World war creates a fantastic learning environment for an economist. War-making nations jolt the economy, manipulate the currency, and impose a vast array of controls on production, price setting, and exchange. Economists are called upon to orchestrate these efforts — and then deal with an ever cascading tumble of new problems emanating from those efforts. Most economist never experience as many “natural” economic experiments or novel economic problems in a lifetime of government employment.
The economic problem or “natural” experiment that Mises was tasked to address in the last year of the war concerned the massive circulation of heavily inflated Austro-Hungarian krone in the conquered Ukrainian region and the replacement of that currency with an independent Ukrainian currency system. Mises proposed the sale of Viennese stocks and bonds to soak up krone and the establishment of a Ukrainian fractional-reserve central bank using some combination of gold, silver, foreign currency and bills of exchange as its fixed ratio reserve fund.
Throughout the war Mises had an up-close and personal opportunity to see the principles of money and fiat currency he’d written about in 1912 tested in the most extreme of circumstances. He saw the problems of money on the ground on the Eastern Front, back home in the food lines of Vienna, and at the highest levels in the monetary discussions of the economists of the Central Powers. This experience must have given him great confidence is earlier theoretical conclusions. What he saw confirmed before him was the monetary basis of inflation, the illusion of using trade and foreign exchange controls to manipulate the value of a dramatically inflated currency, and pathetic folly of so many popular and “scientific” monetary nostrums.
But Mises would never see the outcome of his own proposed monetary experiment in the Ukraine. In October of 1918 Bulgaria abandoned the war and Allied forces advanced across the South Eastern Front. Then, suddenly, the Austria-Hungarian Empire collapsed and the great war was over. The problems of money, banking and inflation now became an immense and very local problem in Vienna itself.