Because so much of what Austria needed to stay alive had to be imported, the Austrian finance minister had to find foreign currencies or gold with which to buy it. If he couldn’t, he had to arrange a foreign loan or hope for a gift. But his principal job was to defend the krone’s value vis-à-vis other currencies. Every uptick in the exchange value of the krone meant that Austria could pay less for coal or pork. Every downward movement meant that Austria had to pay more. That is why housewives stood outside the windows of currency shops waiting for the latest report on the krone’s value with “constricted chests.” For the finance minister, the value of the currency was of even greater consequence, because he was also responsible for the government’s budget. Every decline in the krone’s value caused the government’s deficit to rise. The finance minister’s most important single task was to prevent the currency from collapsing. Ultimately it was a confidence game. People took one’s money if they believed that they could settle their debts with it. What gave them this confidence was, of course, the knowledge that they could settle their debts with it. So every finance minister had to be bullish on his currency, and if he had no gold or foreign currency reserves, he had to use air to keep it afloat.
• • •
Schumpeter, the youngest finance minister in Austria’s history, was delivering his maiden speech in a gilded marble palazzo tucked in a narrow lane—Heaven’s Gate—in the city center. Pacing back and forth, waving his hands, enunciating in his best Theresianum accent, he alternated between playfulness and passion. Success in modern politics, he was aware, depended on a leader’s ability to “fascinate,” “impress,” and “engage” the public. And economic stabilization required “a popular government and a credible leader of brilliance, will, power and words that nations can trust.”33 In the gloomy, frigid hall full of black-coated officials, he radiated energy, optimism, and hope.
The war had saddled all the combatants, including England and France, with unprecedented debts, but Austria’s case was extreme. The imperial government had not dared to raise taxes during the war. In 1919, as a result, tax receipts covered only two-thirds of government spending. The government owed huge interest payments on its war debt, a disproportionate share of which was inherited by the new Austrian Republic. It had also promised relief for the unemployed, principally the cost of sustaining the militia. It had to pay civil servants, including thousands who flocked to Vienna from outposts of the old empire. Finally, it had to provide food subsidies to cover the difference between the price paid by the government and that charged to consumers. The old imperial government had assumed that the lion’s share of the huge debts they were accumulating would be paid by the losers. This, of course, only postponed the day of reckoning.
Most Austrians could imagine only two alternatives now: to be adopted by Germany or to become a permanent ward of the Entente. Otto Bauer was an enthusiastic supporter of Anschluss with Germany. He saw nothing wrong, either, with a little inflation, regarding it as “a means of animating industry and raising the standard of life of the workers.”34 Bankers and industrialists leaned toward an alliance with the Entente. They shared the fondest wishes of British Treasury officials, in particular those of Maynard Keynes, that “Austria will never be allowed to go under. The Entente will put her finances straight. A large loan in sterling is all that is needed.”35
Schumpeter took a different view. He believed that a shrunken Austria had the means to recover economically. His deepest conviction was that nations’ resources matter less than what they did with what they had. As long as entrepreneurs were allowed to create new enterprises, the financial system was functioning efficiently, and there were not too many barriers to trade, society could regenerate itself. He rejected the popular assumption that economic viability depended on vast territories, huge populations, and natural resources. In an extraordinary essay on the sociology of imperialism written in 1919 with Germany in mind, he described how ancient Egypt’s military-industrial complex impoverished the empire by chronic warfare: “Created by wars that required it, the machine now created the wars it required.”36 England became the richest country before she acquired an empire. Switzerland, whose per capita income rivaled that of Britain, was no bigger than Scotland. And before the war, Vienna had been the most important financial, transportation, and trading center in Central Europe. As long as the Allies or her neighbors did nothing to prevent Austria from trading freely or its government from restoring her creditworthiness, he saw no reason why Vienna could not resume her prewar economic role and once again earn a good living, provided no insuperable obstacles were placed in her way. “People so often say that German Austria is not viable,” Schumpeter admitted. But, he added forcefully, “I believe in our future . . . One must not think that a country in order to survive economically must possess all essential raw materials within its own frontiers . . . The neighboring countries cannot exist without us or without our financial mediation.”37
To be sure, the nation had to deal with its massive war debt. The historian Niall Ferguson points out that there are five, and only five, ways to ease such burdens: de jure repudiation, as practiced by Lenin in 1918 and Hitler in 1938, and varying degrees of de facto repudiation involving changing the repayment terms, lowering the value of the money in which the debt is repaid (inflation), or achieving such rapid economic growth that income rises faster than interest payments. The most respectable, of course, is simply to pay it off.
