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Source link: http://archive.mises.org/8996/a-free-market-monetary-system/

A Free-Market Monetary System

November 21, 2008 by

F.A. Hayek writes: 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…. The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money. FULL ARTICLE


Jim Action November 21, 2008 at 9:32 am

I enjoyed reading your article because I found it very insightful.
I understand your point of view regarding governments holding a monopoly on the issuance of money and what I really appreciate is the fact that not many economist consider NEW money OR opening that creative power up and availing it to the common man. To take (as President Lincoln called it) “the supreme prerogative of government, but its greatest creative opportunity” from our elected officials and hand it over to private industry sounds dreadful initially. On first reading your article, I found the thought of it repulsive because I pondered the possible financial collapse it could possibly cause. Until I considered the current economy.

As I read the headlines & watch daily market reports I can now agree with you. And I believe we are at a time in history where this sort of ‘monetary reform’ would be advantageous to many people as long as it stays in balance and meets the requirements of our supply and demand system.

In his essay, The Gospel of Wealth, Andrew Carnagie provides input regarding ‘the problem of wealth and its proper distribution’ that may assist in supporting this matter.

Euro? November 21, 2008 at 9:41 am

Many European governments have given up their monetary monopoly to the European Central Bank that operates to keep the price inflation in certain bounds (below 2%). ECB has been criticised for not lowering the interest rates sooner; but it has just followed its monetary policy of keeping the value of the Euro from inflating. Now, when the inflationary pressure is easing, the interest rates are lowered (very carefully). Whenever the inflation will rise again, the interest rates will be hiked again, irrespective of other political concerns.

I guess that the countries within the Euro system would think again, if ECB would fail in its monetary policy. The stability (or predictability) is the “value” of the currency. Now the situation seem to be that more of the European countries are considering the Euro, as their own currencies have been facing trouble.

Also, counties outside the Euro system are increasingly using Euro instead of USD in international trade. Here there is an example of free market choice of competing currencies Hayek was looking for.

Pat November 21, 2008 at 10:02 am

That sounds like an interesting idea and it certainly would be more in line with the idea of money has a commodity, rather than something else that justifies government’s monopoly. What I would be concerned however is how to implement it. At the very least, we wouldn’t want a scheme under which the government does have the ability to control such system in a manner that could be adverse (For example, the ability to tell which institution can print money. Of course, it wouldn’t be free-market by definition).

greg November 21, 2008 at 10:04 am

Assuming that privatization of money would even materialize, which I really don’t think it ever will, the major drawback I see is the number of currencies or currency manufacturers that would be in the market place. Not all vendors that you trade with will accept all currencies which will result in you having to trade one currency for another. This trade will envolve a transaction cost which you will pay. Apply this problem to the world economy and the complexity will greatly expand.
And since all private currency manufacturers are not created equal, there will be currency futures market where the values between the different currencies will fluctuate. Vendors will need to constantly monitor these value changes to price their goods and services accordingly.
Now I am not pleased with the current monetary policies, and the realist in me says we have to work within the current system to fix it.

joy whitehead November 21, 2008 at 10:05 am

yes, history is a great moderator,however, think about the “NEW” money which was distributed via all of our banking system by the way of the “gift” of a CREDIT CARD to credit-worthy individuals & corporates.this artificial/plastic money-game (opm/30 day,”float”) is what has brought this economy down. gifting to the masses, not qualified to pay back, small or large lines of the PLASTIC-PLAY MONEY/CREDIT cards via signature loans with no collateral backing….bankers knew but chose to pander to their stockholders…NO ONE CARED & WE ARE NOW”STUCK” IN THIS WORLDWIDE DISEASE!!!! why not be a person that will assume responsibility & only buy what can be paid for at the time of purchase?? excepting in situations such as real estate/autos which are backed by real collateral & can be sold if loan is defaulted—AMERICA, THIS IS A REALISTIC SOLUTION….

