by Sylvia Nasar
As it turned out, when the monarchists seized the Hungarian embassy in Vienna on May 4, they unearthed a large cache of the money—reportedly 135 million krone and 300,000 thousand Swiss francs—earmarked for fomenting revolution in Vienna. So, just as the negotiations with Rothschild were winding up, Schumpeter sent his secretary to inform the banker, “There is no need for him to advance any money, as it has been raised elsewhere.”46 When Béla Kun tried to retrieve his war chest and get the aristocratic officers extradited, Schumpeter intervened on their behalf. Before the matter went any further, the Béla Kun government was overthrown by the right-wing Admiral Miklós Horthy and his followers.
• • •
Over the next few weeks, the Austrian government went on a spending spree. The Socialists dominated the coalition government formed in March 1919 because they were the only ones who could control the unemployed, soldiers, workers’ councils, and radicals. Arguing that the large conservative peasant majority would not permit a Socialist revolution and that any putsch would result in Allied intervention, Bauer pressed for a variety of social welfare measures. Aware that they might have only a narrow window in which to act, the Socialists succeeded in laying the groundwork of the Austrian welfare state in a few short weeks. In Vienna alone, sixty thousand war invalids, dependents of POWs, and officials of the former empire and their families qualified for relief. Within a year, one-sixth of the population would be on welfare and not producing any salable goods.
Meanwhile, Schumpeter’s efforts to gather support for his tax proposals stalled. No loans were forthcoming from the Allies. Reserves of gold and hard currencies were minuscule. The government had little choice but to finance its deficit by printing more money.
The government looked for ways to shift the burden onto business via what Bauer called a “far reaching encroachment on the rights of private enterprise, originally conceived as emergency regulation for a few months.” In May the cabinet passed a decree requiring large companies to boost employment by 20 percent. It was soon followed by others compelling employers to recognize trade unions and give workers paid holidays, and forbidding layoffs without government approval. Not surprisingly, the law resulted in a sharp decline in productivity, complaints about “Arbeitsunlust” or absenteeism, and a further slump in tax receipts.
Nonetheless, the Renner cabinet forged ahead with socialization. In mid-May, Otto Bauer announced a program of partial nationalization of mining, iron foundries, power stations, forests, and timber. Schumpeter objected that as long as the government administration got its finances in order and stabilized the krone, business owners would once again invest and expand. After alienating conservatives by proposing that the rich bear the burden of the war debt, he alienated his Social Democratic colleagues by claiming that socializing private enterprises would make it impossible to attract foreign investors and smother any recovery.
Schumpeter’s Social Democratic colleagues trusted him no more than his own party did and called him “vain,” “conceited,” and “affected” behind his back. The other ministers wore shabby clothes and shoes with holes in their soles. Schumpeter dressed like an English banker or diplomat. The cut of his Savile Row suit was impeccable. The silken handkerchief that he tucked under his heavy gold watch was snowy. Newspaper caricatures invariably depicted him in jodhpurs, high boots, and a Homburg. He carried a riding crop under his arm as if to suggest that he intended to whip his ministry, the cabinet, or the whole country into shape. The other ministers lived in modest flats with their frumpy wives. Separated from Gladys, apparently for good, Schumpeter flaunted his lavish bachelor lifestyle. He rented a suite at the posh Hotel Astoria around the corner from the ministry, an apartment on Strudlhofgasse, and half of a palais belonging to a count, where he threw teas and dinners for the likes of the Rothschilds, Wittgensteins, and other plutocrats, as well as foreign diplomats, journalists, and politicians. He often pulled up to the ministry in an ostentatious horse-drawn carriage. He ate in the best restaurants, drank the finest French champagne, and often had a call girl or two on his arm or sitting beside him in his carriage. It was a manner of living far beyond a cabinet officer’s pay grade, and it was obvious that Schumpeter was running up debts to his wealthy friends. Even his old mentor Friedrich von Wieser got the impression that Schumpeter did “not really care about the general misery” or suspected that “as soon as his vanity is no longer satisfied . . . he will retire.”47 Schumpeter made matters worse by pretending to be indifferent to criticism. He would tell reporters, “Do you think that I want to remain Minister of a State that goes bankrupt?”48
