The Collected Works of F. A. Hayek

The Standard

F. A. Hayek, Stephen Kresge

• Publisher: University of Chicago Press
• Year: 2012
• ISBN:
  9780226321196
• Topic: Business
• Subtopic: Business generale
• 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

FOUR

THE DENATIONALIZATION OF MONEY: AN ANALYSIS OF THE THEORY AND PRACTICE OF CONCURRENT CURRENCIES¹

Diseases desperate grown,

By desperate appliances are reli’ved,

Or not at all.

William Shakespeare

(Hamlet, Act iv, Scene iii)

Introduction

For in every country of the world, I believe, the avarice and injustice of princes and sovereign states abusing the confidence of their subjects, have by degrees diminished the real quality of the metal, which had been originally contained in their coins.

Adam Smith²

In my despair about the hopelessness of finding a politically feasible solution to what is technically the simplest possible problem, namely to stop inflation, I threw out in a lecture delivered about a year ago³ a somewhat startling suggestion, the further pursuit of which has opened quite unexpected new horizons. I could not resist pursuing the idea further, since the task of preventing inflation has always seemed to me to be of the greatest importance, not only because of the harm and suffering major inflations cause, but also because I have long been convinced that even mild inflations ultimately produce the recurring depressions and unemployment which have been a justified grievance against the free enterprise system and must be prevented if a free society is to survive.

The further pursuit of the suggestion that government should be deprived of its monopoly of the issue of money opened the most fascinating theoretical vistas and showed the possibility of arrangements which have never been considered. As soon as one succeeds in freeing oneself of the universally but tacitly accepted creed that a country must be supplied by its government with its own distinctive and exclusive currency, all sorts of interesting questions arise which have never been examined. The result was a foray into a wholly unexplored field. In this short work I can present no more than some discoveries made in the course of a first survey of the terrain. I am of course very much aware that I have only scratched the surface of the complex of new questions and that I am still very far from having solved all the problems which the existence of multiple concurrent currencies would raise. Indeed, I shall have to ask a number of questions to which I do not know the answer; nor can I discuss all the theoretical problems which the explanation of the new situation raises. Much more work will yet have to be done on the subject; but there are already signs that the basic idea has stirred the imagination of others and that there are indeed some younger brains at work on the problem.⁴

The main result at this stage is that the chief blemish of the market order which has been the cause of well-justified reproaches, its susceptibility to recurrent periods of depression and unemployment, is a consequence of the age-old government monopoly of the issue of money. I have now no doubt whatever that private enterprise, if it had not been prevented by government, could and would long ago have provided the public with a choice of currencies, and those that prevailed in the competition would have been essentially stable in value and would have prevented both excessive stimulation of investment and the consequent periods of contraction.

The demand for the freedom of the issue of money will at first, with good reason, appear suspect to many, since in the past such demands have been raised again and again by a long series of cranks with strong inflationist inclinations. From most of the advocates of ‘Free Banking’ in the early nineteenth century (and even a substantial section of the advocates of the ‘banking principle’) to the agitators for a “Free Money” (Freigeld)—Silvio Gesell⁵ and the plans of Major C. H. Douglas,⁶ H. Rittershausen,⁷ and Henry Meulen⁸—in the twentieth, they all agitated for free issue because they wanted more money. Often a suspicion that the government monopoly was inconsistent with the general principle of freedom of enterprise underlay their argument, but without exception they all believed that the monopoly had led to an undue restriction rather than to an excessive supply of money. They certainly did not recognise that government more often than any private enterprise had provided us with the Schwundgeld (shrinking money) that Silvio Gesell had recommended.

I will here merely add that, to keep to the main subject, I will not allow myself to be drawn into a discussion of the interesting methodological question of how it is possible to say something of significance about circumstances with which we have practically no experience, although this fact throws interesting light on the method of economic theory in general.