StatusQuoJoe November 21, 2008 at 10:20 am

I appreciate the work that economists do, especially gifted economists such as Hayek but we must never lose sight of the idea that mankind feels comfortable with the freedom to choose how to use his/her personal money. Current trends lean towards absolute control in the use of money as Joy suggested to the point that someone on a computer can pinpoint exactly how you used your money today, i.e. what you bought and how much of it. Considering the evolution of fiat currencies and plausible future trends one can only surmise that the controlling entities of the currency supply endeavor for this kind of control. This control will itself make the user of the currency uneasy which in turn leads to instability. Unless we are all mindless zombies, no one wants to be subject to that kind of control. Having a currency that one can hold in their hand and to be able to use it at their own discretion without the fear of big brother knowing exactly how you use is it, is a HUGE factor in the stability of a currency whether a trained economist wants to admit that or not.

Michael A. Clem November 21, 2008 at 11:05 am

Jim, Hayek’s been dead since 1992. This was a lecture from 1977, although I agree that it has a certain timeless quality to it.
Greg, we’ve addressed these problems before, and you’ve yet to show that these are greater than the problems government monopoly of the money supply has given us. It would be a net benefit to society to go with private money.
Joy, no one *has* to use a credit card, and anybody with financial sense would use them sparingly, if at all. There’s some confusion and argument about whether or not credit cards constitute “money”, though. After all, the credit card company is actually providing the user a loan of its money, which is what is used to pay the merchant. At what point is the credit card company creating new money?
Hayek said a few things that bother me, although overall I tend to agree with this lecture. Good points about gold not giving value to money, but simply providing a check on the inflation of the money supply. And he says what I’ve said, that essentially any money could be used (his “token money”) if a) people accept it, and b) its supply was strictly controlled. All other things being equal, an increase in the money supply WILL increase the prices of goods. That’s only “partial” monetarism, and easily incorporated in Austrian economics. Wouldn’t true monetarism be the view that ONLY the supply of money affects prices?
I’m still not convinced that governments will easily allow private money to circulate, so most likely it would take a grey or underground market at this point to make private money feasible.

Jeffrey Tucker November 21, 2008 at 11:23 am

I really hope that everyone appreciates this piece. I just found it dazzling — and I’m embarrassed to say that I don’t think I had read it before. It is surely Hayek at his very very best. We are now thinking of making it a monograph!

greg November 21, 2008 at 11:33 am

Give me the specifics on how we can realistically change the monetary system and provide a cost-benefit analysis. So far you have listed the benefits and no cost. Give me a business plan on a currency manufacturing business. All I am saying is give me real world analysis! Or we may as well be debating religion.

joebhed November 21, 2008 at 11:34 am

central government planner here

This is interesting.
I have posited several times on this site, and I posit again, that the libertarians and progressives ought to get together and demand the de minimus qualities to sound money – the end of fractional reserve banking through a switch to 100 percent reserve banking, and a move toward greater direct control of the quantity of new money created, in my case through a government issue of debt-free money directly to Americans and the states.

I have suggested that we leave for a later debate the matter of metal-basing our money, and finally the proper role of government.

I read in this and other presentations by Mr. Hayek that the whole rationale for a gold standard is to take the place of a properly managed lever on the issuance of new money, and thus, the total quantity of money in existence.
I am a Friedmanite – in that respect only.
There are metrics and indices that can serve as the proper measure that limits money creation BY THE GOVERNMENT, issued debt-free for the purpose of providing price-stability.

Others have commented that price-stability is a facade dragged out by “central government planners” for the purpose of enabling its continual pervasive and immoral control of the lives of all human beings. That to me is b.s..

And Mr. Hayek’s writings here on the gold standard is proof to me of the proper need to promote price stability.
A lot of people recognize today that SOMETHING is wrong with the money system.
That something is debt-money and fractional-reserve banking.
Abolish them and we will be well on our way to the economic freedom that many are pursuing here.

Michael A. Clem November 21, 2008 at 11:48 am

Well, Greg, so far, you have failed to acknowledge the costs of the government monopoly on money, or does it not bother you that our money today is down by about 95% of what it was in 1913, when the Fed was created? And then figure in the costs of the bubbles and recessions we’ve had to go through. The Great Depression? the Stagflation of the 70′s? The S&L crisis? A mere 13% cost (iirc) instead of these dramatic economic upheavals sounds pretty good to me! And that’s assuming that the market doesn’t find ways to economize on the costs you mention.
One point you and others fail to understand when you want us to lay it out in detail for you is that the market is a continual, ongoing process of discovery and adjustment. I could no more predict exactly what’s going to happen or how millions of people will react to their own particular circumstances than I could tell you precisely how to make a pencil (Leonard Read’s “I, Pencil”). And yet millions of pencils are made and sold, even in this computer age. Never mind how something as complex as a computer is made.
But clearly, the market works for all sorts of goods and services. So why not for the good called money??