Reflecting his faith that Austria could help itself, Schumpeter told his audience that he strongly favored the last option. It was the fastest way to restore investor confidence in Austria’s creditworthiness and revive production. But no postwar government would get away with raising taxes on farmers and the middle class to compensate wealthy bondholders. Jacking up income taxes would also discourage investment just when the economy desperately needed an infusion of fresh capital. Schumpeter’s preferred solution was to force the rich to shoulder Austria’s war debt by levying a steep, one-time tax on property. In effect, he wanted to pay wealthy bondholders off with their own money by seizing a big chunk of their liquid assets, including cash, bonds, and stock.
The genius of Schumpeter’s plan, which reflected the priorities he had set out in his theoretical treatise The Crisis of the Tax State, was that while the ownership of business enterprises, farms, and other property would be reshuffled, it would remain in private hands. Taxing existing property rather than future income had the further advantage of not discouraging investors from making fresh capital available for investment or businessmen from expanding production. To reduce the risk the government would inflate its way out of debt, Schumpeter also proposed creating a central bank that, like the Bank of England, was independent of the Treasury. At the same time, he favored stabilizing the krone at its current value rather than its prewar parity. These measures would bolster the confidence of foreign investors, on whom Schumpeter pinned his hopes, and ensure that Austrian investments would be bargains for them.
Schumpeter’s recovery program required two conditions in order to work: peace terms that did not impose insuperable obstacles to a renewal of trade, and a sustained effort to raise enough taxes to cover the government’s spending. “At the moment we cannot get any credit even abroad because foreigners have no faith in our future,” he told his staff. Eliminating or even dramatically reducing the government’s deficit would require heroic measures, he admitted. He favored sin taxes on “conspicuous consumption” of such proletarian indulgences as beer and tobacco, as well as sales taxes on “luxury foods, luxury entertainment, luxury textiles, luxury stores, servants, luxury clothing.”38 It was not a plan designed to win friends on either the right or the left. His own party was dead set against a tax on property, especially if it included farms. The Socialists considered the notion of taxing beer a hilarious example of Schumpeter’s political cluelessness.
• • •
By the third day of Schumpeter’s tenure as finance minister, the krone
was in free fall. Communist guerrillas, led by a former Austro-Hungarian army corporal who had been trained and armed by Moscow, were riding around Budapest in open trucks festooned with red flags. A Red Guard of demobilized Austrian soldiers immediately set off for the Hungarian capital to express solidarity. The Bolshevik victory was widely interpreted as Hungary’s having thrown herself into Moscow’s arms rather than submit to the Entente. It prompted Lloyd George, the British prime minister and something of a hawk on reparations, to issue a warning to the peace conference. While the Entente, no less “tired, bleeding and broken” than the losers, were intent on making the Germans and their allies pay for reconstruction, Lenin’s disciples were busy trying to seduce Germans with promises of “a fresh start,” that is, as Lloyd George explained, a chance “to free the German people from indebtedness to the Allies and indebtedness to their own richer classes” that had lent the Reich the resources with which to fight the war. If the Allies insisted on imposing overly harsh terms on Germany, the inevitable result would be “Spartacists from the Urals to the Rhine.”39
As if on cue, Lloyd George’s gloomy prophecy proceeded to unfold. On April 7, in Munich, a band of anarchists declared a Bavarian Soviet Republic. Within a week the homegrown mob was replaced by professional revolutionaries—Russian émigrés with ties to the Internationale—who promptly unleashed a reign of terror. A Russian document captured in a police raid suggested that Lenin’s army was poised to march into Germany via Poland to join the insurrectionists. The word in Paris was that Vienna, now flanked by two red capitals, would be the next domino to fall. In a Parliamentary debate on whether or not to leave British troops in Russia to help defeat the Bolsheviks, Winston Churchill warned that “Bolshevism is a great evil, but then it has arisen out of great social evils.” Six weeks later, the British cavalry officer in Russia, General Briggs, wrote to Churchill arguing for British support: “starvation means Bolshevism.”40