In conclusion I will merely say that this task has seemed to me important and urgent enough to interrupt for a few weeks the major undertaking to which all my efforts have been devoted for the last few years and the completion of which still demands its concluding third volume.⁹ The reader will, I hope, understand that in these circumstances, and against all my habits, after completing a first draft of the text of the present paper, I left most of the exacting and time-consuming task of polishing the exposition and getting it ready for publication to the sympathetic endeavours of Arthur Seldon, the Editorial Director of the Institute of Economic Affairs, whose beneficial care has already made much more readable some of my shorter essays published by that Institute, and who has been willing to assume this burden. His are in particular all the helpful headings of the sub-sections. And the much improved title of what I had intended to call Concurrent Currencies was suggested by the General Director of the Institute, Mr. Ralph Harris. I am profoundly grateful to them for thus making possible the publication of this sketch. It would otherwise probably not have appeared for a long time, since I owe it to the readers of Law, Legislation and Liberty that I should not allow myself to be diverted from completing it by this rather special concern for longer than was necessary to get a somewhat rough outline of my argument on paper.

A special apology is due to those of my many friends to whom it will be obvious that, in the course of the last few years when I was occupied with wholly different problems, I have not read their publications closely related to the subject of this Paper which would probably have taught me much from which I could have profited in writing it.

Salzburg
June 30, 1976

A Note to the Second Edition

It is just thirteen months after I commenced writing this study and only a little more than six months since its first publication. It is therefore perhaps not very surprising that the additions I found desirable to make in this second edition are due more to further thinking about the questions raised than to any criticisms I have so far received. The comments so far, indeed, have expressed incredulous surprise more often than any objections to my argument.

Most of the additions therefore concern rather obvious points which perhaps I ought to have made more clearly in the first edition. Only one of them, that on page 224 concerns a point on which further thought has led me to expect a somewhat different development from what I had suggested if the reform I propose were adopted. Indeed the clear distinction between two different kinds of competition, the first of which is likely to lead to the general acceptance of one widely used standard (or perhaps a very few such standards), while the second refers to the competition for the confidence of the public in the currency of a particular denomination, seems to me of ever greater importance. I have now sketched, in a somewhat longer insertion to section XXIV, one of the most significant probable consequences, not originally foreseen by me.

I have made only minor stylistic changes to bring out more clearly what I meant to say. I have even let stand the difference between the more tentative tone at the beginning which, as will not have escaped the reader, gradually changes to a more confident tone as the argument proceeds. Further thought has so far only still more increased my confidence both in the desirability and the practicability of the fundamental change suggested.

Some important contributions to the problems considered here which were made at a Mont Pelerin Society conference held after the material for this second edition was prepared could not be used since I had immediately after to start on prolonged travels. I hope that particularly the papers presented then by W. Engels, D. L. Kemmerer, W. Stützel, and R. Vaubel will soon be available in print. I have, however, inserted at a late stage a reply to a comment by Milton Friedman which seemed to me to demand a prompt response.

I should perhaps have added above to my reference to my preoccupation with other problems which have prevented me from giving the present argument all the attention which it deserves, that in fact my despair of ever again getting a tolerable money system under the present institutional structure is as much a result of the many years of study I have now devoted to the prevailing political order, and especially to the effects of government by a democratic assembly with unlimited powers, as to my earlier work when monetary theory was still one of my central interests.

I ought, perhaps, also to add, what I have often had occasion to explain but may never have stated in writing, that I strongly feel that the chief task of the economic theorist or political philosopher should be to operate on public opinion to make politically possible what today may be politically impossible, and that in consequence the objection that my proposals are at present impracticable does not in the least deter me from developing them.

Finally, after reading over once more the text of this Second Edition I feel I ought to tell the reader at the outset that in the field of money I do not want to prohibit government from doing anything except preventing others from doing things they might do better.

Freiburg im Breisgau
[1977]

I. The Practical Proposal

The concrete proposal for the near future, and the occasion for the examination of a much more far-reaching scheme, is that the countries of the Common Market, preferably with the neutral countries of Europe (and possibly later the countries of North America) mutually bind themselves by formal treaty not to place any obstacles in the way of the free dealing throughout their territories in one another’s currencies (including gold coins) or of a similar free exercise of the banking business by any institution legally established in any of their territories. This would mean in the first instance the abolition of any kind of exchange control or regulation of the movement of money between these countries, as well as the full freedom to use any of the currencies for contracts and accounting. Further, it would mean the opportunity for any bank located in these countries to open branches in any other on the same terms as established banks.

Free Trade in Money

The purpose of this scheme is to impose upon existing monetary and financial agencies a very much needed discipline by making it impossible for any of them, or for any length of time, to issue a kind of money substantially less reliable and useful than the money of any other. As soon as the public became familiar with the new possibilities, any deviations from the straight path of providing an honest money would at once lead to the rapid displacement of the offending currency by others. And the individual countries, being deprived of the various dodges by which they are now able temporarily to conceal the effects of their actions by ‘protecting’ their currency, would be constrained to keep the value of their currencies tolerably stable.