Robert Nabloid November 21, 2008 at 1:13 pm

I agree with the author. The government will never willingly give up control of the money system (nor will the private enterprise called the Federal Reserve).

It will have to come from the private sector… as a result, many will not take it or use it… I don’t mind having 2 currencies though…

greg November 21, 2008 at 2:15 pm

Well, Michael, was the currency system the sole cause of each of those downturns? The Great Depression was staged to be a minor recession until we closed down our trade with the rest of the world and developed a huge government work system. In the 70′s it was price controls and a war in Viet Nam that pushed us over the edge. And no it doesn’t bother me that value of our currency is down from 1913. But the last time I was in Best Buy, the LCD screen TV was less today than when I bought one last year. Or when I filled up my tank of gas today and paid $1.95 a gallon.
Bottom line, you will never see private currencies, so use your knowledge to work within the current system to bring it a step closer to market control. For example, the Fed should not set the Fed Funds rate. It should be set by the market by using the 2 year T-bill rate. This rate would change daily and we will never have to go through another Fed rate meeting. Most important, the market will set the rate through supply and demand of funds.
Next, I would let all those large center banks go under and allow the smaller regional banks take over their business. Not only can they manage their business better, a small regional bank going under will not have the same impact as an Citi.
To say the “market” will work out a solution will not fly. And it should be easy for you to project the cost of minting coins and getting them to the market. You have an product that has only one input material, the material has to be poured into a mold and then it needs to be stamped. Throw in some overhead cost, distribution, marketing and financing cost and you will be close. Same applies to printing paper money backed by a commodity such as gold.
From my point of view, we need a currency system in place that can react quickly to the demands of world trade performed on a technological platform that demands instant movement of funds. I just don’t think moving to many private currency outlets will enhance it.

Mark D. Hughes November 21, 2008 at 2:23 pm

Jeffrey is on the “money.” This is an important look inside Hayek’s head.

I am however, a little confused — admittedly monetary theory is not my strength — as to how Hayek’s proposal squares with Mises’s Regression Theorem.

It is all well and good to participate in a thought experiment and propose a new “token money” which is both accepted by the public and kept under (supply) control. In such an experiment we can see dozens of new moneys emerging and competing for patrons.

It is quite another story, however, to actually get people to “accept” the token money unless it is first backed by something they want…. or something that represents something they want., etc, etc all the way back to some commodity.

Jeff, can you explain what I’m not getting?

fundamentalist November 21, 2008 at 2:34 pm

Mark, it seemed to me that Mises’s regression theorem dealt mainly with the idea that the future value of money is based on its value today, and today’s value is based on the value it had yesterday. The regression goes backwards until you come to the value that gold or silver had as a commodity before it was money. So the value of gold today as money is not directly related to gold’s commodity value, but indirectly through a long regression. Does that help?

Mike Sproul November 21, 2008 at 2:39 pm


What you’re not getting is that people would not accept money unless it was backed by valuable assets. When people say that the US dollar is unbacked, what they mean is that the dollar is physically inconvertible (i.e., the fed will not buy back its paper dollars with gold). They forget that the dollar is financially convertible: the fed will buy back its dollars with its bonds. Convertibility can be delayed, uncertain, at the bank’s option instead of the customer’s option, etc. The fact that the fed has suspended one kind of convertibility is irrelevant as long as other kinds of convertibility are maintained. Anyone who claims that modern paper money is unbacked would have a hard time explaining why every bank that has ever existed has kept assets against the paper money it has issued.

Eric November 21, 2008 at 2:53 pm


The reason you are not terribly upset that gas prices are down to $1.95 today is that they used to be $4.50 only a few months ago. But I used to pay $0.18 a gallon when I was just starting to drive. That was in the 60′s and they even gave you stamps which if collected you could get other goodies.

The fact that prices have gone up so much is an indication of how much past transfers of wealth have occurred. All the people who were living on fixed incomes were robbed already. Maybe you weren’t around yet, so it was your parents who might have been robbed. It just happened slowly. Maybe that’s why they never bought you that ____ (car, education, – fill in the blank) you wanted.

