“How to Deal with Inflation” is a newspaper article extracted from Hayek’s lecture to the Monday Club, published in The Times on March 27, 1980, and republished in the supplied 2022 version with editorial notes. Its argument moves from the monetary causes of inflation to the costs of ending it, concluding with the fiscal obstacles to decisive action. Hayek’s central claim is that inflation must be stopped through monetary restriction, and that doing so immediately is preferable to prolonging the unavoidable disruption through gradual disinflation.
Hayek begins by reaffirming the elementary propositions of the quantity theory, invoking his earlier opposition to Keynes’s influence on public understanding. Yet this affirmation does not amount to an unqualified endorsement of Milton Friedman’s approach. Hayek argues that statistical aggregates and averages obscure differences among monetary instruments, variations in the demand for money, and the consequences of changes in relative prices.
Unfortunately the quantity of money is not a measurable homogenous magnitude but consists of a wide range of mutually more or less substitutable things of varying degrees of liquidity.
This qualification matters because Hayek locates inflation’s damage beyond the average price level. An excessive money supply distorts the structure of relative prices and thereby misdirects productive effort. His account joins a monetary explanation of inflation to an explanation of how inflation changes the allocation of resources. Money’s heterogeneity and variable demand complicate measurement, but do not, for him, undermine the central bank’s responsibility.
Nevertheless, I have no doubt that inflation is caused solely by an undue increase in the quantity of money and that it can and must be prevented under the prevailing arrangements only by the restriction of the basic money supplied by the central bank.
The qualification “under the prevailing arrangements” ties this prescription to the existing monetary system. Hayek rejects cost-push inflation and assigns responsibility to the government agency supplying money. In his account, attempts to control wages or prices address neither the cause nor the effective means of stopping inflation.
The article’s principal practical intervention concerns speed. Hayek takes a position he describes as more radical than Friedman’s because he regards inflationary support for employment as dependent on continuing acceleration.
The reason is that I believe that the artificial stimulus which inflation gives to business and employment lasts only so long as inflation accelerates, that is, as long as prices turn out to be higher than expected.
The mechanism turns on expectations: unexpectedly high prices generate windfalls that sustain otherwise unprofitable businesses and employment. Once inflation ceases to accelerate, those windfalls disappear. Slowing inflation therefore exposes the productive misdirection already created; it does not allow the economy to retain inflation’s supposed benefits while smoothly shedding its costs.
No inflation has yet been terminated without a ‘stabilization crisis’. To advocate that inflation should be slowed down gradually over a period of years is to advocate a long period of protracted misery. No government could stand such a course.
Hayek thus makes both an economic and a political argument against gradualism. Failures and unemployment are temporary consequences of stabilization, but spreading adjustment over years would prolong suffering beyond what a government could withstand. He cites the sharp American price decline of August 1920–February 1921 and the subsequent recovery as evidence that severe adjustment can be followed relatively quickly by renewed growth. His contemporary proposal, however, is to stop further price increases, not to reverse the existing price level.
The conclusion places this prescription within British political circumstances. Hayek urges the present government to act decisively, warning that an “incomes policy” would conceal inflation rather than cure it. Yet he ends by acknowledging a structural difficulty: borrowing has increasingly financed government expenditure under the justification of supporting employment, leaving uncertainty about how to maintain the existing apparatus of government without continued inflation.
The appended editorial notes supply a retrospective perspective distinct from Hayek’s argument. They explain monetarism’s political appeal to the Conservatives as an alternative to bargaining with unions over incomes policies, while also recording how financial innovation and unstable money demand later undermined monetary targeting. The article’s enduring conceptual tension is therefore especially clear: Hayek recognizes the complexity of money and its effects, yet demands an immediate, unequivocal policy response whose implementation encounters both fiscal dependence and measurement difficulties.
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