You are on page 1of 6

01/Mises Vol. 2/Part Ib.

p 7/20/02 12:58 PM Page 154

chapter 15

Restoring Europe’s
State Finances 1

It is a mistake to view the Great War or the ensuing economic hardships
as natural calamities, like earthquakes or floods, as the result of which hu-
manity was the innocent victim. Later generations will recognize more
clearly than is possible today that the groundwork for the collapse of Eu-
ropean civilization was already carefully laid by literary and sociopolitical
trends in the decades immediately preceding the Great War. Imperialist
doctrines of power and force and theoretical justifications for protective
tariffs have led straight to military catastrophe and economic warfare, while
socialist doctrines and the destructive teachings of literary figures like Leo
Tolstoy are directly responsible for Bolshevism. In the same way, current
financial problems are the product of misguided fiscal theories that have
been propounded and propagated for decades.2
There was a time when it was conventional wisdom that taxes were
an evil to be avoided as far as possible and that a finance minister’s only
virtue was frugality. In those days the representatives of the people in par-
liament were at great pains to trim budget proposals in order to save the
population from excessive tax burdens. Unfortunately, this principle was
abandoned in the decades prior to the war. The pernicious doctrine arose
that there was a fundamental difference between the public budget and

1 [The article was delivered in German as a lecture in Cobden-Szövetség, Hungary in
October 1924. It has not been previously published.—Ed.]
2 [On Mises’s diagnoses of the economic ills of Europe in the period between the two
world wars and his economic policy prescriptions for reestablishing both freedom and pros-
perity, see Richard M. Ebeling, “Planning for Freedom: Ludwig von Mises as Political
Economist and Policy Analyst,” in Richard M. Ebeling, ed., Competition or Compulsion?
The Market Economy versus the New Social Engineering (Hillsdale, Mich.: Hillsdale Col-
lege Press, 2001), pp. 1–85.—Ed.]


An associate of Karl Marx. . expenditures were to be based on income. not so much in any selection of its objects. Some taxes will produce these effects in a much greater degree than others. He was killed in a duel over the affections of a woman. He argued for nonrevolutionary change in the direction of socialism through welfare- state policies introduced by the imperial German government. I (Cambridge: Cambridge University Press. without otherwise burdening the economy.” In 1863. as in the general amount of its effects taken collectively. by making a corresponding diminution of their former con- sumption of the necessaries and luxuries of life. —Ed. David Ricardo. Ferdinand Las- salle did a lot to popularize this idea. Vol. taxation of income and the interest on capital had the negative effect of slowing down the process of capital for- mation and hence retarded economic progress. for example.p 7/20/02 12:58 PM Page 155 Restoring Europe’s State Finances  155 household budgets. He referred to the State as “God. which became the accepted gospel on taxation for all radical politicians. or force the contributors to save the amount of the tax. . 1951). while direct taxes were believed to target only the wealthy and the owners of property.” in which he advocated a shift to a system of direct taxation targeted at the capital- ist owners of the means of production. In household budgets. and in particular the Social Democ- rats. never to lay such taxes as will inevitably fall on capital. The Works and Correspondence of David Ricardo.4 This objection was now cavalierly dismissed. since by so doing. It should be the policy of governments .. While no fiscal theorist ever dared to proclaim this principle openly and without reservations.” and condemned free-market liberalism as “the Night-watchman State.3 In the eyes of the older liberals. and if they fall on rev- enue. they impair the funds for the maintenance of labour.” [1821] in Piero Sraffa. pp. but the great evil of taxation is to be found. ed. “On the Principles of Political Economy and Taxa- tion. they must proportionally diminish that fund by whose extent the extent of the pro- ductive industry of the country must always be regulated. . they must either lessen accumulation. . 2/Part Ib. it was believed. Progressive income taxes were introduced and par- 3 [Ferdinand Lassalle (1825–64) was a leading advocate for the German socialist move- ment.—Ed. The principle was reinforced by a singular interpretation of the im- pact of direct and indirect taxes. 152–53: All taxes must either fall on capital or revenue. Lassalle published a pamphlet on “Indirect Taxation and the Position of the Working Class. nevertheless. and thereby diminish the future pro- duction of the country. for the last several decades it has by and large served as the basis for scholarly discussion. It was thought that only indirect taxes on items of mass consumption affected broad segments of the population. . he was one of the founders of the German labor move- ment. If they encroach on capital.01/Mises Vol.] 4 [See.] . while in the public budget expenditures were to determine revenue.