And of course, there’s no way I can prove to you that you could have been better off – say with the same income but still with cars costing $1000-2000 and gas under 20 cents/gallon. But those are the figures you should be considering. And that flat screen tv you are talking about – well that should have cost about $20. When I was a kid, only one parent worked, and it was because we were freer and wealthier – but we just didn’t have the technology we have today. And guess what, it wasn’t the creation of fiat money that created this new technology.

And just because you can’t see how private money would work, just means you’re not an expert enough on the subject. I’m no expert and I can see umpteen ways it could work. How about simply having special debit cards with point of sale computers automatically converting between different monies. Come to think, we already have that, almost. I buy stuff outside the country on my credit cards and they do the currency conversion math automatically. So, what’s so difficult about having gold (or anything else) backed debit cards.

Of course what the government depends on is the idea that what you don’t know (about the truth) won’t hurt you. And they’re right to some extent, at least you won’t be getting upset or angry at the government – and we all know how much harm stress can cause. So, rest easy – ignorance is bliss.

Oh, one last thing. Could you type the enter key once in a while. It’s kinda hard to read your one long paragraph.

Mark D. Hughes November 21, 2008 at 2:56 pm

Thanks Fundamentalist and Mike

However, you answers were of no help

I’m not confused by Hayek’s proposition that the value of money under a commodity standard is largely determined by people’s willingness to trade it, i.e., his examples of gold backed money trading above or below the value of gold.

After a currency becomes accepted as “money” it has in effect become an economic good independent of its original commodity standard. I understand that.

This is what I don’t understand: is Hayek is suggesting that a new money can be introduced without any kind of commodity backing so long as people accept it as money ? In a thought experiment that works, but in the real world, short of pointing a gun at them, how do you get people to accept your NEW unbaked (or backed by a basket of obscure commodities) money.

Dennis November 21, 2008 at 2:57 pm


While Hayek’s proposal for the denationalization of money may produce a more stable monetary system than any that has existed since the classical gold standard was deliberately abandoned in 1914, it has been criticized by some Austrian School economists, including Murray Rothbard. Rothbard’s analysis and criticism of Hayek’s proposal are presented in his essay “The Case for a Genuine Gold Dollar,” which is contained in the book “The Gold Standard: Perspectives in the Austrian School” (edited by Lew Rockwell, Jr.).


greg November 21, 2008 at 3:38 pm

I pumped gas while going to school and remember the 19 cent a gallon. But consider this, you can fly across the US for $400, the percentage you spend on gas to the wage rate was more at .19 than $3.00 today, in real terms a loaf of bread is less today than it was in 1913, you live in a house that is 4 times larger than the one you had in 1966, you have a car that has a life span 2 times greater than the one you filled up in 1966. The fact that you are typing on a computer that has more power than the system that place a man on the moon, should tell you productivity is much greater. You need to be honest, are you better off today than in 1966?

And yes, I understand all your points about currency. I too sat through 5 years of college reviewing every bit of this. And in 1973 I met Hyeck when he lectured at the University of Portland. But when I got out in the real world and started my own business, a pure free market approach just does not work. If you are going to play the game, you must play within the structure you are playing. You want to play a different game, go to another table.

I am on your side, but if you want to see change, you need to rationalize your approach with current data and information to get people to change. Ron Paul will never get anything done on the House Finance Committee if all he does is lecture people on the benefits of Austrian Economics. And I understand the benefits, it is time to change from theory to applied and you can take this school of thought to the next level.

You did convince me of one thing, notice I used the “enter” key.

Eric November 21, 2008 at 4:08 pm


The one argument I have with Rothbard in his “case for a 100% gold dollar” is his statement that if everyone had his own currency, rothbards, yeagers, jones, as he puts it, “then we would have a world of chaos indeed”.

The next statement asks for someone to make an analysis of such a situation.

So, here goes. First I think this is a straw man argument, since even Rothbard’s own writings show that the market will always discount bad monies and favor good monies. This is, after all, the portion of the demand for a money that arises from its use as a medium of exchange. If the money is also a commodity, then it has a combined demand based on the commodity itself and also its use as a medium of exchange. Surely in an ocean of fiat money, someone would again create a commodity based money. And the market would gravitate to that money. Since fiat money has only medium of exchange demand (no commodity demand for it) it has the potential to lose all demand entirely, as no other use would provide a demand for it.

