A Free-Market Monetary System

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A lecture
delivered at the Gold and Monetary Conference, New Orleans, November
10, 1977. It made its first appearance in print in the Journal
of Libertarian Studies
, Volume 3, Number 1.

When a little
over two years ago, at the second Lausanne Conference of this group,
I threw out, almost as a sort of bitter joke, that there was no
hope of ever again having decent money, unless we took from government
the monopoly of issuing money and handed it over to private industry,
I took it only half seriously. But the suggestion proved extraordinarily
fertile. Following it up I discovered that I had opened a possibility
which in two thousand years no single economist had ever studied.
There were quite a number of people who have since taken it up and
we have devoted a great deal of study and analysis to this possibility.

As a result
I am more convinced than ever that if we ever again are going to
have a decent money, it will not come from government: it will be
issued by private enterprise, because providing the public with
good money which it can trust and use can not only be an extremely
profitable business; it imposes on the issuer a discipline to which
the government has never been and cannot be subject. It is a business
which competing enterprise can maintain only if it gives the public
as good a money as anybody else.

Now, fully
to understand this, we must free ourselves from what is a widespread
but basically wrong belief. Under the Gold Standard, or any other
metallic standard, the value of money is not really derived from
gold. The fact is, that the necessity of redeeming the money they
issue in gold, places upon the issuers a discipline which forces
them to control the quantity of money in an appropriate manner;
I think it is quite as legitimate to say that under a gold standard
it is the demand of gold for monetary purposes which determines
that value of gold, as the common belief that the value which gold
has in other uses determines the value of money. The gold standard
is the only method we have yet found to place a discipline on government,
and government will behave reasonably only if it is forced to do

I am afraid
I am convinced that the hope of ever again placing on government
this discipline is gone. The public at large have learned to understand,
and I am afraid a whole generation of economists have been teaching,
that government has the power in the short run by increasing the
quantity of money rapidly to relieve all kinds of economic evils,
especially to reduce unemployment. Unfortunately this is true so
far as the short run is concerned. The fact is, that such expansions
of the quantity of money which seems to have a short-run beneficial
effect, become in the long-run the cause of a much greater unemployment.
But what politician can possibly care about long run effects if
in the short run he buys support?

My conviction
is that the hope of returning to the kind of gold standard system
which has worked fairly well over a long period is absolutely vain.
Even if, by some international treaty, the gold standard were reintroduced,
there is not the slightest hope that governments will play the game
according to the rules. And the gold standard is not a thing which
you can restore by an act of legislation. The gold standard requires
a constant observation by government of certain rules which include
an occasional restriction of the total circulation which will cause
local or national recession, and no government can nowadays do it
when both the public and, I am afraid, all those Keynesian economists
who have been trained in the last thirty years, will argue that
it is more important to increase the quantity of money than to maintain
the gold standard.

the rest of the article

22, 2008

A. Hayek (1899–1992) was a founding board member of the Mises
. He shared the 1974 Nobel Prize in Economics with
ideological rival Gunnar Myrdal “for their pioneering work in the
theory of money and economic fluctuations and for their penetrating
analysis of the interdependence of economic, social and institutional

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