Free Market Monetary System

Jake Miller

December 2, 2014

Austrian Economics

Life Among the Econ Blog

Free Market Monetary System by Hayek

                The idea that I wanted to talk about today for my blog post is the idea of free market monetary system that is discussed by Hayek in his piece titled Free Market Monetary System and the Pretense of Knowledge.  This book is separated by two chapters you could say, but the focus of my post is about the idea of completely free market monetary system that Hayek elegantly describes in this book where he is definitely taking some ideas from Mises.  This is one of Hayek’s most far-reaching ideas because he thinks that there is now way of us ever having decent money unless it is issued by private institutions.  He thinks that the central banks cannot be changed because the government is in charge and is messing things up.  Hayek comes to the conclusion that the market should be in charge of the monetary system solely by itself without government interventionism also known as (Free Market Monetary System).  These ideas help also identify the crisis of the problem of money being controlled by the government and gives an answer to the problem of the quality of money in our country.

                Hayek’s first point to achieving a free market monetary system is to get rid of the gold standard to judge our value of money because the government influences the gold standard.  Hayek proclaims that, “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.”  I absolutely agree with this point of view that Hayek is trying to get across because the gold standard is always being observed by the government, and then the government uses its force to either increase or decrease the money supply which causes more problems when in fact the government interventionism in money causes the problems in money.  The gold standard is the only thing that we have in our world to put a value on money but really the gold standard just puts the self-control of money on the government which would be alright if the government was forced to do the right thing like it forces us.

                Hayek then decides to throw out the idea of private institutions issuing out their own money to their individual clients.  Hayek declares that, “But if private institutions began to issue notes under some other names without any fixed rate of exchange with the official money or each other, so far as I know this is in no major country actually prohibited by law.”  Obviously there is a problem with this idea because once one private institution decides to issue its own money the government that runs the gold standard will make it so impossible to do so without having many barriers to do so.  Another problem that Hayek see with this is why you would create a money that you couldn’t make a contract in terms of between people.

I agree with this idea, but then he came up with an idea that I had never thought of so Hayek states that, “If I were responsible for the policy of any one of the great banks in this country, I would begin to offer to the public both loans and current accounts in a unit which I undertook to keep stable in value in terms of a defined index number…. The essential point which I cannot emphasize strongly enough is that we would get for the first time a money where the whole business of issuing money could be effected only by the issuer issuing good money.”  Hayek believes that this is the only possible way that we can have decent money because a company would know that there money would depreciate because another company can offer a better product or money.  Hayek’s idea of private institutions issuing money is a very clear explanation of how a free market monetary system could operate in our country and others.