Choice in Currency: A Way to Stop Inflation

by Friedrich A. Hayek, Ivor F. Pearce, Harold B Rose

A path-breaking essay by Hayek, newly in print in cooperation with the Institute of Economic Affairs, this piece first appeared in 1976, during an inflationary bout in the U.S.. Hayek saw that it was crucial to bring the forces of competition to bear in currency markets, not just between countries but within them as well.All people should be free to use any currency of their own choosing, even if that means rejecting the favored domestic one. This provides a check against inflation, permitting citizens to keep assets denominated in any unit.Governments, then, would have greater incentive to avoid inflating because a depreciating unit would lead people to flee to other currencies. At least this would work as some check, and it would be a great improvement over the existing system in which citizens in a currency region are caged sheep led to the slaughter.This is an important essay in many respects, because it represents a reform that could take place right now, one that would change the institutional incentives faced by central banks. This is not his full plan for sound money but rather a creative idea to diminish the total power of central banks within individual countries.

Genres: Economics, Politics, Money, Nonfiction

48 pages, Paperback

First published July 1, 1976

About the author

Friedrich August von Hayek CH was an Austrian and British economist and philosopher known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought. He is considered by some to be one of the most important economists and political philosophers of the twentieth century. Hayek's account of how changing prices communicate signals which enable individuals to coordinate their plans is widely regarded as an important achievement in economics. Hayek also wrote on the topics of jurisprudence, neuroscience and the history of ideas.

Hayek is one of the most influential members of the Austrian School of economics, and in 1974 shared the Nobel Memorial Prize in Economics with Gunnar Myrdal "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena." He also received the U.S. Presidential Medal of Freedom in 1991 from president George H. W. Bush.

Hayek lived in Austria, Great Britain, the United States and Germany, and became a British subject in 1938.

Reviews

[Andrew · Rating 5 out of 5]

An overview of international monetary policy arguing that a country should not have a monopoly over the money supply, rather different forms of payment should be allowed to compete within the economy with an established exchange rate e.g. pay with dollars, gold, or silver. Hayek also discusses some historical examples of Weimar Germany in the 1920s with the hyperinflation of the German currency and the French reign of terror with price controls and bans on money not officially approved by the government punishable by fines or imprisonment. An excellent primer on monetary policy, although written in the 1970s the principles are still relevant today and it provides a useful critique of the Bretton Woods monetary policy currently accepted internationally.

[Sean Rosenthal · Rating 4 out of 5]

Interesting Quote:

"The politician, acting on a modified Keynesian maxim that in the long run we are all out of office, does not care if his successful cure of unemployment is bound to produce more unemployment in the future. The politicians who will be blamed for it will not be those who created the inflation but those who stopped it. No worse trap could have been set for a democratic system"

-F. A. Hayek, Choice in Currency

[Tahar Allouche · Rating 2 out of 5]

So it seems that even Hayek would have preconised expansionary policies in Tunisia nowadays..

"There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space. "