The Collected Works of F. A. Hayek

The New World

F. A. Hayek, Stephen Kresge

• Publisher: University of Chicago Press
• Year: 2012
• ISBN:
  9780226321189
• Topic: Business
• Subtopic: Business General
• Index: Business

The two volumes of Good Money concentrate on Hayek's work on money and monetary policy. Published in the centenary of his birth, these volumes bring forth some of the economist's most distinguished articles on monetary policy and offer another vital addition to the collection of Hayek's life work. Good Money, Part I: The New World includes seven of Hayek's articles from the 1920s that were written largely in reaction to the work of Irving Fisher and W. C. Mitchell. Hayek encountered Fisher's work on the quantity theory of money and Mitchell's studies on business cycles during a U.S. visit in 1923-24. These articles attack the idea that price stabilization was consistent with the stabilization of foreign exchange and foreshadow Hayek's general critique that the whole of an economy is not simply the sum of its parts. Good Money, Part II: The Standard offers five more of Hayek's articles that advance his ideas about money. In these essays, Hayek investigates the consequences of the "predicament of composition." This principle works on the premise that the entire society cannot simultaneously increase liquidity by selling property or services for cash. This analysis led Hayek to make what was perhaps his most controversial proposal: that governments should be denied a monopoly on the coining of money.Taken together, these volumes present a comprehensive chronicle of Hayek's writings on monetary policy and offer readers an invaluable reference to some of his most profound thoughts about money."Each new addition to The Collected Works of F. A. Hayek, the University of Chicago's painstaking series of reissues and collections, is a gem."— Liberty on Volume IX of The Collected Works of F. A. Hayek "Intellectually [Hayek] towers like a giant oak in a forest of saplings."— Chicago Tribune "One of the great thinkers of our age who... revolutionized the world's intellectual and political life."—Former President George Herbert Walker Bush

NOTES

INTRODUCTION

¹An article by Hayek, “Exchange Rate Stabilization or Price Stabilization?” is translated and published here for the first time as an Addendum to chapter 1, this volume.

²Hayek on Hayek, Stephen Kresge and Leif Wenar, eds (Chicago: University of Chicago Press, and London: Routledge, 1994), p. 89. Hayek added that this disappointment did not lead to his later opposition to Keynes, as Keynes was then one of his heroes, as he was to many on the Continent because of his criticism of the peace settlement. See John Maynard Keynes, A Tract on Monetary Reform [1923], reprinted as vol. 4 of The Collected Writings of John Maynard Keynes (Cambridge: Macmillan for the Royal Economic Society, 1971).

³“Capital holds a unique position in one respect: It can move from one region to another only in the form of goods or services”. Bertil Ohlin, Interregional and International Trade (Cambridge, Mass.: Harvard University Press, 1933), p. 180.

⁴So sayeth The Economist, October 7, 1995, “Survey, the World Economy”, p. 10. Since the end of the First World War, US policy has consistently placed domestic concerns above exchange rate stability. As the World Economic Conference was informed in 1933, “We [the US delegation] are interested in American commodity prices. What is to be the value of the dollar in terms of foreign currencies is not and cannot be our immediate concern”. Quoted in Barry Eichengreen, Golden Fetters, The Gold Standard and the Great Depression, 1919–1939 (New York and Oxford: Oxford University Press, 1992), p. 333. As the dollar became the dominant reserve currency for the world, this policy was certain to lead to difficulties.

⁵On the genesis of the gold standard and David Hume’s contribution to monetary theory see F. A. Hayek, “Genesis of the Gold Standard in Response to English Coinage Policy in the 17th and 18th Centuries”, in The Trend of Economic Thinking, W. W. Bartley III and Stephen Kresge, eds, being vol. 3 (1991) of The Collected Works of F. A. Hayek (Chicago: University of Chicago Press, and London: Routledge). See also Barry Eichengreen, Globalizing Capital, A History of the International Monetary System (Princeton: Princeton University Press, 1996), pp. 25–26.

