When war broke out in summer 1914, Mises’s artillery reserve unit was called up for active duty. For part of the next four years he sometimes saw intense action on the eastern front against the Russian Army. However, in 1918, during the last year of the war, Mises was assigned to work in various consulting capacities for the Austrian High Command in Vienna. And for a short time he served in Austrian-occupied Ukraine involved with currency matters.50
In 1916, he published “On the Goals of Trade Policy,” in which he presents a clear analysis of the gains from division of labor and international trade. But Mises goes on to explain that what motivated nations such as Germany and Austria-Hungary was a particular dilemma. For these relatively overpopulated countries in Europe, the greater economic opportunities in foreign countries resulted in emigration that meant a loss of manpower both for future wars and as part of the work-force during peace as well as at times of international conflict. Also, in the cultural struggles between countries, emigration meant a loss of part of a nation’s human heritage, since over time many such emigrants were absorbed into the culture and language of the host nation.
Thus, in countries like Germany and Austria-Hungary the task was to develop policies that would raise the living standards and opportunities in the homeland to reduce the incentive to leave and be “lost” to the fatherland. The nationalist trade method rejected free trade and erected protectionist barriers to artificially raise prices and secure domestic employments for the population. Alternatively, such a country could attempt territorial expansion into surrounding areas to gain the land and resources that would overcome the too densely populated condition within the pattern of existing political boundaries in which, for example, Germany was currently confined. One other method was to acquire colonies abroad to which emigrants could move while retaining their cultural identity and political allegiance to the fatherland.
Writing at a time of war, Mises carefully emphasized that these political trade policy goals were in the long run incompatible with the economic forces of an increasingly global market society. These forces were constantly working to guide both labor and capital to where their productive capacity was most highly valued, which inevitably would result in redistributions of people around the world to reflect their most optimal employments in the international division of labor. In the long run, the logic and incentives of the market would transcend the political goals of nationalist ideology.
In “Remarks Concerning the Problem of Emigration,” a memorandum that Mises prepared in 1918 for the Austrian government commission to which he was assigned in Vienna, he suggested a variety of domestic policies that would reduce the incentive for workers to leave Austria. These included making more farmland available out of existing larger estates for the benefit of small landholders who currently could not support their families on the properties they owned. It would be useful for the government and private associations to assist seasonal migrant labor in finding more attractive wage and work condition opportunities abroad, thus increasing the likelihood they would return home to a country that cared about their well-being. It was also necessary to reduce the burden and inconveniences of compulsory military service that too often induced some workers employed abroad to not come home.
Also in the summer of 1918, Mises delivered a public lecture, “On Paying for the Costs of War and War Loans.” He praised the military successes of Austria’s armed forces in its fight against the Allied Powers and the industrial efficiencies of Austrian business that had provided the manufacturing wherewithal for, Austria to do so well, even in the face of Allied blockades that cut Austria off from foreign sources of supply. But production had to be paid for, and the issue arose of whether the government’s war costs should be covered by taxation or debt.
Mises reminded his listeners that borrowing did not enable the current generation to shift any part of the costs of war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by forgoing all that could have been produced and used, if not for the war. Mises also explained to his audience what today is often referred to as the Ricardian equivalence theorem, named after British economist David Ricardo (1772-1823). In his 1820 essay, “Funding System,” 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 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. Ricardo, however, 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.51
But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. First, many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and need for ready cash to pay the tax obligation. Second, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than the government’s. As a consequence, these private individuals would have to pay a noticeably higher interest rate than that at which the government could finance its borrowing. Thus, the interest burden from government borrowing to be paid for out of future taxes would be less for the citizenry than the financial cost of their having to borrow money in the present to cover all the costs of war through current taxation.52 Hence it was both patriotic and cost-efficient for those listening to Mises’s presentation to buy war bonds in support of the war effort.
Finally, in “Inflation,” another lecture delivered in the late summer of 1918, Mises explained the impact of the government’s financing a large amount of its war expenditures through monetary expansion. First, all creditors who had failed to anticipate the resulting depreciation in the value of the Austrian crown are paid back in money possessing less purchasing power than when the loan was issued. This might seem to be a desirable side effect, since clearly the debtor gains by paying back his loan in depreciated crowns, especially if it is “the poor” who are the predominant debtor group. But it was worth recalling, Mises said, that in modern society the debtors were most often businesses that had borrowed to cover investment costs, while the creditors were middle-class citizens, widows and orphans, civil servants, and members of the lower-income working class who had put their savings into the financial institutions that did the lending. Hence, Mises pointed out, in this debtor-creditor relationship, under inflation the “rich” benefited at the expense of the middle class and the “poor.”
Some saw the benefit from inflation in that it also reduced the real value of the government’s accumulating debt, thus reducing the “real” cost of the war. At the same time, rising money incomes and profits in the private sector due to inflation meant that the government gained higher tax revenues in money terms. On the other hand, to the extent to which the government had covered part of its debt with foreign borrowing denominated in another currency, the falling value of the crown on the foreign exchange market due to inflation increased the amount of crowns the government had to pay to meet its foreign financial obligations. Also, some taxes were fixed at a specified level, so in this instance the taxpayer gained in real terms during inflation while the government lost. Furthermore, the worse and more continuing the inflation, the more reluctant citizens would be to buy war bonds and other government debt instruments, thus increasing the difficulties of financing the war other than through inflation. Thus, from a variety of perspectives, inflation was a dangerous and undesirable method of covering the costs of
