Friedrich August von Hayek · 1965
This Walter Eucken Institut pamphlet reissues Hayek’s 1932 essay on the breakdown of the gold standard, together with a 1931 letter to The Times and later remarks on reserves and international liquidity. Hayek frames the republication as a correction of enduring policy errors about the interwar monetary collapse.
Der Einfluß, den Mißverständnisse über die Ursachen des damaligen Zusammenbruches der Goldwährung auch heute noch auf die Politik ausüben, ließ es mir angezeigt erscheinen, ihn in gesonderter Form wieder zu veröffentlichen.
English translation: The influence which misunderstandings about the causes of the collapse of the gold standard at that time still exert on policy today made it seem advisable to me to republish it in separate form.
The central argument is that the gold standard did not collapse because of an inherent shortage of gold or because strong creditor countries made it unworkable. It was undermined by central banks, especially in Britain, that tried to prevent gold flows from producing the domestic credit contraction, price adjustment, and wage adjustment required by the system. Hayek presents the interwar crisis as the result of replacing the “rules of the game” with managed stabilization.
Die eigentlichen Probleme, bei deren Lösung diese Ideen eine zum Teil verhängnisvolle Rolle spielen sollten, begannen mit Englands Rückkehr zur Goldwährung im Jahre 1925.
English translation: The real problems, in the solution of which these ideas were to play a partly disastrous role, began with England's return to the gold standard in 1925.
Britain’s return to prewar parity is the decisive episode. In Hayek’s account, British costs and wages remained too high relative to the world market, but policy-makers resisted the deflationary adjustment needed to sustain parity. Credit expansion at home and appeals for international central-bank cooperation abroad therefore masked rather than solved Britain’s external weakness. Hayek also reverses the common accusation against the United States and France: the decisive problem was not their hostility to gold but Britain’s refusal to let gold movements discipline domestic policy.
Die Theorie der Preis- und Konjunkturstabilisierung war – abgesehen von ihren sonstigen Mängeln – für ein geschlossenes Wirtschaftsgebiet entwickelt worden und war nicht ohne weiteres auf ein einzelnes Land anwendbar, das Glied eines internationalen Systems ist.
English translation: The theory of price and business-cycle stabilization had—quite apart from its other shortcomings—been developed for a closed economic area, and was not readily applicable to an individual country that is a member of an international system.
The theoretical core is Hayek’s attack on price-level stabilization. In a progressing economy, falling prices may reflect rising productivity rather than deficient demand. To prevent such declines by credit creation is still inflationary, even if indexes remain stable. That policy distorts production, prolongs maladjustments, and makes the later crisis sharper than the gradual adjustment would have been.
Die Erfahrung hat nun bestätigt, was die Theorie schon wußte, daß auch eine solche Inflation zu Fehlleitungen der Produktion in einem solchen Ausmaß führen kann, daß schließlich ein Zusammenbruch in Form einer Krise unausbleiblich wird.
English translation: Experience has now confirmed what theory already knew: that even such an inflation can lead to misdirection of production on a scale such that ultimately a collapse in the form of a crisis becomes unavoidable.
The supplements extend the same diagnosis. The rejected Times letter condenses Hayek’s view that central-bank cooperation had been excessive because it aimed at neutralizing gold-standard discipline. The later remarks on reserves argue that international reserves are not meant to finance deficits indefinitely; their function is to convert domestic purchasing power into international money and thereby force correction. For Hayek, calls for more “international liquidity” often disguise the desire to continue inflation without facing balance-of-payments limits.
All this means that there has not been too little but too much cooperation between central banks, and that not the gold standard, but efforts aimed at making the gold standard inoperative are the causes of the present monetary troubles.
The pamphlet is thus a compact statement of Hayek’s monetary internationalism. Gold matters less as metal than as a rule-bound mechanism for coordinating national credit systems. Its breakdown, in his telling, came from insulating national economies from the consequences of their own monetary policies.
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