Fighting Inflation

There was a reason Mises encouraged Hayek and all students he mentored to study the problems of currency and banking. Austrian public finance was in terrible shape and the government paid for substantial parts of its expenditures by printing more money. Wartime controls on foreign exchange were still in place to encourage the belief among the citizens that the government was fighting, rather than creating, inflation.

Seminars

If Mises was waging a campaign against the dangers of economic ignorance, the classroom remained campaign headquarters. The winter semester of 1920–1921 concentrated on business-cycle theory, featuring sessions on the problem of economic crises, on what are “normal” or “good” or “bad” economic conditions, on the historical crises of 1900–1902, 1907, 1873, and on the permanent effects of the business cycle.23

Wieser’s Long Shadow

The seminars Mises held in Vienna in the 1920s, especially the private seminar that he held in his Kammer office, have become legendary due to the prominent role that some of its members played in the social sciences after World War II. The sessions were formative for these young men, even though Mises’s personal impact was not as considerable as one might expect, especially in the case of Hayek, Haberler, Strigl, and Machlup, who worked with him, albeit with interruptions, for more than ten years.

The LSE Connection

The problem of war reparations was the number one issue on the international agenda for the first few years after the war, and remained very prominent until the early 1930s. Initially, the same French and British politicians who had led their countries during the war dominated the negotiations. Steeped in wartime rhetoric, their emotional election campaigns had committed them to hard-line policies against the vanquished. Under such circumstances little progress could be made in regard to Austrian finance and the reparations question.

Advent of the Gold-Exchange Standard

It did not take quite as long to find a solution to Austria’s postwar financial calamities. The first real breakthrough came at a conference that took place in the fall of 1922 in Genoa and led to the signing of a convention in Geneva on October 4, 1922. The so-called Geneva Protocol was the last in a series of negotiations that had begun at the end of 1921, when Austria was promised loans from the British, French, Czechs, and Italians.

Hyperinflation, Currency Competition, and Monetary Reform

Meanwhile, the Verein für Sozialpolitik had put the problem of monetary stabilization on the agenda for its 1923 meeting.

Theory of Money and Credit Reconsidered

Some time before March 1923, Mises had talked to representatives of Duncker & Humblot about a second edition of Theorie des Geldes und der Umlaufsmittel. He planned to incorporate several “major necessary additions” but intended to make cuts elsewhere in order to maintain the overall size of the book. He rejected a first offer as insufficient, both financially and because it stipulated that he cut the book by one sixth.

German Economists Return to Classical Liberalism

The second edition of Theorie des Geldes und der Umlaufsmittel arrived just in time for the annual meeting of the Verein für Sozialpolitik, which took place in late September 1924 in Stuttgart. It provided a welcome antidote to the German edition of John Maynard Keynes’s Tract on Monetary Reform, which Duncker & Humblot had published some months before Mises’s book.113

Silver Linings on the Horizon

The successful second edition of the Theorie des Geldes and the reorientation of the Verein für Sozialpolitik were symptoms of a changed intellectual and political climate that came into full swing after 1923, the year of the “crisis of social policy” and of the stabilization of the mark. Central to both events were Mises’s writings. This fact did not reach the attention of the larger public, but was obvious to all leading circles in academia and in monetary policy.

SINCE ITS EMERGENCE IN eighteenth century France, economic science has focused on the practical problems of policymaking. Government’s impact on the economy was central to economic books and pamphlets; all other problems tended to be dealt with only as much as was necessary to achieve a better understanding of the policy issue under consideration.