• • •
Anschluss, which Otto Bauer regarded as Austria’s only chance for economic revival and Schumpeter was the only cabinet member to oppose, was another major source of friction. In late May, the local correspondent for Le Temps discovered Le Docteur Schumpeter, seated at his desk in the yellow ballroom. The sumptuous baroque palace in the heart of a starving city, the lavish gold leaf decorating the Treasury’s empty vaults, and the floor-to-ceiling frescoes glorifying Austria’s past military triumphs amid anarchy and defeat struck the reporter as highly ironic. And then to come upon Schumpeter, the “bourgeois whipping boy” in the cabinet, sitting “at the feet” of a portrait of Ferdinand I was too much!49 Le Temps readers would have gotten the joke: the famously feeble-minded and sexually impotent Austrian emperor had been forced to abdicate in 1848, another year of revolution. Such a fate seemed likely for the similarly weak and helpless Austrian Republic and its minister, even one as strong-willed, brilliant, and notoriously libertine as Le Docteur Schumpeter.
The Austrian government was trying to influence the terms of a peace treaty that would be dictated by the Entente by waging a propaganda war for “the right to union with Germany.”50 When the Le Temps interview appeared quoting Schumpeter, Bauer accused him at the next cabinet meeting of secretly lobbying the French and English to forbid the merger. As Bauer complained in his memoir, “The French statesmen were able to answer us that the leading men of Austria, the bankers and the industrial magnates daily assured the Entente diplomats at Vienna that Austria did not need union and could get along pretty well by herself, provided the peace conditions were relatively favorable.”51
Bauer’s accusation was largely true. Schumpeter had been giving anti-Anschluss speeches for weeks. He had also proposed the idea of a monetary union with France to Henry Allize, head of the French Military Mission to Vienna. His contention that the new Austrian state could avoid bankruptcy was based on an expectation that France would give a higher priority to establishing a non-German-dominated common market in Central Europe. As late as the end of June, Schumpeter declared publicly that he was hopeful that the Entente would ensure an “equitable distribution of the burden” of war debts and would not insist on the confiscation of Austrian assets in Czechoslovakia, Hungary, and Yugoslavia. As he put it, “In the case of Germany, the peace terms were drafted to check recovery; in the case of Austria, they must encourage it.”52
At the end of May, Schumpeter once again attacked the Anschluss policy in a “sensational” interview with Neues 8 Uhr Blatt, warning, “Our safety lies in our peaceful intercourse with all states, and especially with our immediate neighbors.”53 Bauer wrote him a furious letter, but instead of heeding his warning, Schumpeter tried to engineer a secret side deal with the British. He gave Francis Oppenheimer, Keynes’s emissary to Vienna, the draft of a “secret” plan involving Allied control of Austria’s finances and central bank in exchange for long-term loans. As Oppenheimer reported in a cable to his boss warmly supporting Schumpeter’s plan, the Austrian finance minister
does not share the general opinion that Anschluss to Germany was Austria’s only salvation. He wanted, if possible, a strong Allied Finance Commission to take charge of Austria on the lines of the British financial administration in Egypt, but whatever form the control might take, it would have to safeguard Austria’s amour propre. He insisted that a single currency
throughout the successor states, with Vienna remaining the banker of them all, was perhaps the most important item in the program of Austria’s recovery.