Europe’s wealth had grown so rapidly that all public loans were fully subscribed. became poorer was completely disregarded. Future historians will study the motives that led to this system of government food distribution. But so great were the social and political delusions that it was considered a desirable feature of direct taxation that it taxed away the country’s patrimony. the idea was originally to tax only real income.p 7/20/02 12:58 PM Page 156 156  Selected Writings of Ludwig von Mises ticularly high taxes were levied on joint-stock companies. This situation changed completely in the last decades before the war. Easy credit also played a large share in the cavalier attitude that de- veloped toward increasing public expenditures. this fiscal policy has reduced the economy’s wealth. As one consequence of this.01/Mises Vol. Dur- ing the war and the postwar years. In the past. even taxes on income and profits have now been con- verted into taxes on wealth. Banking organiza- tions had grown by leaps and bounds. By its very nature. Feelings of envy such as this generated the belief that the impoverishment of entrepreneurs and the owners of capital was beneficial to the economy. the representatives of the people were inclined to approve it. A portion of the existing capital has been taxed away. A government was able to obtain whatever loans it needed for its own purposes or for a foreign government that it wanted to support. this belief culminated in the demand that large amounts of money be disbursed by the state to its citizens in the form of food subsidies. and used up. converted into consumption goods. which are the most important type of enterprises. and were po- litically subservient to the government. the representatives of the peo- ple now demanded new expenditures and voted for such large tax increases that they had to be restrained by more farsighted finance ministers. targeted wealth in the form of capital as a source of tax revenue. They were now in the hands of a few central-banking institutions located in each nation’s capital. Whenever discussion turned to a new and popular expenditure. Some of the direct taxes. While in the past parliament had re- sisted budgetary requests and tax proposals. and such attempts often were rebuffed. for instance inheritance and capital-gains taxes. In the wake of monetary depreciation and the resulting taxation of paper profits. In the case of taxes on income and profits. It became an article of faith that the bounty of the state treasury knew no limits and the demands placed on the treasury knew no bounds. as long as it was not paid for through additional indirect taxes but only by new direct taxes. 2/Part Ib. not just the owners of capital. The fact that the economy as a whole. even finance ministers of large and wealthy states were hard-pressed to raise even mod- est loans. a substantial part of .

Large loans were the mainstay of national governments and local ad- ministrations in undertaking sweeping nationalization and municipal own- ership. 1918. and not just in Germany and Austria. the new Soviet government officially repudiated all foreign debts accumulated by both the former imperial Russian government and the provisional government that was in power from Feb- ruary to November 1917. These entrepreneurial activities by gov- ernments have been an unmitigated disaster. By the same avenue. the pop- ulation of the Central European states turned over a large part of its wealth to the state and local governments in the form of loans. The governments could not even manage to make some money from the sale of leftover military supplies and state-owned weapons plants. streetcars. they will never be repaid. they even acquired breweries. That may have been possible as long as there were only a few public enterprises of this sort. Peo- ple do not want to completely abandon the principle of socialization. 5 [By 1914. There is only one remedy for this problem. water works. inns. . hotels.3 billion francs. This solution. On February 10.—Ed]. theaters. It is inconceivable that this system of government-owned enterprises can be maintained in the long run. Hence there are the many attempts to carry through various reforms. which is the only realis- tic option. and we may yet see a large European or even American loan extended to the Soviets. long-term in- vestment in Russia was 11. Even today. after all the bitter experiences of the last decade. ir- respective of the fact that it has failed wherever it has been applied. out of a total of long-term investments of 27. Every- where. Through this method. In an instant. runs counter to the strong socialist convictions of our time and the special interests of those who are employed in these enterprises. whatever gold governments touched turned into dust. demobilized goods were dis- posed of in the most wasteful manner.01/Mises Vol. flourishing enterprises were in need of subsidies. The old fable about Midas has been turned on its head. etc.5 billion francs in Europe and 45 billion francs worldwide. So- viet Russia is receiving long-term credits from foreign suppliers. commercial bakeries. but with their increasing number it is no longer feasible. before the beginning of the First World War. It is unimaginable that taxes will be collected to cover the deficits of these public enterprises.5 Similarly. French foreign. 2/Part Ib. and electrical works (for lighting).p 7/20/02 12:58 PM Page 157 Restoring Europe’s State Finances  157 France’s wealth migrated to Russia and was lost there. Governments and local agencies must sell off all these enterprises and turn them over to private entrepreneurs who will know how to run them at a profit. national and local government agencies acquired or built railroads.