Béla Kun’s emissaries did appear in working-class districts of Vienna to make dramatic pledges to supply food to the proletarians—but not the bourgeoisie—in the future Soviet Republic of Austria. They painted fantastic pictures of life in Budapest, of prices in first-class hotels now on a par with those of rough taverns, workers’ families living like royalty in confiscated palaces, and social equality between the bourgeoisie and the proletarians. In his memoir, Bauer recalled:
As soon as [Béla Kun] realized that we had no intention of [proclaiming the Austrian Soviet] he embarked upon a campaign against us. The Hungarian Embassy in Vienna became a centre of agitation. Large supplies of money came from Hungary to the Communist Party of Austria, which not only served to strengthen its propaganda, but which was also expended for the purpose of bribing trusted individuals among the workers and soldiers. The communist propaganda sought to persuade the workers that there were large supplies of food in Hungary which were sufficient to meet all the requirements of Austria.41
To counter such propaganda, Herbert Hoover sent cables from his Paris headquarters at 51 Avenue Montaigne urging his deputies to plaster Vienna’s city walls with fliers warning that “any disturbance of public order will render food shipments impossible and will bring Vienna face to face with absolute famine.”42 Meanwhile, he stepped up relief operations in a race against Communism and death. In Vienna, the government ordered half a company of the Socialist militia, the Volkswehr, to take up residence in the courtyard of 7 Herrengasse, where the cabinet held its meetings.
Fears of a coup may explain a curious incident related by the food minister, Hans Loewenfeld-Russ. Apparently, Schumpeter had telephoned him on the last day of March, invited himself to dinner, and asked him to invite Ludwig Paul, the transportation minister, as well. As soon as the three men were alone, Schumpeter asked the others abruptly whether, in the event of a coup, they would be willing to join the new Bolshevik government with him. “Not even in my dreams,” retorted Paul sharply.43 Loewenfeld-Russ nodded angrily in agreement. Schumpeter immediately backtracked, chiming in that he too wouldn’t dream of joining such a government.
When Loewenfeld-Russ demanded that Schumpeter explain why he had wanted a private meeting and had asked such a peculiar question, Schumpeter replied that he was merely sounding out the only two cabinet members besides himself who had been appointed not by the chancellor but by a political party.
He was probably telling the truth. At around that time, Cuninghame reported that one of his sources had submitted a “long circumstantial report . . . detailed plan, worked out by the Socialist Party, for establishing a Socialist form of government.” According to Cuninghame’s informant, this government was supposed to be a decoy, “Soviet in appearance rather than reality.”44 Supposedly Renner and other moderates in the cabinet were ready to adopt this ruse, although the more left-leaning members like Bauer refused to have anything to do with it. Cuninghame was instructed by the British Foreign Office to inform the Austrian defense minister that a Bolshevik government, phony or genuine, would mean a suspension of food aid and a resumption of arms shipments to Poland, which was harassing Austria with territorial demands.
• • •
As the Austrian republic hovered between life and death, the cabinet was in permanent session. Sessions typically started hours after the end of the normal work day. Around the time that the opera let out, the fifteen ministers and their undersecretaries converged by car or on foot on the Palais Modena at 7 Herrengasse, one of the finest streets in Vienna, dating from the late Middle Ages. Anxious, sleep-deprived men trudged past the disheveled Volkswehr guards camped in the courtyard and climbed the imposing stairway to the once brilliantly lit, elegant rooms where emperors had met with their councilors and where Karl Renner had set up his chancellery. They had to take care to avoid tripping over the machine guns haphazardly positioned at the windows and were forced by the cold and damp to keep their heavy overcoats on. The meetings usually lasted well past midnight, and the prime minister sometimes sent out to a nearby restaurant for a meager meal and a glass of beer to keep them all going.