So, what Rothbard mentions cannot occur on the true free market (e.g. no government or other force – free = no force). However, what is a possibility is that one or some small number of private monies will dominate commerce, and the others will fall away, just as happens in any business – the good survive, the bad go bankrupt.

In fact, isn’t this sort of what we have with checkbooks, these personal currencies all have to become backed by some more accepted currency, or their value would be discounted to near zero. And as usual, the market provides a way to determine the value of an individual currency on the spot – the various point of sale check validation methods available. In the current case, a check is either deemed slightly less than 100% (to pay for the cost of assessing check worthiness) or 0%. However, there’s nothing theoretically stopping this from having a check discounted in the range between 0 and 100% of some more common money. And then we would have essentially private individual currency, but backed by a common superior currency.

fundamentalist November 21, 2008 at 4:09 pm

Mark D: “is Hayek is suggesting that a new money can be introduced without any kind of commodity backing so long as people accept it as money ?”

It seems so and that’s a good point. People must be able to semi-accurately place a value on money. At first, people used the commodity values of gold and silver to value the money. Later, they used the value in the recent past. But with a brand new money without commodity backing, how do you place a value on it? It doesn’t have a recent past to use as a guide. Hayek doesn’t seem to have addressed that.

DD November 21, 2008 at 6:17 pm


This is what you are basically saying:

If under the current system, we get the FED to increase the reserve ratio to %100, and change the dumb process (meant to deceive the public) of the FED monetizing debt into a straight forward printing money procedure, I believe we achieve what you are asking for.

The main problems with this argument is that Government is still in charged, so you are asking for Government now to start doing the right thing. If government was able to really do the right thing, then a lot of our problems would be solved. The current system is this shape because it is the nature of government to spend and cheat as much as possible, and allows for special interest to get special treatment as in the bankers case. If they still have a monopoly, there is nothing to regulate them exept for their good nature. It isn’t going to happen! It never did and never will. This is why only the free market has natural built in regulatory mechanisms that can ensure long lasting stability and honest money (as described in the article)
The second thing, is that you are wrong about them having tools to stabelize prices. In fact, Hayek himself showed in other works, that the whole price stability target by central banks will always cause a deviation from the natural interest rates (that of a free market) because a steady inflow of artificial credit into the system will induce a higher supply of capital, thus reducing the rates below the natural rate. This fact of lower interest rates below the natural rate will always induce bubbles.
There is no economic justification for price stability, as I believe Murray Rothbard has explained. The money supply is arbitrary and its current supply need not matter. Read “mystery of banking” by Rothbard. At the end of the day, any printing of cheap paper bills is economically equivellant to counterfeiting.

joebhed November 21, 2008 at 7:34 pm

So then, if the government ever did anything good for anybody for real then my way is just fine.
Because a government that can do any good for anybody is capable of doing more good for more anybodies.
But, because, as you imply, the government has never in fact done anything good for anybody, ever, for real, then my way will not work.
I grant you that.
And we do agree that the present system allows the bankers, who have control over money creation and the economy, to be in control of the government through our corrupt ‘monetized’ political structure.
It does not from there follow that there is no other system in which government could or should play any role in the money system providing things like well-being to its citizens.
Like the rest of the world does.
Both common sense and the real reactions of the losers in the current capitalist business cycle downturn, dictate and demand that the government take an active role in protecting the people from the harms that result from the contraction.
After establishing a true government-run central bank, and absorbing the FED into the Treasury Department temporarily, the government should begin issuing debt-free money in whatever amount is proper to resolve the current breakdown of the money system.
Yes, government-issue debt-free money and an honest 100 percent reserve based bank lending system.
The argument against a public-interested setting and achieving of price stability due to its inexactness vis-a-vis a ‘natural’ interest rate is foolish and academic.
Exactness to and deviation from the natural interest rate are of no import in today’s world, when compared to the TRILLIONS of dollars that we allow to bet on an ongoing basis as to which way interest rates will go.
And, in case you haven’t noticed, THAT is what is causing the bubbles.
Inane Financial Leveraging.
In debt-money.
We should have none of it.
I have read Rothbard’s piece.
It did not lead me to believe that the government is the only possible counterfeiter.

newson November 21, 2008 at 8:23 pm

i’ve really got problems with hayek and some of his monetary musings. i think rothbard and mises are far more reliable.

for example, hayek says:
“…very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value…”

why on earth should falling prices through increased productivity negatively impact on debtors? the debtor’s cost structure also falls over the life of the loan. productivity increases are factored in to the loan rate by both debtor and creditor. besides, gold supply increases at a fairly predictable clip these days, and this too would figure in the debtor’s commercial calculations.

