Friedrich August von Hayek, Die Währungspolitik der Vereinigten Staaten seit der Überwindung der Krise von 1920 (1925–1926)

Hayek’s journal article in two installments examines American monetary policy after the crisis of 1920, principally through developments in 1921–1924, with subsequent observations extending into 1925. Presented as a preliminary study for a larger history of American currency and credit, it asks how the Federal Reserve could restrain inflation and moderate business cycles when exceptional gold inflows had disabled traditional guides to central-bank policy. Its central distinction is between possessing the capacity to expand credit and exercising effective control over credit already created throughout the banking system.

The first installment establishes the empirical setting through gold movements, business fluctuations, and bank balance sheets, before examining the Federal Reserve’s gold policy. America’s intact gold currency attracted nearly half the world’s monetary gold. Hayek rejects explanations that simply transfer prewar gold-standard mechanisms to this exceptional situation. European inflation, capital flight, debt payments, political uncertainty, and demand for stable dollar balances all contributed. Some gold reached America to create dollar credits for transactions elsewhere, rather than to purchase American goods or securities.

These circumstances undermined the reserve ratio as a guide to discount policy: abundant reserves could coexist with dangerous credit expansion. Hayek also questions the expectation that European stabilization would automatically restore a “natural” distribution of gold. Countries using foreign-exchange reserves could maintain gold parity without rebuilding proportionate metallic stocks. American efforts to suppress the price effects of gold accumulation themselves weakened the incentive for its departure:

Wird der überschüssigen Goldmenge nicht erlaubt, sich in einer Steigerung des Preisniveaus bemerkbar zu machen, so fehlt der Hauptgrund, der später zu einem Rückfluß des Goldes Anlaß geben könnte.

English translation: If the surplus quantity of gold is not allowed to manifest itself in a rise in the price level, the principal reason that could later occasion a return flow of gold is absent.

Hayek’s account of the Federal Reserve’s response turns on the difference between limiting amplification and neutralizing an inflow. Substituting gold certificates for Federal Reserve notes and rearranging published reserves largely concealed surplus backing, easing public pressure for cheaper credit without materially restricting lending capacity. Gold enabled member banks first to repay rediscounts, then to enlarge reserves independently of central-bank borrowing, and finally to increase securities investments. Keynes’s claim that America had effectively demonetized incoming gold therefore exaggerates the achievement. The Reserve banks declined to exploit their full expansion capacity, but did not withdraw enough existing credit to offset member-bank expansion. Income requirements and the preservation of future policy leverage constrained further contraction.

The second installment develops the theoretical foundations of preventive credit control, evaluates actual policy, surveys currency reforms, and concludes with the Federal Reserve’s organization and New York’s international position. Hayek values American statistical research but distinguishes its description of recurring symptoms from theoretical explanation. Aggregate production and price indices can conceal the changing relationships among successive stages of production. In the ordinary credit-driven boom, the decisive problem is excessive expansion of raw-material and capital-goods industries relative to consumption and genuine saving:

Sie können dem Unternehmer auch Kaufkraft zur Verfügung stellen, ohne daß jemand anderer auf ihre Ausübung in entsprechendem Umfang verzichtet hat, und sind hierzu besonders geneigt, wenn eine günstige Konjunktur das damit verbundene Risiko zu verringern scheint.

English translation: They can also place purchasing power at the entrepreneur’s disposal without anyone else having relinquished its exercise to a corresponding extent, and are particularly inclined to do so when favorable business conditions appear to reduce the associated risk.

This credit-created purchasing power allows the money rate to fall below the real rate, making investments appear profitable that available resources cannot sustain. Yet Hayek does not attribute every fluctuation to monetary causes. He treats the atypical 1921–1924 cycle, which reversed despite plentiful reserves and relatively low interest rates, partly as a continuing adjustment after the earlier crisis. Inventory replenishment and capacity expansion can generate temporary demand whose disappearance propagates a downturn.

Preventive policy must consequently attend to productive proportions rather than merely stabilize an average price index. Hayek also rejects the Federal Reserve’s belief that restricting lending to “productive” commercial purposes adequately limits its quantity:

Nicht erst die durch jene hervorgerufene Spekulation, sondern die durch „legitime“ Kredite ermöglichte übermäßige Ausdehnung gewisser Produktionszweige muß durch rechtzeitige Kreditbeschränkungen verhindert werden.

English translation: It is not merely the speculation brought about by that expansion, but the excessive expansion of certain branches of production made possible by “legitimate” credits, that must be prevented through timely credit restrictions.

The distinction shifts attention from morally suspect speculation to investment disproportions financed through ordinary business lending. Hayek favors comparing inventories, employment, output, retail demand, and saving, while tentatively suggesting that approximately stabilizing total bank credit might address the disturbance more directly. Open-market operations offer greater initiative than discount-rate changes, especially when member banks no longer need rediscounts. Nevertheless, the apparent success of intervention in 1923 does not establish its effectiveness under stronger underlying expansionary conditions.

His caution extends beyond measurement. Additional credit produces “forced saving” and can accelerate capital development; completely suppressing fluctuations might therefore require sacrificing growth beyond what voluntary saving supports. Policy involves judgment about that trade-off, public understanding, and political resistance to deliberately restraining prosperity. Currency reforms likewise encounter limits: unilateral gold stabilization could impose the cost of absorbing the world’s surplus production.

The conclusion leaves central banking itself open to scrutiny. A lender-of-last-resort institution relaxes banks’ liquidity constraints and can enlarge inflationary possibilities unless contraction is as effective as expansion. Although the regional Federal Reserve operates increasingly as a unified institution, its domestic discount market remains incomplete. International dollar acceptances, meanwhile, strengthen New York’s connection with London and its role in world finance. The article’s lasting relevance lies in joining production-structure analysis to the institutional and political limits of monetary management, while urging European economists to engage with America’s emerging leadership in central-bank policy.