But what if Hayek is right, and a strictly ‘sound’ currency fails the market test while a currency of constant value is seen as optimal?
I’m not sure why a currency of “constant value” wouldn’t be “sound currency”. It sounds like sound currency to me.
Gresham or inverse Gresham, what the customers want, they get.
Only if it’s possible to produce for them. We can’t make the impossible happen, even if some people might want flying cars.
Trying to predict, by praxeological means, what kind of money (and of ‘monetary policy’) will win the struggle, would be like trying to predict whether planes in the future will get bigger or smaller.
Trying to predict, by praxeological means, what kind of money (and of ‘monetary policy’) will win the struggle, would be like trying to predict whether planes in the future will get bigger or smaller.
>>But what if Hayek is right, and a strictly ‘sound’ currency fails the market test while a currency of constant value is seen as optimal?## 5. The Root of the Stabilization Idea
Economic calculation does not require monetary stability in the sense in which this term is used by the champions of the stabilization movement. The fact that rigidity in the monetary unit’s purchasing power is unthinkable and unrealizable does not impair the methods of economic calculation. What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference. The endeavors to expand the quantity of money in circulation either in order to increase the government’s capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation. The first aim of monetary policy must be to prevent governments from embarking upon inflation and from creating conditions which encourage credit expansion on the part of banks. But this program is very different from the confused and self-contradictory program of stabilizing purchasing power.
For the sake of economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money. Gold and, up to the middle of the nineteenth century, silver served very well all the purposes of economic calculation. Changes in the relation between the supply of and the demand for the precious metals and the resulting alterations in purchasing power went on so slowly that the entrepreneur’s economic calculation could disregard them without going too far afield. Precision is unattainable in economic calculation quite apart from the shortcomings emanating from not paying due consideration to monetary changes.6 The planning businessman cannot help employing data concerning the unknown future; he deals with future prices and future costs of production. Accounting and bookkeeping in their endeavors to establish the result of past action are in the same position as far as they rely upon the estimation of fixed equipment, inventories, and receivables. In spite of all these uncertainties economic calculation can achieve its tasks. For these uncertainties do not stem from deficiencies of the system of calculation. They are inherent in the essence of acting that always deals with the uncertain future.
I’m not sure why a currency of “constant value” wouldn’t be “sound currency”. It sounds like sound currency to me.
What I have in mind is the distinction between a currency of strictly stable supply, and a currency which’s purchasing power does not vary too much, and this would imply increasing supply.
Only if it’s possible to produce for them. We can’t make the impossible happen, even if some people might want flying cars.
Granted, but assuming some commodity money, it is not difficult to see that an increase in its purchasing power, brought about by increased demand or increased production in the economy, will induce production of said money, until the profits to be had as money producers would be roughly equal to those that can be earned elsewhere. In rough terms, that would imply that the purchasing power of said commodity will be kept relatively stable by market forces.
Whether or not customers would keep this commodity, or dump it in favor of some currency of strictly limited supply, that is a mater of preferences and remains to be seen. But I can see no major problem in producing both ‘flavors’ of money in a free market.
*…*monetary stability in the sense in which this term is used by the champions of the stabilization movement. The fact that rigidity in the monetary unit’s purchasing power is unthinkable and unrealizable does not impair the methods of economic calculation. What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference…
Hayek most of all agrees…
The endeavors to expand the quantity of money in circulation either in order to increase the government’s capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation. The first aim of monetary policy must be to prevent governments from embarking upon inflation and from creating conditions which encourage credit expansion on the part of banks. But this program is very different from the confused and self-contradictory program of stabilizing purchasing power…
Why would be self-contradictory to excpect profits in monetary production, absent government interference, to not vary too much compared to profits to be had in other fields? That is what ‘stable purchasing power’ implies.
I don’t think Hayek is right and here’s why from an article by Bill Bonner:
… sooner or later, a new money system is bound to emerge. Most likely, it will have gold at its base. Why? Because in thousands of years of human experience, nothing better has ever been found. Not that we completely discount the possibility of a better system; humans can be clever. But money is the sort of activity where you don’t want cleverness. You want dumb, honest solidity…you want something that cleverness can’t undermine or circumvent. You want money that smart people can’t fiddle…and that is gold.
I’ve consider Keynes’ idea of a bancor note which is backed by a basket of commodities to reduce volatility. I think it’s safe to speculate that such experimental monies would be tried in a free market of money but I think such monies will not prevail for the simple reason that it’s solving the wrong problem. Sure, there’s some risk entailed in holding a single monetary commodity. The mother-lode of all mother-lodes could be located tomorrow. Or perhaps consumers might rapidly shift their preferred medium of exchange to a different commodity, leaving you the poorer. But there’s risk in everything… and even in nothing. There could be a major earthquake tomorrow. You could have a heart attack. And so on. I don’t know how to insure against all these risks and perhaps diversification in monetary commodities is part of the solution to the problem of volatility in the commodity value of the monetary metal.
However, all these concerns ignore the primary importance of a commodity money… and that is security. Sure, there is risk in everything, but gold isn’t going to evaporate and that is security. Securing wealth is very hard to do and I believe one of the primary reasons that gold has been the king of monies throughout history is the difficulty of counterfeiting it, in other words, its security against debasement. When the king starts watering down the gold, it’s visible, you can easily see the difference between a copper-gold, silver-gold and pure gold coin.