⁶Hume assumed that “money is not, properly speaking, one of the subjects of commerce; but only the instrument which men have agreed upon to facilitate the exchange of one commodity for another”. But silver and gold are traded as commodities; the overriding fact of England’s trade with the Far East was the drain of silver whence it was largely hoarded. Hume observed this vexing predicament: “The skill and ingenuity of Europe in general surpasses perhaps that of China, with regard to manual arts and manufactures; yet are we never able to trade thither without great disadvantage. And were it not for the continual recruits, which we receive from America, money would soon sink in Europe and rise in China, till it came nearly to a level in both places”. England replaced silver with gold and developed a system of banking and credit that would economize on the use of gold. Later controversies in monetary theory largely stemmed from the uncertain connection of credit to specie and its effect on prices and trade balances. Hayek addressed a number of the implications of this evolving controversy in the essays collected in Good Money, Part II: The Standard. (The first quotation from Hume is the first sentence of his celebrated essay, “Of Money” [1752}; the second is from “Of the Balance of Trade” [1752]. See David Hume, Essays, Eugene F. Miller, ed. (Indianapolis, Ind.: LibertyClassics, 1985), p. 281 and p. 313. –Ed.]

⁷F. A. Hayek, “Some Remarks on the Problem of Imputation”, in Money, Capital, and Fluctuations, Early Essays, ed. Roy McCloughry (London: Routledge & Kegan Paul, 1984), pp. 33–34. First published as “Bemerkungen zum Zurechnungsproblem” in Jahrbücher für Nationalökonomie und Statistik (Jena, Band 124, Folge III, Band 69, 1926), pp. 1–18. Translated as “Some Remarks on the Problem of Imputation”, in McCloughry, ed., Money, Capital, and Fluctuations, op. cit., pp. 33–54.

⁸For a full account of Schumpeter and of his elegant letters of introduction, as well as Hayek’s obituary note on John Bates Clark, see The Fortunes of Liberalism (1992), ed. Peter G. Klein, being vol. 4 of The Collected Works of F. A. Hayek, op. cit.

⁹Wesley Clair Mitchell (1874–1948), whose Business Cycles (Berkeley: University of California Press, 1913) was considered by many to be the most influential work of its time on economic thinking, was one of the founders of the National Bureau of Economic Research, where in 1920, in addition to teaching at Columbia University, he assumed the position of Director of Research, which he held until 1945.

¹⁰Quoted by Mitchell in W. C. Mitchell, “The Present Status and Future Prospects of Quantitative Economics”, Round Table discussion at American Economic Association meeting, December 1927. Reprinted in W. C. Mitchell, The Backward Art of Spending Money (New York and London: McGraw-Hill, 1937), pp. 37–38. Gustav von Schmoller (1838–1917), Professor at the Universities of Halle, Strasbourg, and Berlin, was the leader of the German ‘younger historical school’ with whom Carl Menger (1840–1921), the founder of the school of Austrian economics, engaged in heated controversy about the methodology of economic theories. Of the German school Hayek wrote, “Through the study of historical development it hoped to arrive at the laws of development of social wholes, from which, in turn, could be deduced the historical necessities governing each phase of this development. This was the sort of positivist-empiricist approach which was later adopted by American institutionalists (differing from similar more recent efforts only in that it made little use of statistical technique), and which is better described (as by Popper) as historicism”. F. A. Hayek, The Fortunes of Liberalism, op. cit., p. 78. However, Mitchell, while adopting a positivist-empiricist approach to economics, was not noticeably historicist. His methodological views were influenced by Thorstein Veblen and retained a strong institutionalist bias, but the stronger influence on Mitchell was the pragmatism of John Dewey. The American pragmatists were fallibilists unlikely to accept any theory of historical inevitability.

¹¹W. C. Mitchell, “Quantitative Analysis in Economic Theory”, Presidential Address delivered at the Thirty-seventh Annual Meeting of the American Economic Association, December 29, 1924. Reprinted in Mitchell, The Backward Art of Spending Money, op. cit., pp. 33–36.

¹²Ibid., p. 202.

¹³Friedrich von Wieser (1851–1926), who is credited with bringing the term “marginal utility” and the concept of opportunity cost to the Austrian theory of subjective value, was Hayek’s teacher at the University of Vienna. For Hayek’s appreciation of Wieser, see chapter 3 of The Fortunes of Liberalism, op. cit. Mitchell published a sympathetic review of Wieser’s Theorie der Gesellschaftliche Wirtschaft in 1915 (reprinted in The Backward Art of Spending Money, op. cit.) and also wrote a preface, for which Hayek provided some assistance, to the English translation, Social Economics, trans. A. Ford Hinrichs (New York: Greenberg, 1927, and London: Allen & Unwin, 1928).

¹⁴Letter from Hayek to Mitchell, June 3, 1926. The original is preserved in the Mitchell collection at the Columbia University Libraries. Hayek’s review of Foster and Catchings’s Money appears in this volume, chapter 1.

