Stephen Williamson’s “New Monetarism” = F. A. Hayek’s Monetary Economics in a New Bottle with a New Label

Let’s compare Stephen Williamson’s account of “New Monetarism” with Hayek’s account of the expansion and contraction of the supply of various types of monies, near monies, shadow monies, and money-substitute assets of changing liquidity.

Here’s Williamson:

A New Monetarist thinks that, under current circumstances (a large stock of excess reserves, and the interest rate on reserves – IROR – determining short nominal rates) the inflation rate is determined by the demand for and supply of the whole gamut of intermediated liquid assets – including Treasury debt of all maturities and asset-backed securities.

Here’s Hayek:

“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money.  Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money … “


“It is necessary to take account of certain forms of credit not connected with banks which help, as is commonly said, to economise money, or to do the work for which, if they did not exist, money in the narrower sense would be required.  The criterion by which we may distinguish these circulating credits from other forms which do not act as substitutes for money is that they give to somebody the means of purchasing goods [or securities] without at the same time diminishing the money spending power of somebody else. …. The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.”

Williamson contrasts “New Monetarism” against the “Old Monetarism” of Friedman, et al.  Hayek, of course, always stood opposed on theoretical and empirical grounds to the “crude monetarism” of Friedman, et al, while always advocating the general principle that the changes in the money supply lies behind changes in prices levels, and, significantly, that inflation is a monetary phenomena.

It is also noteworthy that Williamson embraces Hayek’s famous “Knowledge Problem” exactly where Hayek first identified it, in the relation between different monies, near monies, and money substitutes.

Here’s Williamson:

We can’t even measure everything we want to in that respect, including shadow-banking activity. For all we know, there may be a lot of substitution going on between observed and unobserved intermediation activities. Still, the second chart does not make me optimistic about inflation.

Here’s Hayek:

Any attempt to get complete fixity in the quantity of money must come to grief on the fact that it is only possible in part to regulate the quantity of the various surrogate monies.  On the other hand, to compensate for changes in their quantity by a change in that of real money meets the problem that it is not possible to ascertain the quantity of them in circulation.  Yet no other criterion exists by which the quantity of money could be regulated such that the establishment of prices is not disturbed.

F. A. Hayek, “Intertemporal Price Equilibrium and Movements in the Value of Money”, 1928.


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3 Responses to Stephen Williamson’s “New Monetarism” = F. A. Hayek’s Monetary Economics in a New Bottle with a New Label

  1. Martin says:


    What I wonder about is whether the existence of ‘money’-substitutes is a failure of the monetary authorities to provide sufficient currency to do the job? My conjecture, based on reading this, is that the monetary authorities created a shortage which was masked by the creation of money-substitutes by the private sector. I’d be curious to hear your opinion on this.

  2. Steve Williamson says:

    Where can I find those Hayek quotes?

    Steve Williamson

  3. Greg Ransom says:


    The first two quotes are from pp. 113-114 of _Priced and Production_, 2nd edition, 1935.

    The last quote is from “Intertemporal Price Equilibrium and Movements in the Value of Money”, _Collected Works of F. A. Hayek, Vol. 5_, p. 219.

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