Denationalisation of Money: The Argument Refined

The Hobart Papers are intended to contribute a stream of authoritative, independent and lucid analyses to understanding the application of economic thinking to private and governmental activity. Their characteristic concern has been the optimum use of scarce resources to satisfy consumer preferences and the extent to which it can be achieved in markets within the appropriate legal/institutional framework created by government or by other arrangements.

It has long been a common belief among economists since the classical thinkers of the 18th century that one of the most important functions of government was to create a monetary mechanism and to issue money.1 The debates among economists have been on how far governments have performed this function efficiently and on the means of increasing or decreasing the power of government over the supply of money. But the general assumption has been that government had to control monetary policy and that each country had to have its own structure of monetary units.

This assumption is now questioned by Professor F. A. Hayek. He goes much more fully into the ‘somewhat startling’ departure from the classical assumption which he touched on in Choice in Currency, Occasional Paper No. 48, published in February 1976.

Even this short expansion of the theme indicates insights into the nature of money and its control for a wide range of readers: they should stimulate the student and suggest precepts for politicians. In effect, Professor Hayek is arguing that money is no different from other commodities and that it would be better supplied by competition between private issuers than by a monopoly of government. He argues, in the classic tradition of Adam Smith but with reference to the 20th century, that money is no exception to the rule that self-interest would be a better motive than benevolence in producing good results.

The advantages that Professor Hayek claims for competitive currencies are not only that they would remove the power of government to inflate the money supply but also that they would go a long way to prevent the destabilising fluctuations that government monopoly of money has precipitated over the last century of ‘trade cycles’ and, an urgent question in the 1970s, make it more difficult for government to inflate its own expenditures.

Although the argument in places is necessarily abstract and requires close attention, the central theme is crystal clear: government has failed, must fail, and will continue to fail to supply good money. If government control of money is unavoidable Professor Hayek thinks a gold system better than any other; but he maintains that even gold would be found less dependable than competing paper currencies whose value would be maintained more or less stable because their issuers would have a strong inducement to limit their quantity or lose their business.

The argument for competitive currencies is in the direct line of descent in the thinking of the Austrian school of economists which Professor Lord Robbins largely introduced to Britain by bringing Professor Hayek to the London School of Economics in 1931. These two helped to make the works of Menger, Wieser, Böhm-Bawerk and Mises known to British students and teachers, but little further has been heard of the Austrian School until the last year or two. New interest in the Austrian School by economists in the USA is being followed by increasing attention in Britain, particularly by young economists. In this Hobart Paper Special, Professor Hayek refers to the writings of several of his predecessors and may further stimulate interest in the Austrian school of economics.

Although italicising is not common in IEA Papers it has been used here moderately to help especially readers new to economics to follow the steps in the argument.

Professor Hayek’s Hobart Special comes at a time when, after pre-war monetary blunders said to have precipitated the 1929-32 Great Depression, nearly a third of a century of post-war ‘monetary management’ (or mis-management) by government, and when attempts at international management have hardly been more successful, economists are again looking to means of taking money out of the control of government altogether. In Hobart Paper 69 (Gold or Paper?) Professor E. Victor Morgan and Mrs Morgan re-examine the breakdown of monetary management since the war and re-assess the case for reestablishing a link between currency and gold. Some months ago Mr Peter Jay, the Economics Editor of The Times, proposed a Currency Commission.2 Both of these approaches reflect the anxiety to reduce or remove the power of politicians over the supply of money and will seem to younger economists and to new generations in finance, commerce, industry and teaching to be radical departures from post-war economic thinking. Professor Hayek’s proposal that the supply of money be put into the market-place along with other goods and services is even more revolutionary: he is arguing that the attempt for the past 50 years to depend on benevolence in government to manage money has failed and that the solution must lie in the self-interest of monetary agencies that will suffer by losing their livelihood if they do not supply currencies that users will find dependable and stable. Professor Hayek’s Hobart Special, and the works of other economists who are trying to evolve methods of ‘taking money out of polities’, should stimulate economists and non-economists alike to re-examine the first principles of the control of money if civilised society is to continue.

The Institute is known for rapid publication—normally a few short weeks from completed MS to copy. Professor Hayek’s movements from Austria to Scotland and then to London elongated the usual timetable of editing, processing for publication, and proof-reading. Even so these stages—for a manuscript twice the length of a typical Hobart—ran from early July to late September. I should like to thank Michael Solly, who excelled himself in helping to make this timetable possible, and Goron Pro-Print our printers, who worked rapidly and accurately.

Its constitution requires the Institute to dissociate its Trustees, Directors and Advisers from the argument and conclusion of its authors, but it presents this new short work by Professor Hayek as an important reconsideration of a classical precept from one of the world’s leading thinkers.

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3 In the Second Edition, Professor Hayek notes that it was not among those duties that Adam Smith said fell to the state (page 33).

4 The Times, 15 April, 1976.

• 1In the Second Edition, Professor Hayek notes that it was not among those duties that Adam Smith said fell to the state (page 33).
• 2The Times, 15 April, 1976.
• 3It has long been a common belief among economists since the classical thinkers of the 18th century that one of the most important functions of government was to create a monetary mechanism and to issue money. The debates among economists have been on how far governments have performed this function efficiently and on the means of increasing or decreasing the power of government over the supply of money. But the general assumption has been that government had to control monetary policy and that each country had to have its own structure of monetary units.
• 4Professor Hayek’s Hobart Special comes at a time when, after pre-war monetary blunders said to have precipitated the 1929-32 Great Depression, nearly a third of a century of post-war ‘monetary management’ (or mis-management) by government, and when attempts at international management have hardly been more successful, economists are again looking to means of taking money out of the control of government altogether. In Hobart Paper 69 (Gold or Paper?) Professor E. Victor Morgan and Mrs Morgan re-examine the breakdown of monetary management since the war and re-assess the case for reestablishing a link between currency and gold. Some months ago Mr Peter Jay, the Economics Editor of The Times, proposed a Currency Commission. Both of these approaches reflect the anxiety to reduce or remove the power of politicians over the supply of money and will seem to younger economists and to new generations in finance, commerce, industry and teaching to be radical departures from post-war economic thinking. Professor Hayek’s proposal that the supply of money be put into the market-place along with other goods and services is even more revolutionary: he is arguing that the attempt for the past 50 years to depend on benevolence in government to manage money has failed and that the solution must lie in the self-interest of monetary agencies that will suffer by losing their livelihood if they do not supply currencies that users will find dependable and stable. Professor Hayek’s Hobart Special, and the works of other economists who are trying to evolve methods of ‘taking money out of polities’, should stimulate economists and non-economists alike to re-examine the first principles of the control of money if civilised society is to continue.