interview: Hayek on Money, Keynes, Friedman & Gold


Q: You taught with Lord John Maynard Keynes at the same university, did you not?

Hayek: I taught at his university while he was advising government. We at the London School of Economics were evacuated to Cambridge for the whole World War II period, and Keynes got me rooms in his college. But he was most of the time advising governments, so we met only occasionally on weekends. We were personally very good friends.

He had the illusion that a little inflation is good. Too much, no. He was one of the cleverest men I knew, but he was not really a very competent economist at all. He had strong intuitions, which sometimes were right, and the strong conviction that he could put over any theory that he invented to justify his particular recommendations. He was a very great man, but I don’t think he was a great economist.


Q: This controversial theory of competition of currencies is beginning to receive some attention. How do you think it would work? Would the major banks issue currencies, or would there be gold coins issued?

Hayek: It seems to me that my original plan is right, but I am afraid that I’ve come to the conclusion that politically, it is completely Utopian. Governments will never allow monetary competition, and even bankers do not understand the idea because they have all grown up in the system which is so completely dependent on central banks. So I think we need a roundabout way. After all, in the modern world, currency is no longer the most important money. Credit and credit cards are substitutes. While governments can stop people from issuing money, they can hardly stop them from opening accounts in something unless they introduce a complete system of exchange control. I do not expect that any bank will understand this idea. But I hope that one of the big dealers in raw materials will be prepared to open accounts which will be redeemable in so much of current moneys as are necessary to buy this list of raw materials. Through these accounts he can make his unit—call it the “solid”—the standard unit without it ever being used in circulation. People very soon will begin to keep their accounts in “solids”—the only thing which is trustworthy. Although it’s a thing where many people can compete, most of them will probably choose the same list of raw materials. If one major firm will start this, others will imitate it. So I think we can forget about existing money and existing banks, and gradually open a system of accounts which will displace the government money.

Q: Maybe the unit, one day, will be known as the “Hayek.” Continuing on the money issue, it seems to me that the fundamental flaw in Milton Friedman’s theory of monetary control is becoming more and more evident today. The authorities are now admitting that they don’t even know what the money supply is. So how could you have a theory based on a steady increase in the money supply?

Hayek: You know, about forty years ago, I once wrote a sentence something like this: Almost the worst thing which could happen would be if mankind ever forgot the quantity theory of money—except they should ever take it literally. While I still believe that it is true that the price level is determined from the quantity of money, we never know what the quantity of money in this sense is. I think the rule ought to be that whoever issues the money must adapt the quantity so that the price level will remain stable. But to believe that there is a measurable magnitude which you can keep constant, with beneficial effects, I regard as completely wrong.

I don’t like criticizing Milton Friedman not only because he is an old friend but because, outside of monetary theory, we are in complete agreement. Our general views on what is desired and what is not are almost identical until we get on to money. But if I told him what I said before, that I very much doubt whether monetary policy has ever done anything good, he would disagree. He personally is convinced that a good monetary policy is a foundation for everything.

Q: What do you think will be the outcome of the Third World debt crisis?

Hayek: I don’t know. If we are very lucky—I doubt that we should be so lucky—we may get through it without either a resumption of inflation or new controls being clapped on. But the only good thing I hope to see is that people are becoming somewhat aware that the present monetary system is not very satisfactory and that we will have to consider fundamental reform. I don’t think anybody is yet going far enough.

I sympathize with the people who would like to return to the gold standard. I wish it were possible. I am personally convinced it cannot be done for two reasons: The gold standard presupposes certain dogmatic beliefs which cannot be rationally justified, and our present generation is not prepared to readopt beliefs which were old traditions and have been discredited. But even more serious, I believe that any attempt to return to gold will lead to such fluctuations in the value of gold that it will break down. So although I must sympathize with the gold standard people, I don’t believe that is a possible way. I think, in the long run, only my much more radical proposal will be feasible.

Q: Do you see the future as being more and more inflation and currency depreciation, or do you think that we could have a depression?

Hayek: Many things in the last three years have moved very much better than I had hoped. Particularly in England, the fact that Mrs. Thatcher would be able to bring inflation down as well as she has done, and the same to some extent in America, is very encouraging. If you can bring down inflation to zero, and have it stay there, I think the position of the leading countries can be saved. I’m not sure that means the positions of their banks can be saved!

from “Exclusive Interview with F. A. Hayek”.  James Blanchard, III.  Cato Policy Report, vol. VI, no. 3, May/June 1984

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