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Good Money, Part 2: The Standard

Good Money, Part 2: The Standard

by F. A. Hayek, Stephen Kresge (Editor)

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The two volumes of Good Money concentrate on Hayek's work on money and monetary policy. Published in the centenary of his birth, these volumes bring forth some of the economist's most distinguished articles on monetary policy and offer another vital addition to the collection of Hayek's life work.

Good Money, Part I: The New World


The two volumes of Good Money concentrate on Hayek's work on money and monetary policy. Published in the centenary of his birth, these volumes bring forth some of the economist's most distinguished articles on monetary policy and offer another vital addition to the collection of Hayek's life work.

Good Money, Part I: The New World includes seven of Hayek's articles from the 1920s that were written largely in reaction to the work of Irving Fisher and W. C. Mitchell. Hayek encountered Fisher's work on the quantity theory of money and Mitchell's studies on business cycles during a U.S. visit in 1923-24. These articles attack the idea that price stabilization was consistent with the stabilization of foreign exchange and foreshadow Hayek's general critique that the whole of an economy is not simply the sum of its parts.

Good Money, Part II: The Standard offers five more of Hayek's articles that advance his ideas about money. In these essays, Hayek investigates the consequences of the "predicament of composition." This principle works on the premise that the entire society cannot simultaneously increase liquidity by selling property or services for cash. This analysis led Hayek to make what was perhaps his most controversial proposal: that governments should be denied a monopoly on the coining of money.

Taken together, these volumes present a comprehensive chronicle of Hayek's writings on monetary policy and offer readers an invaluable reference to some of his most profound thoughts about money.

"Each new addition to The Collected Works of F. A. Hayek, the University of Chicago's painstaking series of reissues and collections, is a gem."— Liberty on Volume IX of The Collected Works of F. A. Hayek

"Intellectually [Hayek] towers like a giant oak in a forest of saplings."—Chicago Tribune

"One of the great thinkers of our age who . . . revolutionized the world's intellectual and political life."—Former President George Herbert Walker Bush

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University of Chicago Press
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Collected Works of F. A. Hayek Series
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6.00(w) x 9.00(h) x 0.80(d)

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Good Money, Part II

The Standard

By F. A. Hayek, Stephen Kresge

The University of Chicago Press

Copyright © 1999 Estate of F. A. Hayek
All rights reserved.
ISBN: 978-0-226-32119-6




The five lectures which are here reproduced are necessarily confined to certain aspects of the wide subject indicated by the title. They are printed essentially as they were delivered and, as is explained in the first lecture, limitations of time made it necessary to choose between discussing the concrete problems of the present policy of Monetary Nationalism and concentrating on the broader theoretical issues on which the decision between an international standard and independent national currencies must ultimately be based. The first course would have involved a discussion of such technical questions as the operations of Exchange Equalization Accounts, Forward Exchanges, the choice and adjustment of parities, cooperation between central banks, etc., etc. The reader will find little on these subjects in the following pages. It appeared to me more important to use the time available to discuss the general ideas which are mainly responsible for the rise of Monetary Nationalism and to which it is mainly due that politics and practices which not long ago would have been frowned upon by all responsible financial experts are now generally employed throughout the world. The immediate influence of the theoretical speculation is probably weak, but that it has had a profound influence in shaping those views which today dominate monetary policy is not open to serious question. It seemed to me better therefore to concentrate on these wider issues.

This decision has permitted me a certain freedom in the discussion of alternative policies. In discussing the merits of various systems I have not felt bound to confine myself to those which may today be considered practical politics. I have no doubt that to those who take the present trend of intellectual development for granted much of the discussion in the following pages will appear highly academic. Yet fundamentally the alternative policies here considered are no more revolutionary or impracticable than the deviations from traditional practice which have been widely discussed and which have even been attempted in recent years—except that at the moment not so many people believe in them. But while the politician—and economist when he is advising on concrete measures—must take the state of opinion for granted in deciding what changes can be contemplated here and now, these limitations are not necessary when we are asking what is best for the human race in general. I am profoundly convinced that it is academic discussion of this sort which in the long run forms public opinion and which in consequence decides what will be practical politics some time hence. I regard it therefore not only as the privilege but as the duty of the academic economist to take all alternatives into consideration, however remote their realization may appear at the moment.

