Friedrich A. von Hayek, “Über »neutrales Geld«” (1933)

This file is a short, single-author theoretical note. In five numbered sections Hayek intervenes in a terminological dispute over “neutral money,” prompted by recent discussions by Koopmans and Egle. Its thesis is deliberately restrictive: neutrality is an analytical construction for monetary theory, not first of all a practical maxim for central banks.

Der Begriff neutrales Geld war bestimmt, als Instrument der theoretischen Analyse zu dienen und sollte keineswegs in erster Linie eine währungspolitische Norm bilden.

English translation: The concept of neutral money was designed to serve as an instrument of theoretical analysis and by no means was intended primarily to constitute a norm for monetary policy.

Hayek’s purpose is to isolate the “active” effects of money on the economy. Neutral money names the imagined case in which a money economy would leave relative prices to be governed only by the “real” determinants recognized by barter-equilibrium theory. The point is not to define a stable purchasing power of money, but to ask when money can be ignored as an independent influence on relative and intertemporal prices. He links this to older distinctions between money as mere numéraire and money as monnaie, and to the Menger-Mises idea of a constant “inner objective exchange value” of money.

The second move is causal. In barter, supply and demand coincide in the same transaction; with money, sale and purchase can be separated. This is why cash balances, hoarding, dishoarding, newly created money, and destroyed money matter: each can introduce demand without a corresponding current supply, or supply without corresponding demand.

Der Ausgangspunkt für die Beantwortung des theoretischen Problems des neutralen Geldes ist die Erkenntnis, daß die grundsätzliche Identität von Angebot und Nachfrage, die bei Naturaltausch auf jedem Markt bestehen muß, durch das Dazwischentreten des Geldes durchbrochen wird.

English translation: The starting point for answering the theoretical problem of neutral money is the recognition that the fundamental identity of supply and demand, which under barter must hold in every market, is broken by the intervention of money.

Hence Hayek’s benchmark of a constant money stream. It is not presented as a simple statistical quantity target, but as a theoretical way to prevent monetary impulses from falsifying the structure of prices and production. In this sense the essay is continuous with Preise und Produktion: monetary disturbances matter because they redirect production by altering relative-price signals.

Diese Problemstellung führt also unmittelbar zu der Annahme eines konstanten Geldstromes mit den Ausnahmen, die ich in Preise und Produktion roh angedeutet habe.

English translation: This formulation of the problem thus leads directly to the assumption of a constant money stream, with the exceptions which I roughly indicated in Prices and Production.

The middle sections add the crucial qualification. To preserve in a monetary economy the equilibrating tendencies of general theory, all the conditions of neutrality would have to hold; Hayek doubts that this is practically possible. Long-term contracts denominated in money, expectations of stable prices, and sticky prices—especially downward stickiness—create “Reibungswiderstände.” A policy that pursued neutrality alone might impose excessive adjustment costs.

Um die Tendenzen zu einem Gleichgewichtszustand, die von der allgemeinen Wirtschaftstheorie beschrieben werden, in einer Geldwirtschaft zu erhalten, müßten alle jene Bedingungen, die die Theorie des neutralen Geldes aufzuzeigen hat, verwirklicht werden.

English translation: In order to preserve, within a money economy, the tendencies toward a state of equilibrium described by general economic theory, all those conditions which the theory of neutral money has to set forth would have to be realized.

This leads to the essay’s policy conclusion: neutrality remains the leading criterion, but not the only one. Practical monetary policy may have to choose a compromise between allowing the full operation of equilibrium tendencies and avoiding destructive frictions.

Es ist zumindest möglich, daß die Währungspolitik hier ein Kompromiß zwischen zwei nur alternativ verwirklichbaren Zielen zu suchen haben wird: nämlich zwischen der vollständigen Durchsetzung der Tendenzen zu einem Gleichgewichtszustand und der Vermeidung übermäßiger Reibungswiderstände.

English translation: It is at least possible that monetary policy will here have to seek a compromise between two aims that can only be realized alternatively: namely, between the complete assertion of the tendencies toward a state of equilibrium and the avoidance of excessive frictional resistances.

The final section rejects a reduction of neutral money to any “price level” rule. Hayek concedes that stabilizing some average—especially an average of prices of original factors of production—may be the most workable maxim for conscious monetary regulation. But that is a second-best policy problem, not the theoretical problem of neutral money. To call it by the same name would obscure the difference between an ideal condition and a feasible rule.

Aus den schon angeführten Gründen würde ich es jedoch für ein bedauerliches Durcheinanderbringen zweier verschiedener Probleme halten, wenn dieses währungspolitische Problem unter dem Namen des Problems des neutralen Geldes behandelt würde.

English translation: For the reasons already given, however, I would regard it as a regrettable confounding of two different problems if this monetary-policy problem were treated under the name of the problem of neutral money.

The relevance of the note lies in this distinction. Hayek makes “neutral money” a counterfactual standard for detecting monetary distortions of relative and intertemporal prices, while denying that any aggregate price index can capture the problem directly. The structure of the essay—definition, monetary rupture of barter identity, constant money stream, frictions, and price-level critique—turns a seemingly technical term into a methodological warning: monetary theory must not confuse analytical neutrality with administratively convenient stabilization.