Friedman Versus Hayek on Private Outside Monies: New Evidence for the Debate

Abstract

Friedrich Hayek is often credited with the resurgence of interest in alternative monetary systems. His own proposal, however, received sharp criticism from Milton Friedman, Stanley Fischer, and others at the outset, and never gained much support among academic economists or the wider population. According to Friedman, Hayek erred in believing that the mere admission of competing private currencies will spontaneously generate a more stable monetary system. In Friedman's view, network effects and switching costs discourage alternative systems in general from emerging and prevent Hayek's system in particular from functioning as desired. I offer new evidence provided by events in Somalia since the 1990s as support for Friedman's initial doubts.

Keywords: competitive monies, Friedman, government and the monetary system, Hayek, monetary regimes, monetary standards, network effects

JEL Classification: B20, B22, B25, B30, B31, B53, E02, E42, G28