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

Meanwhile Germany's situation had improved considerably. In May, the revanchiste Poincaré government had lost the general elections in France and the new leadership under Herriot, Painlevé, and Briand immediately set out to bring about an end to the politics of seizure in the Ruhr. As a consequence, the German government was finally able to come to a financial agreement with its former enemies and obtained even better conditions than Austria had in the Geneva Protocols two years earlier. Germany obtained western credit for 800 million gold marks to bolster the reserves of the Reichsbank and thus enable it to operate on a gold exchange standard. In contrast to Vienna, the Berlin government did not have to make any of the far-reaching concessions that would have diminished its political sovereignty. The agreement that was signed in London on August 16, 1924 on the basis of a report from U.S. envoy Charles Dawes was, as all sides agreed, the first true inter-governmental agreement since the war.¹¹⁴

A level of optimism finally returned to the population. This apparently helped the German economists face up to the “crisis of social policy” that Weber and Mises had caused with their recent writings. The assembly in Stuttgart broke new ground in the history of the Verein für Sozialpolitik when, on the last two days of the meeting, the great majority of the speakers endorsed—with some qualifications—the case for free trade. This ended the more than fifty-year old tradition of monolithic advocacy of the welfare state, inflation, and protectionism.¹¹⁵

The debate had been put on the schedule at the very last minute. Two considerations came into play: first, in January 1925, the German government was going to recover its sovereignty in matters of foreign trade (it had been denied this freedom by the Treaty of Versailles); second, the Dawes Plan had finally created a reliable basis for policy-making. True to its mission, the Verein sought to give intellectual guidance to the forthcoming parliamentary debates—though it was impossible to commission any research papers before the Stuttgart meeting. Herkner's choice of the invited speakers was therefore bound to set the tone for the entire debate. He chose four well-established economists who he knew to be open to free trade: Max Sering, Christian Eckert, Bernhard Harms, and Georg Gothein. At the meeting, these men did indeed call on the German government to pioneer the reestablishment of global free trade, but Gothein and Sering argued that some tariffs should be kept in place, not as a protection for certain industries, but as the basis of future international negotiations to enhance further the freedom of trade.¹¹⁶

These statements were so well received that 107 participants went on to sign a “proclamation of university professors” calling for free trade.¹¹⁷ Mises's friend Georg Jahn expressed the significance of the event in a 1927 essay on the free-trade movement in Germany:

[The new free-trade initiatives] have found expression in a proclamation that was agreed upon, in Stuttgart (1924), in the wake of a meeting of the Verein für Sozialpolitik dealing with the reform of trade policy and which was signed by a great number of academic economists. The proclamation says: “Germany's new economic structure, the implications of the London Agreement, and important changes in the forces cooperating on the world market have confronted Germany with an entirely new trade-political situation. The undersigned representatives of the economic and social sciences, among them many who before the war had advocated the basic principles of [then protectionist] German trade policy, emphasize that under current conditions Germany is forced to make the advantages of world trade its own, most notably in order to rationalize its agriculture and its industry. Hence, they can concur with industrial and agrarian tariffs only to the extent that these are necessary and adequate means to make international trade more liberal.

Jahn went on:

What these academic economists demand is nothing less than restoration of trade policy to the free-trade ideas of the nineteenth century.... Major parts of agriculture and industry might continue to be in need of protection. But the greater interest of the state is in free trade and not in the conservation of a system of protective tariffs, which increases rather than diminishes the problems.¹¹⁸

It was probably the most joyful experience that Mises ever had at a Verein meeting, even though he did not fully concur with all provisions of the proclamation.¹¹⁹ The events most certainly took him by surprise. Returning from his summer vacation in Bad Gastein, Mises had spent only a couple of days in Vienna and then traveled to Stuttgart. He did not plan to take part in the discussions, but eventually gave in to the demands of the other participants who rightly saw in him one of the main driving forces behind the apparent new orientation.¹²⁰

Thus, in a comment he made after the trade sessions, when the convention had turned to problems of currency and inflation, Mises observed that the meeting had featured “remarkable progress toward a de-mercantilizing of economic thought.” Protectionist ideas had

lost much, if not all, of their old attractiveness for this group. And it is not different in the field of monetary theory. All advocates of the State Theory of Money have disappeared and some who not long ago advocated abolishing the gold standard now advocate calculation in gold and the gold standard.

He also took a shot at those who, like Alfred Schmidt-Essen (in those days an influential writer on monetary questions) claimed that the gold standard is a monetary order in the exclusive interest of the United States and England. Turning this argument on its head, Mises said: “It was not a foreign commodity that depreciated our currency, but a foreign doctrine—the fight against and the rejection of the quantity theory—that we accepted with the banking theory.” Then he recollected the story of how, on an evening three years earlier, he walked with a German visitor through the streets of Vienna. While most factories stood silent or had significantly reduced their operations, only the printing presses of the Austro-Hungarian Bank were busy.

Things had definitely improved. The inflation had been stopped and the party of inflation and its theories—most notably the banking theory of money—had lost much of their authority. At the Verein meeting, Mises's views did not encounter any serious resistance. Melchior Palyi merely objected that his criticism of the banking theory had gone too far.¹²¹ The only view that Mises himself opposed was Felix Somary's contention that monetary reform was a matter of constitutional amendment. Anticipating a tenet of the late twentieth century school of constitutional economics, Somary claimed that monetary stability was essentially a legal issue that could be solved through a suitable monetary constitution that limited the powers of the central bank management. Mises objected that this approach does not get to the root of the problem, namely, the inflationist mindset. Ultimately, central bank policies are determined by ideas, not by legal codes.¹²²