The state and local governments simply cannot afford the luxury of engaging in public enterprises. stopped just short at the rim of the abyss. but this is nothing more than a cheap slogan.—Ed. Today this fact needs little emphasis. the struggles with inflation are vivid in everyone’s memory. In the last analysis it is the doctrine that the state can spend what it wants irrespective of its revenue that must bear the blame for the great in- flation of the war and postwar periods. One of the stipulations under the loan agreement was that eighty thousand government workers would be dismissed as part of an austerity program. and above all by eliminating public enterprises. Business leadership—or in the case of joint- stock companies the representatives that operate them on behalf of the owners—implies that profit and loss is borne by the owners. Germany and Russia are among the states that allowed inflation to run its course to the bitter end. and England in particular.] . The reason that the Western powers. It is perfectly true that these enterprises lack business lead- ership. As long as public enterprises have a monopoly position. Monsignor Ignaz Seipel. 2/Part Ib. Still others. etc. But where public enterprises must compete in the open market. they will always re- main bureaucrats. arranged for a $126 million loan from the League of Nations to assist in the financial and monetary recon- struction of the country.6 It would have been much wiser to have started with the elimination of useless government programs. It was a mistake to start out by reducing the number of public servants as a means of restoring sound public finances.01/Mises Vol. they can resort to the printing of new money. they can conceal their mismanagement through accounting gimmicks. they can- not resort even to this expedient. Austria and Hungary among them. Civil servants or agents of the state or the local municipalities are always subservient to the control of government authorities. Other states. But business leadership is not something external that can be in- jected into public enterprises. It was hard enough to persuade public opinion that this system must very quickly lead to a total collapse. the federal chancellor of Austria. Commercialization of public enterprises has been advocated. parliamentary committees. No matter how conscientious and educated they may be. such as France and 6 [In 1922. Governments take it for granted that when they are unable to acquire money through other means.p 7/20/02 12:58 PM Page 158 158  Selected Writings of Ludwig von Mises while circumventing the only really effective solution. have sounder finances than the Central and Eastern European states is not their greater wealth but the fact that they run fewer public enterprises and above all that they have no public railroads.

Rus- sia. What is needed is frugality. salt mines. This does not mean that cultural expenditures must be cut to the bone.: American Enterprise Institute. All that is lacking is the will to carry them through. is not sufficient in itself to restore sound finances. It is absurd to ex- pect to save money by cutting a research position in a medical institute. The restoration of sound state finances has not triggered the crisis.—Ed. but we know that it is effective. Yeager. the problem could eas- ily be ignored. this enormous asset yielded a deficit of more than 3 million gold crowns in 1923. This in itself is no cause for concern.8 This is the wrong way to look at the matter. What is required is neither new nor easily popularized. The crisis was brought to a head not by the restoration of sound state finances but by the elimination of the misleading bookkeeping that had been produced by the progressive depreciation of the crown. the railroads—it would not have needed that large loan from the League of Nations. The ability to economize.7 Calling a halt to an inflation- ary policy. see Leland B. partly as a result of the austerity program connected with the loan from the League of Nations. D. The expenditure side of the budget must be radically trimmed. but there will probably be a 1. and France. Austria.] . unemployment had risen to about 15 percent of the Austrian workforce. but particularly in Austria. Under state management. C. 7 [For brief accounts of the ending of the post-World War I inflations in Germany. The balance sheet for 1924 is not yet complete. described in footnote 6. The net value of publicly owned Austrian forests is estimated at 170 million gold crowns.—Ed. Today we know what is wrong and what are the remedies. above all. people are talking about the crisis that has been unleashed by the attempt to restore sound public fi- nances.8 billion gold crown deficit. But it is an un- deniable fact that it cannot afford the luxury of unprofitable public enterprises. however. despite the selling off of a million cubic meters of timber.01/Mises Vol. Everywhere. while public enterprises continue to squander billions. waited until the next-to-last moment. 2/Part Ib. is the hallmark of a good finance minister. and. Hungary.] 8 [When Mises delivered this lecture in late 1924.p 7/20/02 12:58 PM Page 159 Restoring Europe’s State Finances  159 Italy. As long as inflation concealed the poor performance of the public sector and the economy as a whole. not the invention of new taxes. Experiences with Stopping Infla- tion (Washington. It is not true that a state like Austria cannot afford essential state expenditures. To recognize a problem is the first step in solving it. 1981). If the state had sold off its timberland and similar types of property —mines.