This article is adapted from a lecture presented at the 2025 Supporters Summit in Delray Beach, Florida.
Economic freedom should include freedom in money. It’s a freedom even, as we say these days, that advanced economies don’t have. My guiding text for this talk is Friedrich Hayek’s celebrated essay “Choice in Currency.” That is chapter 7 of this excellent book—Hayek for the 21st Century: Essays in Political Economy—that the Mises Institute has published. It’s a classic text, and I hope you’ll all take a look at it if you haven’t.
Now, freedom and money, Hayek suggests, can in concept be created through competition, through freedom of choice in money. That is to say, let the people use any money they want. Let the monies compete with each other, and the superior monies, just like in any competition, will win out. The opposite of this is, of course, a government monopoly in money, which allows the government to inflate.
The point I wish to make is that the ability to control the money is a deep and fundamental source of the power of the state. Each central bank (in our case, the Federal Reserve), of course, is part of the state and a key helper in the project of expanding and maintaining the power of the government over the people. Now, we can think about this. I know you know this already. It’s very simple, but let’s just say it again to remind ourselves. To stay in power, governments have to keep spending money. They need to give money to their friends, to give money to their supporters, to carry out their various projects, and—most expensive of all—to have wars.
In the meantime, people don’t like being taxed, so the politician is put in the position of wanting to spend without taxing. And what’s the answer? Well, you borrow. If the lenders don’t want to lend to you, you simply have a compliant central bank to print up the money that you need, and to buy your bonds, as we have observed over long periods of time now.
That way, you can keep spending. That way, you can maintain your position of power for the government.
Of course, at the same time, you’re depreciating the currency. You have inflated prices, you’ve taken away the people’s purchasing power, which is a kind of implicit taxation, and destroyed part of the value of their wages and their savings. In short, as Hayek writes, “Practically all governments of history have used the exclusive power to issue money in order to defraud and plunder the people.”
Further, Hayek says, “The politician, acting on a modified Keynesian maxim that in the long run we are all out of office”—I think that’s a wonderful line—wants “more and cheaper money,” which is “an ever-present political force which monetary authorities have never been able to resist.”
Well, is it true that the central bank can’t resist? I think it is. On one side of this argument, we had Nobel Prize–winning economist Thomas Sargent, who proposed in 1982 that we just need central banks that are legally committed to refuse the government’s demand for additional credit. In other words, just to say no to financing deficits with newly created money.
So I wish you to picture this. The Treasury has come to the central bank and said, “Here are these bonds. We want you to buy them.” Imagine the head of the central bank saying, “Well, I’ve got your request, but sorry, we’re not buying a penny of your debt with money we create. Of course, we could do it, but we won’t. So just cut your government expenses and good luck.”
I doubt that this would be a winning career move for a politically appointed chairman of the central bank, and I suspect you doubt it too. And I suspect that its probability is something close to zero, don’t you think? Moreover, in a time of war or other national emergency, the likelihood of this response is precisely zero.
So Hayek, in a very creative intellectual move, says that instead of trying to improve the behavior of the central bankers—which we’re all working on, and we ought to keep working on it—here’s something more radical. Let us simply, quoting Hayek here, “deprive governments (or their monetary authorities) of all power to protect their money against competition.”
Let them go ahead and keep printing up their paper money, just as always. Let them buy as many bonds of the government—finance as many deficits—as they want, but don’t let them have a monopoly in this money. So the money they create for deficit financing, to improve the power of the state, has to compete with some other money that will come along.
Hayek continues, “If people were free to refuse any money they distrusted”—in other words, you can’t have a legal tender law—“and to prefer money in which they had confidence,” there could be no “stronger inducement to governments to ensure the stability of their money.” So make the government compete with other monies, and as in other cases of competition, you’ll improve the quality of the product. And this idea of Hayek’s is indeed consistent with a free society.
Hayek concludes, “I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.”
Well, that was 50 years ago and we’re not there yet. But today this thought is especially congenial to those who want private cryptocurrencies to compete with dollars, and this Hayek essay is enormously popular among advocates of cryptocurrencies, and taken as a kind of canonical text for competition in currency. It is a philosophical position consistent with their creation.
I do want to note in passing—because stablecoins have been much in the news of late, and we have the GENIUS Act, very favorable to stablecoins—that this thought does not apply to stablecoins because stablecoins are just part of the dollar system. If the dollar is depreciating, your stablecoin is depreciating, too. It doesn’t achieve the Hayekian purpose of competition in money because it’s just part of the dollar monopoly. So, it doesn’t present a competitive currency.
But Hayek, thinking about the possible competitors to the government’s fiat currency, was not really focused on other things that are themselves fiat currencies, whether they be fiat currencies issued by other governments. You could have the euro competing with the dollar, for example, or private fiat currencies such as bitcoin, which isn’t yet a currency but wishes to be.
