Hayek’s Plan for Private Money
The most famous Austrian economist is 1974 Nobel laureate Friedrich Hayek. Because of his moderate views excusing state interventions in various circumstances, hardcore Rothbardians tend to regard Hayek as less than pure in many areas.
However, one area where Hayek is certainly more radical (though perhaps not correct!) than even Murray Rothbard is monetary institutions, as detailed in his fascinating (1978) pamphlet The Denationalisation of Money.
When it comes to the free market’s handling of money, the typical Austrian argument is over fractional reserve banking (FRB). Some think FRB is perfectly legitimate (so long as the banks do not receive special privileges from the government), while others consider it inherently fraudulent. But both groups agree that fiat money is a horrible creation of the state and that the free market would always settle on a commodity (such as gold) as the underlying base money.
Inasmuch as many of the participants in the FRB debate are far more radical than Hayek on most policy issues, it is quite surprising then that Hayek’s proposal calls for privately issued, competing fiat currencies. That is, Hayek proposes that individual firms issue pieces of paper that are not backed by any production or consumption good. In a sense, Hayek wants to privatize central banking.
As the reader can imagine, this proposal strikes almost everyone—even modern Austrians—as absurd; we will deal with some of the major objections below. But partly because of this near-unanimous rejection, and partly because the analysis in any case is instructive, I will attempt in this article to give Hayek’s case the best possible defense.
Hayek argues that, if only government obstacles were removed, the free market would provide the optimal quantity (and variety!) of monetary products. Just as the forces of competition lead to low prices and superior quality in every other line, so too would competition in the “fiat money industry” lead to monies that were infinitely better than their government-produced counterparts. For example, the private monies would be far more stable in their purchasing power, would be harder to counterfeit, and would be available in more convenient denominations.
Although one can imagine an equilibrium situation given that the public is already holding vast quantities of such private currencies, it is difficult to conceive of how they would “get off the ground” in the first place. Here is the most ingenious part of Hayek’s proposal (which naturally I am adapting for a modern exposition):
A private firm could initially print up, say, 1 million pieces of paper (that of course would be difficult for an outsider to reproduce) with a cute picture of Friedrich on them. The firm then contractually pledges to redeem each “Hayek,” at any time, for either $10 or 80 Chinese yuan. Assuming that the firm has substantial assets and that everyone is fully confident of their redeemability, the Hayeks at auction will sell for somewhat more than $10. This is because they will always be worth at least $10, but they might (in the not too distant future) be worth more, if and when the Chinese government lets the yuan appreciate against the dollar. (In that case, investors could redeem each Hayek for ¥80, which would exchange for more than $10.) For the sake of argument, let’s suppose that the firm initially auctions all 1 million Hayeks for $12 each.
Thus far the proposal involves nothing too radical; each Hayek is really just a derivative asset. How, then, would the issuing firm get the p
Article from Mises Wire