What if the government let anyone use a currency of his or her own choosing? What if the government permitted entrepreneurs to innovate in the monetary sector, such as by creating digital currencies or minting commodity money?
This is precisely what F.A. Hayek argues in this book written in 1974.
He wrote this near the end of his career, after thinking through all the economic arguments for monetary reform and examining the political viability of various proposals. He shows the essential nonviability of government money, and calls for a complete free market in the production and distribution and management of money.
This book is the very core of the Hayekian approach to monetary policy and the book that drew the world’s attention to this radical thinker following his Nobel Prize in economics. The argument is substantively similar to Mises’s but rather than a gold standard, Hayek argues for completely abandoning government attempts to reform money. The result would be competitive private currencies that permit the market alone to choose the dominant currency the world over.
In the digital age, his argument takes on new significance, as experimentation in cryptocurrency continues apace. Hayek explains that money as a commodity is not a black-and-white issue. The moneyness of any commodity is contingent on time and place. A money can be that in one space among one community but not in another.
In many ways, this monograph is more radical than any monograph in the whole of the tradition of Austrian monetary theory. Hayek just said it outright: Invent a new money because government money is broken. Forget reform. Take the task into your own hands, right now.
The change in his view came about because of his “despair about the hopelessness” of finding a politically feasible solution to stopping inflation. He had worked for many decades but made no progress. It finally dawned on him that the reform had to come from within the market itself, through the total denationalization of money. Government can never be trusted with a money monopoly.
This contrasts with a two-thousand-year-old consensus that government needs to manage money. Why was this the consensus? Hayek says that there is no answer available to this question. It is just an assumption that has been around forever, simply because that’s what governments have done it. But why have they done it? In order to control the realm and extract additional revenue by manipulating the money. It has been the self-interest of government to control money, but it has never been in the interest of the people.
To be sure, there was once a difficulty in assessing the fineness and quality of money. The ordinary person had no competence to do so, so it was possible that government was needed to guarantee quality. But far from guaranteeing quality, government reduced the quality and took away from private markets the responsibility of discerning real from fake money.
It is technically possible that governments could control money in a responsible way, but it never happens. This is because governments have a direct interest in ruining money. A major factor is that government control of money builds government power. This is the major reason why the power to make money has to be take away — it is strongly in the interests of preserving and protecting freedom itself.
Government control of money allows governments to take whatever they want from the people. This is untenable and contradictory to every principle of republican government. Control of money allows governments to cover deficits by issuing more money, and this accounts for the huge explosion of debt in the 20th century.
What kind of money would the public accept in a free market? There are four considerations: First, there is money for cash purchases. Second, there is money for holding reserves for future needs. Third, there are contracts for deferred payments. Fourth, there is money for keeping book and serving as a unit of account. It is possible that different forms of money can serve these functions in different ways.
Nor does the money accepted by the market need to be “stable.” in a free market, prices are always changing. Money expresses those prices good by good and service by service. It is a foolish task to try to stabilize those prices because in so doing you end up freezing the market in place. Prices should not be stable but rather reflect the realities of human choice and resource supply.
Nor does money have to be strictly controlled in its quantity. If the money is too loose, it will be rejected by the market. The presumption behind the quantity theory of money is that there is a perfect way to measure what is and is not money. This is just not true — as we know from the myriad definitions put out by the Federal Reserve. Even with dollars, no one can say with certainty what is or isn’t the quantity of money.
The main reason we’ve mostly lived with bad money for a good part of modern history is because private enterprise has not been permitted to give us a better one.
I have now no doubt whatever that private enterprise, if it had not been prevented by government, could and would long ago have provided the public with a choice of currencies, and those that prevailed in the competition would have been essentially stable in value and would have prevented both excessive stimulation of investment and the consequent periods of contraction.