Choice in Currency by F. A. Hayek

Author:F. A. Hayek [F. A. Hayek]
Language: eng
Format: epub
ISBN: 978-1-61016-138-1
Publisher: The Ludwig von Mises Institute
Published: 2009-11-06T16:00:00+00:00

HAROLD ROSE

Esmée Fairbairn Professor of Finance, London Graduate School of Business Studies

Economic Adviser to Barclays Bank

Author of Management Education in the 1970s: Growth and Issues (1969)

PROFESSOR HAYEK’S prescription involves abolition of all exchange control and allowing exchange rates to move freely. But then it would not be necessary to eliminate the monopolistic title of legal tender as well. For the movement of interest rates and forward exchange rates would fully reflect the degree of trust in different currencies, and the price mechanism would enable contracts to be made to no disadvantage even in a weak currency, thus avoiding all the costs of inconvenience and uncertainty the absence of legal tender would entail.

Put in this way, Professor Hayek’s prescription becomes less revolutionary than it sounds, and I have correspondingly less faith in its efficacy. For sustained inflation has not been confined to countries whose governments have surrounded them with the wall of exchange control, and there is in any event nothing to prevent several countries from inflating together, as they have done during the past few years.

Whether governments would in practice be any more ready to affirm their financial virtue by abolishing exchange control than by submitting themselves to more direct financial disciplines, such as the limitation of the money supply, is to be doubted. But Professor Hayek’s analysis is undoubtedly correct in pointing to the operation of a kind of Gresham’s Law if our inflation continues. Sooner or later the evasion of exchange control will spread; and the ordinary citizen, with no means of defending himself, will have the worst of all worlds.

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