Can we trust money to government ?

ALL CONCERNED about the fatal course of monetary policy in most of the world must be profoundly grateful for the revelations about how monetary policy is made in the recent series of articles by Stephen Fay and Hugo Young (Review Front).

Before I comment on the wider significance of the developments they describe, I hope you will allow me to point out a basic misconception which suggests that they tacitly accept the decisive error apparently shared by most participants in the controversy.

Probably the most frequently occurring technical term was "deflation".  There was in fact no occasion ever to mention it.  None of the parties involved in the dispute ever advocated deflation in the only meaningful sense of that term.  The difference was entirely between groups who wanted more and others who wanted less inflation.  But apparently nobody dared to suggest that inflation be stopped altogether.

It is true, of course, that to reduce the rate of inflation, or even to slow down its rate of increase below that which has come to be expected, produces effects somewhat similar to those of deflation.  But this must happen sooner or later once a country has embarked on a course of inflation, since to maintain the stimulating effect which it has only as long as it tums out to be faster than was foreseen would lead to the sort of hyper-inflaion which completely destroys any economic order.

The bitter necessity of causing such a "stabilisation crisis" becomes inescapable once an expansionist policy has been pursued for any length of time.  But the responsibility for the inevitability of such painful measures rests wholly with those who have in the first instance recommended an expansionist monetary policy as a palliative.

But the chief significance of your reporters' description of how governments determine monetary policy seems to me to be that it should, in any thinking persons, destroy all hope that we can ever again get from governments even tolerably good money.

Govemments were pevented from grossly abusing their monopoly of the issue of money only as long as public opinion imposed upon them the discpline of the Gold Standard.  This beneficial discipline, based on a quasi-religious belief, I am afraid cannot be restored.  But no democratic government freed from this discipline can resist the pressure of those groups whih it can temporarily help out of some difficulty by manufacturing a little more money.

Yet the necessity of governments possessing a monopoly to issue a distinctive national currency seems natural or inevitable only because this has always existed.  Governments have always enforced it to secure power and sources of finance.  But it could never be argued, and has never been shown, that this was necessary or even beneficial to the smooth flow of economic activities.

Competing private issuers, offering distinctive monies under different names, could stay in this profitable business only by offering the public good moneymdash;that is one it preferred to holdmdash;making contracts, keeping accounts and calculating in.  The public would soon show which kind of standard it preferred and good only issuers who kept the value of the money they issued strictly to that standard could hope to stay in the business.

Only when free enterprise is allowed to equip itself with the kind of money it needs to function properly can we now hope ever again to get decent money.

F. A. Hayek
University of Freiburg

Professor F. A. Hayek, doyen of right-wing economists, is a Nobel prizewinner.



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Most recent update: 21 April 2021