Hayek on Monetary Stability (1926)

Friedrich August von Hayek’s review of J. R. Bellerby’s Monetary Stability and G. M. Verrijn Stuart’s Inleiding tot de leer der waardevastheid van het geld examines whether stabilizing a price index can eliminate monetary disturbances. It proceeds from criticism of Bellerby’s policy comparison to an appreciative but theoretically dissenting account of Verrijn Stuart’s treatment of the same problem. Its central distinction is between an unchanged average of prices and an economic process undisturbed by money: Hayek rejects the assumption that these necessarily coincide.

Hayek situates Bellerby’s book within English-language explanations of business cycles and unemployment as predominantly monetary phenomena. Bellerby contrasts a “constant price normal system,” which prevents lasting departures from a fixed price level, with a “composite system,” which permits gradual price movements, judging their acceptability through indicators of production, trade, and employment. Hayek objects that this comparison leaves the fundamental question unexamined:

Auch für ihn ist es Dogma, daß der Weg zur Ausschaltung aller monetären Störungen des Wirtschaftslebens nur über eine Stabilisierung des allgemeinen Preisniveaus führen könne, und er verzichtet darauf, die ganze Problematik dieses Begriffes, die Frage der Berechtigung der Durchschnittsziehung aus Preisen bzw. ihre Veränderungen darstellenden Verhältniszahlen, aufzurollen.

English translation: For him too it is a dogma that the path to the elimination of all monetary disturbances of economic life can lead only by way of a stabilization of the general price level, and he forgoes opening up the whole problematic character of this concept, the question of the justification for striking averages of prices, or of the index numbers that represent their changes.

For Hayek, index stability should first be treated as a possible indication of approximation to the desired condition, whose adequacy requires investigation. Bellerby instead identifies it with that condition, reducing the choice between systems to practical expediency. His preference for constant prices therefore follows from an insufficiently defended premise rather than from a convincing demonstration. Nevertheless, Hayek finds substantial value in his comparisons concerning consumption, social justice, social peace, and international relations.

Verrijn Stuart receives greater theoretical credit because he explicitly attempts the proof Bellerby largely assumes. He correctly defines the objective as preventing money from disturbing the formation of prices and incomes, and recognizes that strict stability of money’s subjective and objective value is impossible when relative prices change. Yet his proposed solution—holding an improved average of all prices, including labor services, constant—does not satisfy Hayek. Verrijn Stuart assumes that monetary price changes necessarily alter the average, whereas relative price changes under a constant relationship between money supply and demand leave it unchanged. Hayek identifies the missing justification succinctly:

Auch ihm erscheint letzterer Sachverhalt so selbstverständlich, daß er ihn ohne weitere Begründung als gegeben annimmt.

English translation: To him, too, the latter state of affairs appears so self-evident that he assumes it as given without further justification.

The objection concerns the inference from an aggregate measure to the absence of monetary disturbance. It does not diminish Hayek’s regard for Verrijn Stuart’s formulation of the problem or his command of monetary theory:

Wenn ich aber in diesem Kernpunkt, der Frage nach dem Wesen der Wertstabilität des Geldes, dem Verfasser nur in der Problemstellung aber keineswegs in seiner Beantwortung zustimmen möchte, so muß hervorgehoben werden, daß der Verfasser bei der Darstellung der grundlegenden Zusammenhänge und Gesetzmäßigkeiten des Geldwesens, die für die Beurteilung der Hauptfrage in Betracht kommen, ein seltenes Maß von Scharfsinn und Urteilskraft beweist.

English translation: But if on this central point, the question of the essence of the stability of the value of money, I can agree with the author only in the formulation of the problem and by no means in his answer to it, it must be emphasized that in his exposition of the fundamental interconnections and regularities of the monetary system which come into consideration for the judgment of the main question, the author displays a rare measure of acumen and power of judgment.

The remaining discussion explains this favorable assessment. Hayek particularly values Verrijn Stuart’s treatment of interest and the value of money, drawing on Wicksell and Mises while incorporating Fisher. He praises the critiques of the quantity theory and Fisher’s stabilization proposal, while finding the attempted tax-based supplement to Mises’s marginal-utility explanation less convincing. Verrijn Stuart’s preferred institution is an inconvertible paper currency regulated through price indices; his defense addresses both advocates of gold and writers who underestimate the interest rate’s role in limiting money creation.

Hayek closes by presenting his discussion of Verrijn Stuart as an invitation to greater attention among German specialists. The review’s significance lies in combining that advocacy with a precise conceptual reservation: monetary policy’s objective must be established independently of the statistical indicator proposed to guide it. Neither book, in Hayek’s judgment, demonstrates that a stable price average guarantees an undisturbed economic process.