In 1494, Pope Alexander VI signed the Treaty of Tordesillas, dividing the newly discovered lands around the world outside Europe between Spain and Portugal. The House of Habsburg thus came to control vast tracts of the Americas through the Spanish Empire and, before their expulsion, Jesuit missions. Dynastic marriages facilitated geographic expansion but also genetic contraction: consanguineous marriages (between cousins) produced physical disorders and defects. In the 18th century, the House of Habsburg became extinct; its successors titled themselves the House of Habsburg-Lorraine (although are still referred to as Habsburgs). It was these ‘potential hereditary implications’ that dissuaded Hayek from marrying his cousin before leaving for America in 1923 (Ebenstein 2003, 253).

The Habsburgs were the ‘last possessors of the shadowy universal monarchy of the Middle Ages’. Their Empire was a ‘geographic nonsense, explicable only by dynastic grasping and the accidents of centuries of history’. Their Österreich (Eastern Reich) empire was only partly European: as Foreign Minister Prince Klemens Wenzel von Metternich noted, ‘Asia begins at the Landstrasse’, the road leading eastward out of Vienna. The zenith of its power was reached in the 16th and 17th centuries; during the Counter-Reformation, the Jesuits helped the Habsburgs regain the Germanic lands, the siege of Vienna was lifted (1683) and victory achieved in the War of the Holy League against the Ottoman Turks (1699). The Turkish invasions provided the Habsburgs with a ‘mission [as] defenders of Christianity’. A ‘new, Imperial aristocracy’ emerged: ‘the hangers-on of the Habsburgs’ (Taylor 1964, 11–15, 284). After two centuries of decline, especially relative to Prussia, the Holy Roman Empire (962–1806) was dissolved by Napoleon’s reorganization of Germany; the Doppelkaiser (double emperor) Francis II had just declared himself hereditary Emperor of Austria, as Francis I. Victory as part of the Seventh Coalition which ended Napoleon’s Hundred Days (July 1815) was one of the Habsburg’s last military successes.

After a quarter-century of almost continuous warfare, the Congress of Vienna (1814–1815) restored equilibrium by endorsing Austrian dominance in Central Europe; yet Prussia was emerging as the stronger military and economic power. Friedrich List’s (1841) Das Nationale System der Politischen Ökonomie (The National System of Political Economy) advocated economic unification and development: his work provided inspiration for the European Coal and Steel Community (1951) and the European Economic Community/European Community/ European Union (1957–). The post-1818 German Customs Union (Zollverein) helped unify Prussian and Hohenzollern territories: by 1866 it had expanded to include most of the German states.

Alois Hitler’s (1837–1903) employment symbolized this exclusion: he was an Austrian customs official (1855–1895). The first sentence of chapter 1 of his son’s Mein Kampf (1939 [1925], 17) relates to the ‘destiny’ associated with his border birthplace: ‘German Austria must be restored to the Great German Motherland’. In 1919, Mises declared that ‘a unitary German state is a political and moral necessity’ and would become the ‘starting point of a new calm and peaceful development in German affairs’ (cited by Silverman 1984, 69, 941). John Van Sickle (18 September 1930) recorded in his diary that Mises still believed that some form of Anschluss was inevitable (Leonard 2011, 93, n22). According to Kurt Leube (2003, 13), Hayek also favoured Anschluss with Germany (without specifying whether Hayek later changed his mind).

The end of the Cold War allowed the European Union (EU) and its predecessor to lift sanctions against partial-post-apartheid South Africa (1991) and admit partially-denazified Austria as a member (1995). Six years later, the EU imposed sanctions on Austria after Jörg Haider, leader of the far-right anti-immigration Freedom Party of Austria (FPÖ) entered the governing coalition. From the dissolution of the First Reich to the imposition of EU sanctions (1806–2001) and beyond, the ‘German question’ involved two issues: who would be included in the Second and Third Reichs; and how to prevent a Fourth. The ‘German question’ of the Third Reich (1933–1945) involved the extent and composition of Deutschland: the same issue preoccupied Europe in the interregnum between the First and Second Reichs (1806–1871).

The New York Times (1860) described the Habsburgs (like the Ottomans) as the ‘sick man of Europe’.¹ Prussian victories against the Habsburgs (1866) and France (1870–1871) led to the exclusion of the Austrian Germans and their ethnically diverse Eastern Empire from the Second Reich (1871–1918).This was a triumph for the small German solution (Kleindeutsche Lösung) and a defeat for the greater German solution (Großdeutsche Lösung- Deutschland including Österreich). Hitler’s newspaper, Völkischer Beobachter (The People’s Observer), was Kampfblatt der nationalsozialistischen Bewegung Großdeutschlands – the ‘fighting paper of the National Socialist movement of Greater Germany’ (Layton 1970). The Second Reich had been a German Empire; but the Austrian-led Third Reich was the German Empire (Seaman 1972, 96).