“…demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind.”

why is hayek obsessed with keeping the value of money constant? and measured with what yardstick? this goes against all tenets of austrianism, and seems to put him in the uneasy company of monetarists targeting cpi.

i’m with mark d hughes – i can’t believe that hayek wasn’t aware of mises’ money regression theorem, and yet it’s not treated here.

he doesn’t even make sense in his citing the case of sweden during the great war – the logic is all over the place.

DD November 21, 2008 at 9:05 pm


“current capitalist business cycle downturn”

I don’t know what you mean by that, but this downturn is a result of a bubble created by our monetary policy. The banks are indeed part of that monetary system. You are missing an important fact here, that maybe I didn’t quite make clear before. This sysem is a maifestation of government.
The FED is a government entity. Don’t be fooled by this the fact that it is not officially federal (but private). The Bank of England, or the Bank of Israel for example, are federal banks serving the same purpose as the FED. If the money supply was handed over to the treasury, what would happen? Ben Bernake would work for the treasury. Who cares what the scheme is? You’re describing this like Government is hopeless and it has all these well intentional experts wanting to do what is right, but the FED is in charged. This isn’t the case, the FED was created by congress and can be destroyed by Congress. The person doing the most harm right now is your Secretary of Treasury (Paulson). The system is as is because that’s what they created. It is serving a few bankers very well, but these bankers would be nothing without government. It so happens that this system is serving government also very well. It has control over our freedom!
Having established that the system is controlled and directed by Government entities, you must understand that it is government that caused this mess, so it is certainly not going to do the right thing now. Most of them don’t have a clue even if they wanted to. You think your president elect Obama even knows what fractional reserve banking is? He thinks this is how capitalism works (or he knows very well that it isn’t but he’s exploiting the events to promote his big government socialistic plans).

The only way out of this mess, is to let the free market clean up the system. Government is useless and can only do harm. Government makes no money (it doens’t produce anything), and it has no savings (we are bankrupt). It only confiscates from productive people in order to transfer their wealth to the unproductive (and unearned). Does that sound like something that can help the situation? (forget morality).

If by any chance, you are influenced by this book “Web of Debt”, then I urge you to look through the Literature and media parts of mises.org and learn a little more in depth sound economics. The author of this book (it’s quite embarassing) has very poor understanding of sound economics, which is why she makes false claims and completly misdiagnoisis the source of the problem. Her theory about why a gold standard won’t work is simply false.

Gil November 22, 2008 at 12:53 am

Personally I don’t get the ‘competing currencies’ part. We already have that in terms of international currencies and I’m sure most people want the one currency to spend and don’t want to be like a U.S. checkout operator who expects U.S. dollars as payment only for the customer to hand over Euros, Australian dollars, British pounds, etc. and tries to do some sort of conversion. Should not the free market pick the one currency (gold) and then compete for quality of that currency (e.g. 99.98% fine gold one ounce coin) and be done with it? Considering the way people have rejected silver as inflationary (*cough* *cough* Cross Of Gold *cough* *cough*) and silver should be even more inflationary now that film photography is pretty much defunct. It’d only make sense to me for the free market to use privately minted gold coins lest the whole thing comes full circle and you’d be back to paper money with the problems you sought to avoid all over again.

fundamentalist November 22, 2008 at 8:42 am

Gil: “I’m sure most people want the one currency to spend and don’t want to be like a U.S. checkout operator who expects U.S. dollars as payment only for the customer to hand over Euros, Australian dollars, British pounds, etc. and tries to do some sort of conversion. Should not the free market pick the one currency…”

I’m guessing that’s how Hayek saw fre banking working. Many currencies would start out competing with each other and eventually one, or a few, would win in the marketplace because of the issuers’ self-restraint.

Were we to allow foreign currencies as payment in the US, Swiss currency would probably win out over all others because the Swiss inflate so little compared to the US and others.

cris November 22, 2008 at 9:17 am

So many opinions, so many points of view, minimal clarity. Sounds kinda like stock market capitalism, doesn’t it?

