Hayek on Machlup’s Die Goldkernwährung (1925)

Friedrich August von Hayek’s review, published in Archiv für Sozialwissenschaft und Sozialpolitik 54 (1925), issue 1, pp. 239–243, assesses Fritz Machlup’s historical and theoretical study of gold-core currency systems. Hayek praises its clarification of monetary principles and its independent theoretical insight, while questioning both the analytical distinctiveness of Goldkernwährung and some advantages claimed for it. His discussion follows Machlup’s treatment of definitions, historical experience, and monetary theory before considering the book’s Ricardo appendix.

Machlup defines gold-core currency as a gold currency with gold circulation reduced to a minimum. Hayek accepts the definition but doubts whether it identifies a fundamentally separate monetary mechanism. The category encompasses arrangements whose central problems also arise in other monetary systems employing fiduciary media. Even an ideal type without circulating gold does not remove this difficulty. Hayek instead favors distinctions based on the form of redemption and the assets employed to maintain the currency’s external value.

His assessment of the introductory material is restrained:

Zu den in dem einleitenden ersten Teil behandelten Tatsachen, die im wesentlichen bekannt sein sollten, ist wenig zu bemerken.

English translation: Concerning the facts treated in the introductory first part, which should be essentially familiar, there is little to remark.

The significant disagreements concern policy and empirical expectations. Economizing on gold can facilitate a return to convertibility with limited reserves, but Hayek regards this as virtually the system’s sole monetary-policy advantage. Greater independence of discount policy from gold movements is a doubtful benefit, while widespread gold economization could reduce gold’s own value. He also challenges Machlup’s estimates of likely gold outflows, invoking the Philippines and India as cases in which harvest failures produced substantial monetary drains.

The historical section earns substantially stronger approval:

Sehr gründlich und durch seine Vollständigkeit bemerkenswert ist der zweite, historische Teil der Arbeit.

English translation: Very thorough, and remarkable for its completeness, is the second, historical part of the work.

Hayek regards its omissions as largely excusable consequences of restricted access to relevant works by Keynes, Jevons, and Kemmerer. The survey encompasses major gold-exchange-standard experiments, South American conversion funds, and the Austro-Hungarian Bank’s foreign-exchange policy. Its scope also illustrates why the broader category of gold-core currency should not simply be equated with the gold-exchange standard: conversion funds may belong to the former without constituting the latter.

The theoretical discussion provides the review’s central argument. Hayek endorses Machlup’s rejection of the balance of payments as an ultimate explanation of exchange rates and his criticism of Otto Heyn. Gold reserves do not preserve exchange stability merely by financing an external deficit. Rather, gold exports are supposed to induce a contraction of monetary circulation, restoring the currency’s threatened external value. The adjustment principle is therefore shared with a currency in which gold itself circulates.

Hayek emphasizes the corrective importance of this analysis:

Vom Gesichtspunkt der notwendigen Berichtigung weitverbreiteter Irrtümer ist dies vielleicht der wichtigste Teil der Arbeit.

English translation: From the point of view of the necessary correction of widespread errors, this is perhaps the most important part of the work.

The practical implication is that measures offsetting monetary contraction can frustrate the adjustment that reserve outflows should bring about. Hayek suggests that historical evidence of reserve misuse, particularly in the Philippines, would have strengthened Machlup’s theoretical case by showing the consequences of outflows that fail to reduce circulation.

Hayek finds especially strong evidence of Machlup’s ability in the concluding analysis of foreign-exchange policy, discount policy, and money creation, associating its theoretical quality with his training under Ludwig von Mises. He highlights discount policy’s role in defending the currency principle against the banking principle. Machlup’s characterization of the latter as a national system of money creation also links banking arrangements to the international distribution of an increased supply of goods.

The final assessment separates theoretical achievement from policy enthusiasm. Hayek remains unconvinced that gold-core arrangements substantially lessen the pain of adjustment or warrant looser discount policy. Their immediate importance lies instead in offering a transitional route from inconvertible paper to gold currency during Europe’s precarious monetary reconstruction.

The review closes by welcoming Machlup and Wilhelm Fromowitz’s partial translation of Ricardo’s 1816 Proposals for an Economical and Secure Currency. Hayek treats Ricardo’s ingot plan as the source of nearly all gold-core proposals, drawing particular attention to its discussion of commodity monetary foundations and its anticipatory criticism of index-number methods for stabilizing monetary value.