Prussia was predominantly Protestant; Austria was predominantly Roman Catholic. As Carl Menger (Austrian School), William Stanley Jevons (British Neoclassical School) and Leon Walras (Lausanne School) became Neoclassical Founding Fathers, the First Vatican Council (1869–1870) proclaimed the ‘Holy Father’ Pius IX and his successors as beneficiaries of the dogma of papal infallibility. The Unification of Italy undermined papal power: Pius IX described himself as ‘a prisoner in the Vatican’. But the Syllabus of Errors (1864) condemned specific attitudes associated with modernity: including the separation of Church and State (No. 55), the threat to Catholic monopoly power associated with freedom of religion (Nos. 77, 15, 78) and the heretical idea that ‘The Roman Pontiff can, and ought to, reconcile himself, and come to terms with, progress, liberalism and modern civilization’ (No. 80) (Morris 2011, 213).

This Ultramontanism, which asserted the superiority of papal authority over the authority of local temporal or spiritual hierarchies, was a direct challenge to emerging, modernizing states. Military victories had left Prussia, and thus the Second Reich, with sizeable Catholic components: Posen, Alsace-Lorraine and Upper Silesia. These Catholics gravitated towards the German Centre Party (formed in 1870). The liberal intellectuals in Otto von Bismarck’s coalition viewed Catholicism with suspicion: the Kulturkampf (1872–1878) was an assault on their power. Many seminaries were closed; the Jesuits were banned; religious teachers were banned from government schools: and clerics who discussed politics from the pulpit faced two years’ imprisonment.

This 19th-century conflict between Church and State had a medieval forerunner: the Investiture Contest, which had culminated in civil war (the Great Saxon Revolt, 1077–1088) and the excommunication of Henry IV, the Holy Roman Emperor and the King of the Germans, in 1076. In 1077, he had made a penitential journey from Speyer, near Mannheim, to the Castle of Canossa to seek forgiveness from Pope Gregory VII. This mid-winter, hair-shirt, barefoot walk of about 500 miles (800 km) across the Alps had reflected the relative diplomatic and military power of the medieval papacy. Prussia’s power, meanwhile, was derived from what Bismarck described as ‘blood and iron’. In 1872, when its relations with the Vatican were severed after Pius IX rejected the appointed ambassador, in the Reichstag Bismarck responded: ‘Have no fear; neither in body nor in spirit are we going to Canossa’ (cited by Lowe 2005, 281). Blood and iron plus Alfred Nobel’s explosive chemistry remained the sources of military power until the atomic age.

The 17th-century spoils of Habsburg victory in the Balkans added to their unstable ownership of a non-German Empire. Then 19th-century nationalism further undermined their power: the 1867 Austro-Hungarian Compromise obliged the Habsburgs to share power with a separate Hungarian government. German and Italian unification also weakened the Habsburgs; then, after the Great War of 1914–1918, the Serbs, Croats and Slovenes broke away to form what became known as Yugoslavia. The ‘Unification or Death’ (‘Black Hand’) terrorist group had provoked the 1914 July Crisis, which led to the Habsburg invasion of Serbia and the Great War; during his trial for the assassination of Habsburg Archduke Franz Ferdinand, Gavrilo Princep proclaimed: ‘I am a Yugoslav nationalist, aiming for the unification of all Yugoslavs, and I do not care what form of state, but it must be free from Austria’ (cited by Andjelic 2003, 11).

The Austrian School of Economics was born amid these inter-German tensions. Menger’s (1985 [1883]) Investigations into the Method of the Social Sciences with Special Reference to Economics attacked the methods of the German Historical School; Gustav von Schmoller’s unfavourable review initiated the Methodenstreit (the battle over method). The term ‘Austrian school’ was interpreted by Mises (2003 [1969], 19) as a slur, reflecting the excluded status of ‘backward’ Austria compared to ‘modern’ Prussia: ‘When the German professors attached the epithet “Austrian” to the theories of Menger and his two earliest followers and continuators, they meant it in a pejorative sense.’

Mises’ assertion was false or at least unproven: the term ‘Austrian’ had been attached to ‘School of Economics’ by Austrians; and Menger was the first to use Österreichische Schule von Volkswirthen (Schulak and Unterköfler 2011, 27–28). If anything, the ‘rivalry ... made Austria more prominent in economical discussions than she had been for almost a century’ (Bonar 1888, 1). However, between the ‘debacle of 1848’ and the German Anschluss, Austrians ‘suffered feelings of inferiority’ (Johnson 1972, 391, 396).

Menger became tutor to the Habsburg Crown Prince Rudolf (1858–1889), who committed suicide with his 17-year-old mistress. The new heir, Karl Ludwig, renounced his claim in favour of his son, Franz Ferdinand. But in 1894, Franz Ferdinand fel...