Hayek’s journal article advocates an international currency backed by a fixed basket of storable raw materials. Drawing on proposals independently developed by Benjamin Graham and Frank D. Graham, it seeks to preserve the gold standard’s automatic operation and international reach while overcoming gold’s inadequate response to changes in the demand for liquidity. The argument proceeds from a reassessment of gold to an explanation of commodity convertibility, its operation through depression and recovery, and its administrative and political feasibility. Its central concern is how predictable monetary rules might coordinate national economies without requiring either discretionary international government or insulated national monetary management.
Hayek begins by distinguishing the institutional virtues of the gold standard from the properties of gold itself. Gold supplied an international currency without an international monetary authority, made policy comparatively predictable, and encouraged increased production of monetary reserves when their value rose. Given limited economic knowledge and conflicts among interests, discretionary coordination could not readily reproduce these advantages.
It will be noticed that none of these points claimed in favour of the gold standard is directly connected with any property inherent to gold.
This distinction opens the case for reform. Gold’s special position depended substantially on inherited prestige, which had made international acceptance possible without deliberate organization. The weakening of that prestige now permits alternatives. Hayek’s principal objection to gold is not erratic discoveries but its slow supply response: increased liquidity demand raises gold’s value and depresses prices before additional production arrives. When demand subsides, the enlarged gold stock remains, potentially supporting excessive credit expansion.
The deeper problem is the divergence between individual and social liquidity. People can make themselves more liquid by holding money without thereby improving society’s capacity to meet uncertain future needs. Greater uncertainty should encourage accumulation of resources adaptable to many uses. Gold instead directs production toward an asset with few nonmonetary applications, whose quantity cannot adjust promptly. A commodity reserve would translate the desire for financial flexibility into stocks of generally useful materials.
The basic idea is that currency should be issued solely in exchange against a fixed combination of warehouse warrants for a number of storable raw commodities, and be redeemable in the same “commodity unit.”
The fixed combination is essential. Currency would represent specified quantities of several commodities together, not an entitlement to obtain it against any one commodity independently. Hayek compares this arrangement with Alfred Marshall’s “symmetallism,” distinguishing it from bimetallism. Only the basket’s aggregate price would be fixed; individual prices could change with relative scarcity. The scheme therefore stabilizes a monetary standard without guaranteeing each producer a particular price or protecting excessive output of a specific material.
The hoarding of money, instead of causing resources to run to waste, would act as if it were an order to keep raw commodities for the hoarder’s account.
This sentence captures the proposal’s coordinating mechanism. Increased cash holdings would correspond to accumulated commodity reserves; renewed expenditure would release those reserves. Unlike an index currency maintained through discretionary changes in the money supply, the basket’s price would be anchored directly by the authority’s readiness to buy and sell. Hayek also extends the Grahams’ primarily American proposal internationally: different national baskets would introduce a new source of instability. Major participating countries should therefore adopt units of identical composition.
Introduction would be easiest when demand slackened, with a buying price announced slightly below the prevailing market value. As prices fell, monetary purchases would absorb baskets no longer saleable at that price. Sustained raw-material incomes would support demand for manufactures, limiting the spread of depression. Hayek argues that even countries producing none of the reserve commodities could benefit, since currency issued to foreign suppliers would provide purchasing power for the issuing country’s products.
During recovery, reserve sales would meet rising demand while withdrawing money from circulation. This would check both price increases and the temporary stimulus to excessive raw-material production that Hayek identifies as a major source of instability. The qualification matters: stabilization depends on available stocks, making prior accumulation during slack activity crucial. He expects monetary contraction to damp the boom before those reserves are exhausted, rather than claiming an unlimited capacity to supply commodities.
Administration would rely on private storage and specialist brokers assembling or redistributing warehouse warrants. The authority’s transactions could consequently remain mechanical. Hayek acknowledges problems of storage costs, quality, location, and periodic revision of the basket, but regards them as tractable. A buying–selling margin could meet storage costs; money holders would voluntarily bear the forgone interest. Precisely regulated substitution of futures for stored goods could address temporary shortages. Gold could also be linked to the system without determining money’s value.
The conclusion situates currency reform within the political likelihood of continuing commodity reserves and market intervention. Hayek’s alternative is to replace arbitrary controls over particular prices with a common, predictable rule. The article’s relevance lies in this institutional synthesis: monetary stability, useful reserve accumulation, and freer international exchange are presented as mutually supporting objectives, achievable through constrained public commitments rather than continual discretionary direction.
This work was divided into 6 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 6 sections and cites the passage.
Ask the Librarian