¹⁵See Hayek’s later essay, “The Theory of Complex Phenomena”, particularly section 4. In F. A. Hayek, Studies in Philosophy, Politics, and Economics (Chicago: University of Chicago Press, 1967), pp. 22–42.

¹⁶Irving Fisher, assisted by Harry Gunnison Brown, The Purchasing Power of Money (New York: Macmillan, 1911). Fisher extended and refined the proposal in Stabilizing the Dollar (New York: Macmillan, 1920). Hayek’s review of Stabilizing the Dollar appears in chapter 1, this volume.

¹⁷See Irving Fisher, The Making of Index Numbers (Boston and New York: Houghton Mifflin, 1922), pp. 229 ff.

¹⁸Mitchell had had a hand in compiling the data which Fisher used to test his formulae, data which for the first time linked prices to quantities. These price changes covered the volatile period of the First World War and were compiled by the Price Section of the War Industries Board. Mitchell continually emphasized the difficulty of obtaining reliable data. See Wesley C. Mitchell, “The Making and Using of Index Numbers”, in US Bureau of Labor Statistics, Index Numbers of Wholesale Prices in the United States and Foreign Countries (Washington, D. C.: Government Printing Office, 1921).

¹⁹It is asserted by no less an authority than the chairman of the US Federal Reserve System, Alan Greenspan, that the consumer price index provided by the Bureau of Labor Statistics overstates what Greenspan believes to be the true rate of inflation in the United States. Those who share Greenspan’s view rest their case on changes in “quality”: Stain-resistant fabrics added to furniture count as a price reduction if prices remain unchanged. (See the report “Study Criticizing Consumer Price Index Is Disputed by Labor Statistics Bureau”, The Wall Street Journal, Dec. 20, 1996, p. A2. On Greenspan’s position and the effect that altering the CPI would have on social security and tax payments see the article “Greenspan Seeks Panel on Cost of Living”, The Wall Street Journal, Jan. 31, 1997, p. A2.)

²⁰Milton Friedman, “Commodity Reserve Currency”, Essays in Positive Economics (Chicago: University of Chicago Press, 1953), p. 214. Hayek’s proposal for a commodity reserve currency may be found in Good Money, Part II.

²¹Wesley C. Mitchell, ibid., p. 11.

²²“In particular, the proposals of Professor Irving Fisher for a compensated dollar amounted, unless all countries adopted the same plan, to putting into practice a preference for stability of internal price level over stability of external exchange”. J. M. Keynes, A Tract on Monetary Reform, op. cit., p. 126. Of course, if all countries did adopt the same plan, it would mean the equivalent of floating exchange rates.

²³Fisher, Stabilizing the Dollar, op. cit., p. 129, note 1.

²⁴See chapter 1, this volume, p. 43. The outline for the thesis Hayek began at New York University in 1923 but never completed may be found in the Hayek papers at the Hoover Institution Archives, Stanford University.

²⁵W. C. Mitchell, Business Cycles, The Problem and Its Setting, op. cit., pp. 138–139.

²⁶F. A. Hayek, “The Future Unit of Value” [1981], now reprinted in Good Money, Part II, being vol. 6 of The Collected Works of F.A. Hayek. The statement is not actually in the report but was inferred by some observers, notably J. R. Commons. See chapter 2, this volume, p. 126.

²⁷As Hayek points out, “Perceptive observations about the alternation of periods of prosperity and stagnation had already been made nearly a hundred years ago to proponents of the ‘currency school’, but it was only in the last decade that economists, especially in English-speaking countries, shifted their focus from isolated recession phenomena to these fluctuations”. See this volume, chapter 2, page 101.

²⁸Hayek’s review of a contemporary thesis, H. L. Moore’s Generating Economic Cycles, appears in chapter 1, this volume. Moore was one of the first economists to appreciate the general equilibrium theory of Leon Walras and he set himself the task of producing inductive verification of that theory. Ironically, hi...

Table of contents

• Cover
• Copyright
• Title Page
• Series Page
• Contents
• Editorial Foreword
• Introduction
• One: A Survey of Recent American Writing: Stabilization Problems in Gold Exchange Standard Countries
• Two: Monetary Policy in the United States after the Recovery from the Crisis of 1920
• Three: The Fate of the Gold Standard
• Four: The Gold Problem
• Five: Intertemporal Price Equilibrium and Movements in the Value of Money
• Six: On ‘Neutral’ Money
• Seven: Price Expectations, Monetary Disturbances, and Malinvestments
• Afterword
• Notes
• Name Index
• Subject Index