He added, “Suffice it to say that it was a rare and fortunate privilege to have had to deal with such a genial, open-minded expert.”54 The two continued to meet frequently. Among other things, Schumpeter was actively trying to help the British acquire the Austrian companies that controlled shipping on the Danube. As Oppenheimer had informed Keynes, “Dr. Schumpeter had agreed to facilitate the transfer of this company, possibly of the other three as well, into British ownership on exceptional terms for cash, and he promised to maintain for us a first refusal until we had either accepted or declined the offer.”55 Naturally, nothing in Vienna stayed secret for long. “Schumpeter carries on with his intrigues,” Bauer wrote to Renner. “I shall do nothing for the time being, but after the conclusion of the peace treaty it will be inevitable to force his resignation.”56
• • •
Almost as soon as the Allied treaty terms had been presented to the Germans on May 7 in Versailles, the Austrian delegation, with the prime minister Karl Renner at its head, left Vienna for France. On June 2, 1919, after spending two weeks cooling their heels in the old royal chateau in Saint-Germaine-en-Lay, relishing the French food and wine, they learned the Entente’s terms for Austria. “It was a terrible document,” Otto Bauer recalled. Large chunks of German-speaking Austria were parceled out to the Czechs, Yugoslavs, and Italians. “Equally harsh were the economic provisions . . . They were simply a copy of the German Peace Treaty.”57 The draft Treaty of Saint-Germaine acknowledged that the Austro-Hungarian Empire had broken up but penalized only Austria for its crimes. Three million German-speaking Austrians were to live under Czech rule. The private property of Austrian citizens was to be confiscated. Austria’s government was to pay reparations for thirty years. The coup de grâce, at least from Bauer’s point of view: union with Germany was expressly forbidden.
In Vienna, the reaction was shock mingled with disbelief. Schumpeter told a reporter that “the Allies’ motivation can only be to destroy German Austria.”58 On June 30, he said, “It is not easy to kill a people. In general it is impossible. But here we have one of the few cases in which it is possible . . . fiscal collapse inevitably brings with it social collapse.”59 When the foreign exchange market issued its verdict on the treaty, the krone collapsed once more. As Friedrich Wieser told a London conference on relief and reconstruction at which Keynes was present a few months later, the currency markets
have declared thereby that they do not consider the Austrian Republic, with boundaries as fixed by the Peace Treaty, and with the burdens laid upon her therein, as capable of life. The Austrian who loves his country will do everything in order to keep her alive. But it is not surprising that the outside world, to whom her existence is a matter of indifference, has declared that she is incapable of life.60
By treating Austria as harshly as Germany, the Allies not only destroyed the viability of the new state but also shredded what little was left of Schumpeter’s credibility. He was forced to admit that his political judgment had been naïve. He was, as he confided to his diary, a man without an intuitive feel for political reality, “a man without any antennae.”61
• • •
Schumpeter’s political demise was agonizingly drawn out. At the July 15 cabinet meeting, Bauer hurled yet another accusation at him, this time of sabotaging the “socialization” of basic resource industries by conniving to deliver a major Austrian mining and timber concern into the hands of Italy’s Fiat company, making it impossible for the government to take it over. Schumpeter tried vainly to defend himself by portraying a series of transactions with a foreign exchange trader named Kola as an attempt to raise gold and hard currencies with which to defend the krone.62 Two weeks later, Schumpeter had the humiliating task of defending the government’s plan to sell or mortgage several of the nation’s “immortal works of art,” including the emperor’s prized Gobelin tapestries. There was no other way to raise the requisite foreign currencies for buying food abroad, he argued, warning dryly, “This process cannot be often repeated.” He begged the lawmakers one final time to pass his budget: “The greatest problem of the State would be to get through the next three years without Government bankruptcy and without the issue of new notes,” he pleaded, knowing that his arguments were falling on deaf ears.63 It was Schumpeter’s last appearance in front of parliament.