Hayek was really thinking of gold. This is something about this celebrated essay I think is not usually properly understood. Hayek’s original speech was given in 1975. That was the year after the United States at long last lifted its oppressive 1933 law making it illegal for Americans to own any gold; that is to say, illegal to protect themselves from the depreciation of the monopoly currency of the government.
This ban on gold was an amazing act by the United States, actually, when you look back on it now. It does show how far a government will go to protect the monopoly of its own fiat currency.
So, thinking about gold in contrast to this, Hayek says, “Where I’m not sure is whether in such a competition for reliability any government-issued currency would prevail, or whether the predominant preference would not be in favor of . . . ounces of gold. It seems not unlikely that gold would ultimately re-assert its place as ‘the universal prize in all countries, in all cultures, in all ages,’ . . . if people were given complete freedom to decide what to use as their standard and general medium of exchange.”
What do you think? If we had free competition in monies, do you think that gold would win out as the preferred competitor and thereby force the governments to issue sounder currencies? An interesting thought.
As Hayek also wrote, famously and correctly, competition is a “discovery procedure.” We find out through competition things we couldn’t know otherwise, and if we had such a competition in currencies, that would give us the answer.
Now, think how much things have changed since Harry Dexter White, the chief American negotiator at the Bretton Woods Conference in 1944 and also, as you may recall, a spy for the Soviet Union, asserted that gold and the US dollar were “synonymous.”
We’ve come a long way from Harry Dexter White’s thought there.
As we know, the price of gold and dollars is over $4,000 at the present time. Just think about that relative to the par value exchange rate of dollars and gold out of Bretton Woods, which was $35 an ounce. That’s a factor roughly of 100 to 1. We didn’t quite achieve Harry Dexter White’s synonymousness of dollars and gold.
Now, it’s equally correct to think about the price of dollars in gold as it is to think about the price of gold in dollars. So, in that sense, the price of dollars is down 99% since 1971. One winner of this is the US Treasury, since the US Treasury is long gold, holding 8,000 tons, which is over 261.5 million ounces. So, the unrealized profit to the US Treasury on its gold position is basically $1 trillion.
It’s not on the books, but it’s the reality of the Treasury’s gold position. Now, this contrasts with a notable opinion piece in the Financial Times from about 20 years ago (April 16, 2004), which had the headline “Going, Going, Gold: The Pointlessness of Holding Bullion Continues to Sink In.”
“The barbarous relic, as Keynes called it, is crumbling to dust,” wrote the Financial Times. “For central banks and governments to hold [gold] is a betrayal of the public.” “Gold is on its way out,” they concluded.
Well, things change in economies, as we know. At the time that article was published, the price of gold in dollars was $400, so it’s more than 10 times that now. And at that point, central banks were, as a group, selling gold. Now central banks are buying heavily, and they’re building their positions with gold as a reserve currency. Sort of interesting. Central banks were selling at the bottom, and they’re buying at what might be the top. But that’s perhaps natural human behavior.
My brother Bruce, who lives in Switzerland, remembers that 20 years ago, when the Swiss central bank was forced to sell gold by its politicians, his friends who worked for the bank literally were crying when they were forced to sell their gold.
But today, many central banks are buying gold and increasing gold in their reserves. Can this central bank market for gold perhaps be considered an example of the free competition in currencies which Hayek envisioned?
After all, whatever the case was right after World War II, now no country can force other countries to accept the monopoly of its currency. And among central banks, there actually is choice in which currencies, including gold, to hold in their reserves. So this movement in gold is extremely interesting in and of itself. But something particularly interesting about it is that it seems to be a case of a Hayekian competition in currencies.
Now, an insightful essay by Angus Deaton suggests that when we’re looking at the gold price today, we’re not really looking at gold going up. We’re looking at the dollar going down, or fiat currencies in general declining. This strikes me as quite correct. Deaton continues, “If you hold fiat money, you have a claim on the future discretion of politicians. Whereas if you hold gold, you have a claim on the future indiscretion of politicians.”
I think that’s very nice. Or you might say gold is a hedge against the state’s pursuit of power by monetary means.
We can guarantee that as long as it’s able to, through monopoly fiat currency, the state will continue to maintain and expand its power through monetary means. So the state will prevent the competition that Hayek envisioned from occurring, but it can’t prevent it in this interesting international case of central banks.
I think if we contrast the freedom-of-money case that Hayek makes—which will be hard to do in any domestic context because the state will not sit happily by and allow for competition that will reduce its power (we know that)—with the international central bank case, that sharp contrast, I think, is a major reason to study this justifiably celebrated chapter in this book. Thank you.