And indeed I must confess that it seems to me in many respects the future development of professional and public opinion on these matters is much more important than any concrete measure which may be taken in the near future. Whatever the permanent arrangements in monetary policy, the spirit in which the existing institutions are administered is at least as important as these institutions themselves. And just as, long before the breakdown of the international gold standard in 1931, monetary policy all over the world was guided by the ideas of Monetary Nationalism which eventually brought its breakdown, so at the present time there is grave danger that a restoration of the external apparatus of the gold standard may not mean a return to a really international currency. Indeed I must admit that—although I am a convinced believer in the international gold standard—I regard the prospects of its restoration in the near future not without some concern. Nothing would be more fatal from a long-run point of view than if the world attempted a formal return to the gold standard before people had become willing to work it, and if, as would be quite probable under these circumstances, this were soon followed by a renewed collapse. And although this would probably be denied by the advocates of Monetary Nationalism, it seems to me as if we had reached a stage where their views have got such a hold on those in responsible positions, where so much of the traditional rules of policy have either been forgotten or been displaced by others which are, unconsciously perhaps, part of the new philosophy, that much must be done in the realm of ideas before we can hope to achieve the basis of a stable international system. These lectures were intended as a small contribution to this preparatory work which must precede a successful reconstruction of such a system.

It was my good fortune to be asked to deliver these lectures at the Institut Universitaire de Hautes Etudes Internationales at Geneva. I wish here to express my profound gratitude for the opportunity thus afforded and for the sympathetic and stimulating discussion which followed the lectures. My thanks are particularly due to the directors of the Institute, Professors [William E.] Rappard and [Paul] Mantoux, not only for arranging the lectures but also for undertaking their publication in the present series.

I am also indebted to a number of my friends and colleagues at the London School of Economics, particularly to Dr. F. Benham, Mr. F. Paish, Professor Robbins, and Mr. C. H. Secord, who have read the manuscript and offered much valuable advice as regards the subject matter and the form of exposition of these lectures. This would certainly have been a much bigger and much better book if I had seen my way to adopt and incorporate all their suggestions. But at the moment I do not feel prepared to undertake the larger investigation which my friends rightly think the subject deserves. I alone must therefore bear the blame for the sketchy treatment of some important points and for any shortcomings which offend the reader.

I hope however it will be borne in mind that these lectures were written to be read aloud and that this forbade any too extensive discussion of the more intricate theoretical points involved. Only at a few points, I have added a further explanatory paragraph or restored sections which would not fit into the time available for the lecture. That this will not suffice to provide satisfactory answers to the many questions I have raised I have no doubt.

F. A. Hayek
London School of Economics and Political Science
May 1937

Lecture 1. National Monetary Systems


When I was honoured with the invitation to deliver at the Institut five lectures "on some subject of distinctly international interest", I could have little doubt what that subject should be. In a field in which I am particularly interested I had been watching for years with increasing apprehension the steady growth of a doctrine which, if it becomes dominant, is likely to deal a fatal blow to the hopes of a revival of international economic relations. This doctrine, which in the title of these lectures I have described as 'Monetary Nationalism', is held by some of the most brilliant and influential economists of our time. It has been practiced in recent years to an ever-increasing extent, and in my opinion it is largely responsible for the particular intensification of the last depression which was brought about by the successive breakdown of the different currency systems. It will almost certainly continue to gain influence for some time to come, and it will probably indefinitely postpone the restoration of a truly international currency system. Even if it does not prevent the restoration of an international gold standard, it will almost inevitably bring about its renewed breakdown soon after it has been re-established.

When I say this I do not mean to suggest that a restoration of the gold standard of the type we have known is necessarily desirable, nor that much of the criticism directed against it may not be justified. My complaint is rather that most of this criticism is not concerned with the true reasons why the gold standard, in the form in which we knew it, did not fulfill the functions for which it was designed; and further that the only alternatives which are seriously considered and discussed completely abandon what seems to me the essentially sound principle—that of an international currency system—which that standard is supposed to embody.

But let me say at once that when I describe the doctrines I am going to criticize as Monetary Nationalism I do not mean to suggest that those who hold them are actuated by any sort of narrow nationalism. The very name of their leading exponent, J. M. Keynes, testifies that this is not the case. It is not the motives which inspire those who advocate such plans, but the consequences which I believe would follow from their realization, which I have in mind when I use this term. I have no doubt that the advocates of these doctrines sincerely believe that the system of independent national currencies will reduce rather than increase the causes of international economic friction; and that not merely one country but all will in the long run be better off if there is established that freedom in national monetary policies which is incompatible with a single international monetary system.

The difference then is not one about the ultimate ends to be achieved. Indeed, if it were, it would be useless to try to solve it by rational discussion. The fact is rather that there are genuine differences of opinion among economists about the consequences of the different types of monetary arrangements we shall have to consider, differences which prove that there must be inherent in the problem serious intellectual difficulties which have not yet been fully overcome. This means that any discussion of the issues involved will have to grapple with considerable technical difficulties, and that it will have to grapple with wide problems of general theory if it is to contribute anything to their solution. My aim throughout will be to throw some light on a very practical and topical problem. But I am afraid my way will have to lead for a considerable distance through the arid regions of abstract theory.

