Theories (South Holland, Ill.: Libertarian Press,  1959), pp. 241-321, and “Unresolved Contradiction in the Marxian Economic System” (1896) in Shorter Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian Press, 1962), pp. 201-302; see also H. W. B. Joseph, The Labour Theory of Value in Karl Marx (London: Oxford University Press, 1923).—Ed.]
[23. ][In the 1820s through the 1860s, there was a heated and highly sophisticated debate between two groups of British monetary theorists known as the Currency School and the Banking School. The Currency School argued: (a) note currency should vary precisely with changes in the specie currency on deposit in the banking system; (b) the note currency should be fully convertible into specie; (c) the rate of interest was a significant influence on the volume of notes in circulation; (d) the foreign exchange rate was a good guide for controlling the volume of notes in circulation. The Banking School argued that (a) the “needs of business” should regulate the quantity of banknotes issued, and the banks should not “force” notes into circulation in excess of the needs of business; (b) the Currency School was correct that banknotes should be fully convertible; but (c) any drain of specie on the banking system might be counteracted by a decrease in the “hoards” of money held by the public, and an increase in specie or notes put into circulation might have no influence on spending and prices, because it might be absorbed into people’s “hoards.” On the controversy between the Currency and Banking schools, see Jacob Viner, Studies in the Theory of International Trade (New York: Augustus M. Kelly,  1965), pp. 218-89; Charles Rist, History of Monetary and Credit Theory: From John Law to the Present (New York: Augustus M. Kelly,  1966), pp. 202-36; and Lloyd Mints, A History of Banking Theory, in Great Britain and the United States (Chicago: University of Chicago Press, 1945), pp. 74-114.—Ed.]
[24. ][The phlogiston theory originated in 1667 with Johann Joachim Becher; it posited that inside flammable substances was a special element without odor, color, taste, or mass that is freed by the burning process, and is what caused the burning process. It was refuted in the eighteenth century through a variety of quantitative experiments.—Ed.]
[25. ][For Mises’s analysis of the Great Inflation in Germany during and then after the First World War, see Ludwig von Mises, “Stabilization of the Monetary Unit—from the Viewpoint of Theory,” (1923) in The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 1-51; also, Richard M. Ebeling, “The Great German Inflation,” The Freeman: Ideas on Liberty (November 2003), pp. 2-3, and “The Lasting Legacies of World War I: Big Government, Paper Money, and Inflation,” Economic Education Bulletin, vol. 58, no. 11, 8 pp.
[26. ][See Ludwig von Mises, “The Controversy over the Theory of Value,” (1932) reprinted in Epistemological Problems of Economics (New York: New York University Press,  1981), pp. 204-16.—Ed.]
[27. ]See Franz Boese, Geschichte des Verein für Sozialpolitik,1872-1932 [History of the Society for Social Policy, 1872-1932] (Berlin: Duncker & Humblot, 1939), p. 236.
[28. ][The 1932 meeting of the Verein für Sozialpolitik in Dresden was the last meeting of the society until after the Second World War. See Peter G. Klein, ed., The Collected Works of F. A. Hayek, vol. 4, The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom (Chicago: University of Chicago Press, 1992), pp. 145-46, where Hayek says thatin September 1932, during a committee meeting of the Verein für Sozialpolitik in Bad Kissingen, a rather large group of professional colleagues was sitting together at tea in a garden, when Mises suddenly asked whether we were aware that we were sitting together for the last time. The remark at first aroused only astonishment and later laughter, when Mises explained that after twelve months Hitler would be in power. That appeared to the other members too improbable, but more than anything they asked why the Verein für Sozialpolitik should not meet again after Hitler had come to power. Of course, it did not meet again until after the end of the Second World War!—Ed.]