In mid-October, utterly isolated and constantly ridiculed in the media, Schumpeter was finally dismissed. The manner and circumstances were so brutal that one liberal newspaper accused Renner of character assassination. Nor was that the end, for several of his actions as finance minister resulted in investigations that continued for months. Felix Somary, the banker, observed that “Schumpeter made light of everything” and attributed his cool manner to his training at the Theresianum, “where the students learned to cultivate self-control and under no circumstances to show emotion. One should master the rules of the game of all parties and ideologies, but avoid commitments.”64 Inwardly, though, Schumpeter was shattered. He was convinced that he lacked “the quality of leadership,”65 and his public humiliation was made more painful by his mother’s disappointed hopes. The fact that subsequent Allied stabilization programs for Austria were modeled on his or that the government that sacked him was judged to be “incapable of governing the country” failed to ease the sting of failure. When asked about his experiences, he rarely said more than “I held the minister-ship in a time of revolution, and it was no pleasure, I may assure you.”66
• • •
In November, when Wieser returned from London, his acquaintances were still talking about Schumpeter’s fall. The older man observed, “It seems that Schumpeter is utterly ruined in the eyes of all the Parties. Even the young economists, who regarded him as their leader, have written him off. No one has any more expectations of him.”67 His former admirers had sold him short. After two terms at the University of Graz, where he licked his wounds, Schumpeter did what many former public servants do. He joined the private sector.
His timing was impeccable. The destruction of Austria’s hopes for the future coincided with a stock market boom and deal-making frenzy. As one observer recalled,
Stock quotations began to adapt themselves from day to day to the falling value of money. The capitalists sought to preserve their capital from depreciation by investing it in securities and bills . . . The Stock Exchange speculated upon a continuous fall in the Krone. The Krone’s exchange value vis a vis other currencies fell faster than its internal purchasing power. As a result, Austrian prices were far below the level of world market prices and large profits could be realized by exporting Austrian products.68
In a last-minute expression of appreciation, parliament had awarded Schumpeter a golden parachute in the form of a banking license, and by 1921 Schumpeter had parlayed it into the presidency of a small but old, highly respected bank. He had run through his savings and borrowed heavily to live far beyond the means of a professor and politician. Now he needed to make money.
Chapter VII
Europe Is Dying: Keynes at Versailles
Expert opinion is being ignored.
Keynes has been too splendid about the Austrian treaty. He is going to fight. He says he’s going to resign.
—Francis Oppenheimer, 19191
Vienna was not unique. In January 1919, famine and pestilence raged from St. Petersburg to Istanbul. To the Britons and Americans who came to Europe to survey the damage, the whole continent seemed to be on the verge of dying. After a ten-hour drive from the coast to Lille, in eastern France, one observer wrote in his diary that he could recall seeing no “human being not connected with the Army . . . or any animal . . . or really any living thing except rank grass or any inhabited house.” In Ypres, Belgium, where some of the worst fighting had taken place, “the colors of the bricks and stone are mellowed; grass and moss are beginning to
grow over the ruins.”2
Eight weeks after the signing of the armistice, the restoration of peaceful conditions had proved impossible. The blockade was still in effect. The Allies dared not give up their most effective weapon against Germany too soon. Fighting involving hundreds of thousands of troops continued as dozens of small wars erupted. Pogroms, expulsions, and mass murder were under way. Eight and a half million men had lost their lives. Nearly as many were left physically disabled or psychologically maimed. An entire generation of children in Central Europe—the Kriegskinder, or children of war—was growing up underfed and undersized.
In the aftermath of the war, the “universal age” and its economic achievements seemed as unreal as a dream. In addition to the staggering loss of life and property, the prewar channels of trade and credit were in ruins. Everywhere new barriers to exports and imports were springing up. Those who possessed something to sell were often reluctant to part with it for paper currencies issued by bankrupt governments; a large share of trade reverted to barter. Winners and losers alike had mortgaged themselves to the hilt to fight the costliest war in history, exhausting not only their reserves but also their limited powers of taxation. As late as 1916, France, Germany, and Russia had no income tax. Now there was no credit to feed the population, fuel the furnaces, repair the damaged factories, or finance renewed trade. The threat of bankruptcy as much as the thirst for revenge was making shaky governments determined to make someone else foot the bill.