Choice in Currency: A Way to Stop Inflation - F.A.HAYEK
LONG-RUN MONETARY STABILITY
THE UPSHOT would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product.
I do not believe there is any reason to fear that in such a competition for the most general acceptance of a currency there would arise a tendency to deflation or an increasing value of money. People will be quite as reluctant to borrow or incur debts in a currency expected to appreciate as they will hesitate to lend in a currency expected to depreciate. The convenience of use is decidedly in favour of a currency which can be expected to retain an approximately stable value. If governments and other issuers of money have to compete in inducing people to hold their money, and make long-term contracts in it, they will have to create confidence in its long-run stability.
‘The universal prize’
Where I am not sure is whether in such a competition for reliability any government-issued currency would prevail, or whether the predominant preference would not be in favour of some such units as ounces of gold. It seems not unlikely that gold would ultimately re-assert its place as ‘the universal prize in all countries, in all cultures, in all ages’, as Jacob Bronowski has recently called it in his brilliant book on The Ascent of Man,1 if people were given complete freedom to decide what to use as their standard and general medium of exchange - more likely, at any rate, than as the result of any organized attempt to restore the gold standard.
The reason why, in order to be fully effective, the free international market in currencies should extend also to the services of banks is, of course, that bank deposits subject to cheque represent today much the largest part of the liquid assets of most people. Even during the last hundred years or so of the gold standard this circumstance increasingly prevented it from operating as a fully international currency, because any inflow or outflow in or out of a country required a proportionate expansion or contraction of the much larger super-structure of the national credit money, the effect of which falls indiscriminately on the whole economy instead of merely increasing or decreasing the demand for the particular goods which was required to bring about a new balance between imports and exports. With a truly international banking system money could be transferred directly without producing the harmful process of secondary contractions or expansions of the credit structure.
It would probably also impose the most effective discipline on governments if they felt immediately the effects of their policies on the attractiveness of investment in their country. I have just read in an English Whig tract more than 250 years old: ‘Who would establish a Bank in an arbitrary country, or trust his money constantly there?’1 The tract, incidentally, tells us that yet another 50 years earlier a great French banker, Jean Baptist Tavernier, invested all the riches he had amassed in his long rambles over the world in what the authors described as ‘the barren rocks of Switzerland’; when asked why by Louis XIV, he had the courage to tell him that ‘he was willing to have something which he could call his own!’ Switzerland, apparently, laid the foundations of her prosperity earlier than most people realise.
Free dealings in money better than monetary unions
I prefer the freeing of all dealings in money to any sort of monetary union also because the latter would demand an international monetary authority which I believe is neither practicable nor even desirable - and hardly to be more trusted than a national authority. It seems to me that there is a very sound element in the widespread disinclination to confer sovereign powers, or at least powers to command, on any international authority. What we need are not international authorities possessing powers of direction, but merely international bodies (or, rather, international treaties which are effectively enforced) which can prohibit certain actions of governments that will harm other people. Effectively to prohibit all restrictions on dealings in (and the possession of) different kinds of money (or claims for money) would at last make it possible that the absence of tariffs, or other obstacles to the movement of goods and men, will secure a genuine free trade area or common market - and do more than anything else to create confidence in the countries committing themselves to it. It is now urgently needed to counter that monetary nationalism that I first criticized almost 40 years ago1 and which is becoming even more dangerous when, as a consequence of the close kinship between the two views, it is turning into monetary socialism. I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.2
You may feel that my proposal amounts to no less than the abolition of monetary policy; and you would not be quite wrong. As in other connections, I have come to the conclusion that the best the state can do with respect to money is to provide a framework of legal rules within which the people can develop the monetary institutions that best suit them. It seems to me that if we could prevent governments from meddling with money, we would do more good than any government has ever done in this regard. And private enterprise would probably have done better than the best they have ever done.