On April 17, the ministers had barely begun to tackle the “unimaginably long” agenda when thousands of gaunt and ragged men with “pinched and yellow” faces came marching along the Ringstrasse, now strewn with litter, past luxury high rises with boarded-up windows, to gather in front of parliament a few blocks away. Most were unemployed factory workers and demobilized soldiers, many with missing limbs or other visible war wounds. Scattered among them was a small cadre of armed Communist Party members and foreign agitators. After a few hours, they succeeded in whipping the crowd into a sufficient frenzy to storm the parliament building and, once inside, set it ablaze. When shooting started, the Volkswehr rushed in. In retaking the building, the “peoples’ militia” shot some fifty demonstrators dead and wounded several hundred, or so the first reports claimed.
One episode shocked the public even more than the attempted putsch. At the height of the fighting, a horse was shot out from under a policeman in the street in front of the parliament. As the animal lay dead in the street, a hungry mob tore it to pieces and carried off hunks of bloody meat. For ordinary Viennese, who adored the emperor’s white show horses the way Americans loved boxing champions, the incident seemed to prove that civilization was reverting inexorably to barbarism. No one could have been more appalled than the republic’s newly installed finance minister, who, even in these desperate times, kept several thoroughbreds.
In Budapest, the opinion on the street was that revolution was imminent in Vienna, but by midafternoon the insurrection had petered out. Friedrich Adler, the recently released assassin of the monarchy’s penultimate prime minister and a popular Socialist politician, had arrived to urge calm. The Communist leaders themselves could not agree on whether to proclaim a Soviet republic. The next day, the heads of the workers’ councils declined to call a general strike. Ellis Ashmead-Bartlett, the Daily Telegraph’s war correspondent, rushed to the Austrian capital from Budapest. “Instead of finding
Vienna in flames, I found the town absolutely quiet.”45
• • •
Hotel Sacher, across from the opera and famous for its voluptuous chocolate cake, was the preferred trysting place for Vienna’s diplomats, spies, and counterrevolutionaries. Madame Sacher was said to be an ardent monarchist. Schumpeter lunched there often. On May 2, Sir Thomas Cuninghame discovered Schumpeter in one of the “salles privees” at the rear of the hotel, huddled with four other men, including Ellis Ashmead-Bartlett, the British correspondent who had broken the story of the slaughter at the battle of Gallipoli. Halfway through their meal, Cuninghame, who had apparently heard that Ashmead-Bartlett was in town, joined them.
Ashmead-Bartlett was trying to raise money on behalf of about 150 Hungarian officers who were hanging around Vienna, terrified of being deported on the one hand and eager to organize a counterrevolution against Bela Kun on the other. Their trouble was the complete lack of money or credit with which to hire as much as a train, beyond that extended by the sympathetic Madame Sacher. Von Neumann, the Budapest banker, was in Vienna to help in the fund-raising effort. Other rich sympathizers were afraid to lend them cash for fear that such a loan would reach the ears of Austria’s Socialist government. Louis Rothschild, on whom the plotters had pinned their hopes, was changing his conditions daily. Finally, Cuninghame had suggested that Ashmead-Bartlett see Schumpeter, known to the British as a bitter opponent of union with Germany, which Britain also opposed.
The journalist was impressed by Schumpeter’s intelligence, lively manner, and flawless command of English. He noted approvingly that Schumpeter was not yet forty and betrayed none of the caution typical of Treasury men. “We discussed the future of Austria,” he recalled. Schumpeter had immediately declared himself in favor of a constitutional monarchy such as Britain’s and agreed that “the only way to eliminate the Red danger from Vienna was to drive the Soviet Government out of Hungary.” After saying that he would gladly advance the revolutionaries money from the Treasury were it not for the need to account for every kroner to parliament, he offered to assure Rothschild that if he lent the money, the Treasury would look the other way. “This was good news,” said Ashmead-Bartlett, “as it did away with Louis Rothschild’s main objection . . . namely his fear of being asked awkward questions by the Austrian government.”