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Hoisted from the Archives: Friedrich Hayek's Accursed Love for Gold

March 2009:

A Note on Friedrich Hayek and Lionel Robbins in the Great Depression...: Larry White continues his war with Milton Friedman over Friedman's condemnation 25 years ago of "the London School (really Austrian) view that I referred to... when I spoke of 'the atrophied and rigid caricature [of the quantity theory] that is so frequently described by the proponents of the new income-expenditure approach and with some justice, to judge by much of the literature on policy that was spawned by the quantity theorists'. This time I appear to be Friedman's proxy:

Lawrence White: DeLong acts as though he is unaware (though elsewhere he has indicating having read my paper) Hayek's and Robbins' monetary policy norm was not that the central bank should let a deflationary monetary contraction procede. Rather, the central bank should stabilize nominal income MV, meaning expand M to offset a drop in V, and expand the monetary base to offset a drop in the money multiplier...

Since Friedman can no longer speak, let me say that I still agree with him. I think that White's painting of Hayek and Robbins as people who wanted to stabilize MV is completely wrong--it is Ben Bernanke and the inflation targeters who want to stabilize MV, not Hayek and Robbins. If you had asked Hayek back at the time, he would have said that increasing the monetary base from 1929-1933 in order to offset the decline in monetary velocity was the very last thing that he wanted to see done. Stabilizing MV at its 1929 level was not on his or Robbins's agenda by any means.

In fact, he did say so.

Let me pull out his 1932 denunciation of monetary policies that stabilize the price level:

Hayek (1932), "The Fate of the Gold Standard": ...the extraordinary influence exercised by two particular representatives of... the concept of a systematic stabilization of the price level... Irving Fisher and Gustav Cassel... succeeded in making the concept of price stabilization as the objective of monetary policy into a virtually unassailable dogma... the influence of which upon actual developments it is impossible to overestimate....


It was not a big step from the desire to be released from the unpleasant necessity of adapting the general standard of living to the lower level of national income by reductions in wages and prices, to a theoretical justification of a monetary policy which rendered inoperative the tendencies of the gold standard in that direction.... The most important error is the distinction drawn between temporary movements of gold... [which] should not be allowed to bring about any changes in the domestic volumes of credit, and 'genuine' movements.... What is left unexplained in this is why movements of gold should under any circumstances represent movements of capital that are not genuine.... [T]he great monetary theorists of the classical period from Ricardo onwards always insisted that a non-metallic circulation of money ought always to be so controlled that the total volume of all money in circulation changes in just the same way as would happen if gold alone were in circulation....

[T]he artificial prevention of the fall in prices... up to 1929... is not meant to depict the fall in prices which has occurred since then as innocuous.... Instead of prices being allowed to fall slowly [from 1918 to 1929]... such volumes of additional credit were pumped into circulation.... Whether such inflation merely serves to keep prices stable, or whether it leads to an increase in prices, makes little difference...

Today I would note that Hayek appears to share the gold fetishism of von Mises and others: the "great monetary theorists" insist that the proper monetary policy has the money supply "controlled [so] that the total volume of all money in circulation changes in just the same way as would happen if gold alone were in circulation".

Thus if improvements in gold mining technology halve the cost of production of gold and so double the price level, that--according to Hayek--does not produce any price system distortions that lead to overinvestment and require a prolonged and painful liquidation to put things right. But if a fiat-money government were to undertake policies that double the price level in the absence of improvements in gold mining technology, that would produce price system distortions that lead to overinvestment and require a prolonged and painful liquidation to put things right.

Needless to say, there is no coherent model of a monetary economy in which this could possibly be correct.

Thus I interpret it as the survival at a prelogical level of a deep attachment to a cost-of-production theory of value, whereby it is the sin of the Mammon of Unrighteousness for anything that can be produced as cheaply as fiat money is to actually have value, and that sin must bring fearful retribution from the Gods of the Market.