There is indeed another way in which I might have dealt with my subject. And when I realized how much purely theoretical argument the other involved I was strongly tempted to take it. It would have been to avoid any discussion of the underlying ideas and simply to take one of the many concrete proposals for independent national currency systems now prevalent and to consider its various probable effects. I have no doubt that in this form I could give my lectures a much more realistic appearance and could prove to the satisfaction of all who have already an unfavourable opinion of Monetary Nationalism that its effects are pernicious. But I am afraid I would have had little chance of convincing anyone who has already been attracted by the other side of the case. He might even admit all the disadvantages of the proposal which I could enumerate, and yet believe that its advantages outweigh the defects. Unless I can show that these supposed advantages are largely illusory, I shall not have got very far. But this involves an examination of the argument of the other side. So I have come rather reluctantly to the conclusion that I cannot shirk the much more laborious task of trying to go to the root of the theoretical differences.


But it is time for me to define more exactly what I mean by Monetary Nationalism and its opposite, an International Monetary System. By Monetary Nationalism I mean the doctrine that a country's share in the world's supply of money should not be left to be determined by the same principles and the same mechanism as those which determine the relative amounts of money in its different regions or localities. A truly International Monetary System would be one where the whole world possessed a homogeneous currency such as obtains within separate countries and where its flow between regions was left to be determined by the results of the action of all individuals. I shall have to define later what exactly I mean by a homogeneous currency. But I should like to make it clear at the outset that I do not believe that the gold standard as we knew it conformed to that ideal and that I regard this as its main defect.

Now from this conception of Monetary Nationalism there at once arises a question. The monetary relations between small adjoining areas are alleged to differ from those between larger regions or countries; and this difference is supposed to justify or demand different monetary arrange merits. We are at once led to ask what is the nature of this alleged difference? This question is somewhat connected but not identical with the question what constitutes a national monetary system, in what sense we can speak of different monetary systems. But, as we shall see, it is very necessary to keep these questions apart. For if we do not we shall be confused between differences which are inherent in the underlying situation and which may make different monetary arrangements desirable, and differences which are the consequence of the particular monetary arrangements which are actually in existence.

For reasons which I shall presently explain, this distinction has not always been observed. This has led to much argument at cross purposes, and it is therefore necessary to be rather pedantic about it.


I shall begin by considering a situation where there is as little difference as is conceivable between the money of different countries, a case indeed where there is so little difference that it becomes doubtful whether we can speak of different 'systems'. I shall assume two countries only and I shall assume that in each of the two countries of which our world is assumed to consist, there is only one sort of widely used medium of exchange, namely coins consisting of the same metal. It is irrelevant for our purpose whether the denomination of these coins in the two countries is the same, so long as we assume, as we shall, that the two sorts of coins are freely and without cost interchangeable at the mints. It is clear that the mere difference in denomination, although it may mean an inconvenience, does not constitute a relevant difference in the currency systems of the two countries.

In starting from this case we follow a long established precedent. A great part of the argument of the classical writers on money proceeded on this assumption of a "purely metallic currency". I wholly agree with these writers that for certain purposes it is a very useful assumption to make. I shall however not follow them in their practice of assuming that the conclusions arrived [at] from these assumptions can be applied immediately to the monetary systems actually in existence. This belief was due to their conviction that the existing mixed currency systems not only could and should be made to behave in every respect in the same way as a purely metallic currency, but that—at any rate in England since the Bank Act of 1844—the total quantity of money was actually made to behave in this way. I shall argue later that this erroneous belief is responsible for much confusion about the mechanism of the gold standard as it existed; that it has prevented us from achieving a satisfactory theory of the working of the modern mixed system, since the explanation of the role of the banking system was only imperfectly grafted upon, and never really integrated with, the theory of the purely metallic currency; and that in consequence the gold standard or the existence of an international system was blamed for much which in fact was really due to the mixed character of the system and not to its 'internationalism' at all.

For my present purpose, however, namely to find whether and in what sense the monetary mechanism of one country can or must be regarded as a unit or a separate system, even when there is a minimum of difference between the kind of money used there and elsewhere, the case of the "purely metallic currency" serves extraordinarily well. If there are differences in the working of the national monetary systems which are not merely an effect of the differences in the monetary arrangements of different countries, but which make it desirable that there should be separate arrangements for different regions, they must manifest themselves even in this simplest case.


Excerpted from Good Money, Part II by F. A. Hayek, Stephen Kresge. Copyright © 1999 Estate of F. A. Hayek. Excerpted by permission of The University of Chicago Press.
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Meet the Author

F. A. Hayek (1899-1992), recipient of the Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974, was a pioneer in monetary theory and a leading proponent of classical liberalism  in the twentieth century. He taught at the University of London, the University of Chicago, and the University of Freiburg.

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