Proposal More Practicable than Utopian European Currency

This seems to me both preferable and more practicable than the utopian scheme of introducing a new European currency, which would ultimately only have the effect of more deeply entrenching the source and root of all monetary evil, the government monopoly of the issue and control of money. It would also seem that, if the countries were not prepared to adopt the more limited proposal advanced here, they would be even less willing to accept a common European currency. The idea of depriving government altogether of its age-old prerogative of monopolising money is still too unfamiliar and even alarming to most people to have any chance of being adopted in the near future. But people might learn to see the advantages if, at first at least, the currencies of the governments were allowed to compete for the favour of the public.

Though I strongly sympathize with the desire to complete the economic unification of Western Europe by completely freeing the flow of money between them, I have grave doubts about the desirability of doing so by creating a new European currency managed by any sort of supranational authority. Quite apart from the extreme unlikelihood that the member countries would agree on the policy to be pursued in practice by a common monetary authority (and the practical inevitability of some countries getting a worse currency than they have now), it seems highly unlikely, even in the most favourable circumstances, that it would be administered better than the present national currencies. Moreover, in many respects a single international currency is not better but worse than a national currency if it is not better run. It would leave a country with a financially more sophisticated public not even the chance of escaping from the consequences of the crude prejudices governing the decisions of the others. The advantage of an international authority should be mainly to protect a member state from the harmful measures of others, not to force it to join in their follies.

Free Trade in Banking

The suggested extension of the free trade in money to free trade in banking is an absolutely essential part of the scheme if it is to achieve what is intended. First, bank deposits subject to cheque, and thus a sort of privately issued money, are today of course a part, and in most countries much the largest part, of the aggregate amount of generally accepted media of exchange. Secondly, the expansion and contraction of the separate national superstructures of bank credit are at present the chief excuse for national management of the basic money.

On the effects of the adoption of the proposal all I will add at this point is that it is of course intended to prevent national monetary and financial authorities from doing many things politically impossible to avoid so long as they have the power to do them. These are without exception harmful and against the long-run interest of the country doing them but politically inevitable as a temporary escape from acute difficulties. They include measures by which governments can most easily and quickly remove the causes of discontent of particular groups or sections but bound in the long run to disorganize and ultimately to destroy the market order.

Preventing Government from Concealing Depreciation

The main advantage of the proposed scheme, in other words, is that it would prevent governments from ‘protecting’ the currencies they issue against the harmful consequences of their own measures, and therefore prevent them from further employing these harmful tools. They would become unable to conceal the depreciation of the money they issue, to prevent an outflow of money, capital, and other resources as a result of making their home use unfavourable, or to control prices—all measures which would, of course, tend to destroy the Common Market. The scheme would indeed seem to satisfy all the requirements of a common market better than a common currency without the need to establish a new international agency or to confer new powers on a supra-national authority.

The scheme would, to all intents and purposes, amount to a displacement of the national circulations only if the national monetary authorities misbehaved. Even then they could still ward off a complete displacement of the national currency by rapidly changing their ways. It is possible that in some very small countries with a good deal of international trade and tourism, the currency of one of the bigger countries might come to predominate, but assuming a sensible policy, there is no reason why most of the existing currencies should not continue to be used for a long time. (It would, of course, be important that the parties did not enter into a tacit agreement not to supply so good a money that the citizens of the other nations would prefer it! And the presumption of guilt would of course always have to lie against the government whose money the public did not like!)

I do not think the scheme would prevent governments from doing anything they ought to do in the interest of a well-functioning economy, or which in the long run would benefit any substantial group. But this raises complex issues better discussed within the framework of the full development of the underlying principle.

II. The Generalization of the Underlying Principle

If the use of several concurrent currencies is to be seriously co...

Table of contents

• Cover
• Copyright
• Title Page
• Plan of the Collected Works
• Contents
• Editorial Foreword
• Introduction
• One. Monetary Nationalism and International Stability
• Two. A Commodity Reserve Currency
• Three. Choice in Currency
• Four. The Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies
• Five. Toward a Free Market Monetary System
• Six. The Future Unit of Value
• Notes
• Name Index
• Subject Index