The whole idea of having competing monies is already reality, and hopefully always will be. Currently the most valuable “money” is either a short position in the stock market or a strategic credit default swap. Call it money or call it immoral, either position is still valuable (until the government changes all the rules–they’ve been doing this almost every day).

Elitists have their pet theories about how the system should be changed, but no one has a handle on it. It’s to complicated. We should celebrate that. If “money” could be “perfected” we’d all become serfs again (instead of bloggers). Some tyrant would eventually wrest complete control.

jp November 23, 2008 at 6:19 pm

Hayek’s “Denationalization of Money” is available free of charge at the IEA as a pdf.



newson November 23, 2008 at 8:48 pm

tks for the tip, jp

Swiss Franc November 24, 2008 at 1:27 am

Brief history of Swiss Franc:

“The Swiss Franc is known as a ‘hard currency’. The franc holds this reputation as, until May 2000 fiscal laws required a 40 per cent gold cover for currency in circulation. This enabled the currency to remain very stable, thus making Swiss banks more attractive to international investors.

In the first half of the nineteenth century, the Swiss franc was unregulated and as such was considered to be a highly variable and complicated currency. Before the currency was regulated in 1850 by the Swiss Federal Constitution, the country had 75 entities and 25 cantons – all of which produced their own individual coins. The situation was further complicated by private banks distributing their own banknotes, thus adding to the lack of uniformity amongst the currency.

The introduction of the Swiss Federal Constitution of 1848 and the Federal Coinage Act of 1850 ensured that only the Federal government could distribute currency and that the Franc became the nationally recognised currency.”

“Economic fundamentals. A history of low inflation and current account surpluses.

Strong reserve position. The Swiss franc has always been more than a paper currency – it still is backed by gold. At market prices, actual gold reserves significantly exceed currency in circulation. Switzerland has the fourth largest gold holding in the world, after the EURO countries, the IME, and the US. But reserves do not consist only of gold. Non-gold reserves are almost five times as high as gold reserves. Relative to GDP, the level of international reserves – with or without gold – is far ahead of all other countries.

Sound policies. Because of its autonomy from political influences, the Swiss National Bank has created the world’s best managed currency, concentrating foremost on price stability.”

Gold wars November 24, 2008 at 6:04 am

Swiss Franc- the constitution was reformed in 1999, there was even a referendum.
The CHF is no longer backed by gold.

SNB has been coordinating rate cuts with ECB and Fed. their independance is a shadow of what it was.
It’s still a relatively strong currency… but things have changed much.

Read “Gold Wars”

Paul Marks November 24, 2008 at 8:54 am

It is depressing to read about “standards” and the “backing” of money – this indicates that the errors of the past (such as the great build up of credit money in the late 1920′s under the mask of the gold “standard”) have not been learned from.

As for what F.A. Hayek actually says:

Of course coins may be more valuable than their content in metal – no one has ever denied that, Hayek created a straw man for the purpose of knocking it down.

However, this does NOT mean that it is a good idea to have token coins.

What people (not just “private business”) choose to make contracts in (i.e. to use as money) should (of course) be up to them.

However, historically people tend to choose a material – for example gold or silver of a particular quality.

This does not mean that government should freely mint gold and silver into coins – the minting of coins has been in many times and places a private business.

But nor does it mean that banks (or other such) are well advised to call anything they feel like (token coins, notes or computer credit) “money”.

Such things would not likely be “competing currencies” – they would be more likely be based on fraud. As the banks would pretend they were gold (or some other commodity) and then play fractional reserve games.

There is a vast difference between gold-as-money (or silver-as-money or some other commodity in a contract) and a gold “standard” – the latter opens the gates to massive fraud.

And a private currency (or private currencies) that were not even “based on” a commodity (not an “index of commodities”) would not even need the gates of fraud opened as they would be an absurdity from the start.

A government can force people to pay their taxes in its paper notes and credit – but a bank (hopefully) can not. So people would treat this “private currency” of token notes (and computer credit) with the contempt it deserved.

Allow people to choose what commodity they wish to make contracts in (and it will be a commodity) and allow other people to make coins out of this commodity (and to charge for this service).

Allow people to lend out money they actually have (i.e. real savings), but punish as fraud the lending out of money that does not really exist.

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