The Evolution of Hayek's Thought on Gold and Monetary Standards

Abstract

Hayek’s evolving thought on gold and the gold standard is complex and, at times, confusing. Hayek initially supported the gold standard and paid special attention to those nations whose central banking policies he viewed as relatively loose. Early on he viewed attempts at stabilization of exchange rates and price levels to be at odds with the fundamental mechanisms of the gold standard. Instead, he preferred a static measure of the broader money stock (White 1999). This put him at odds with economists such as Irving Fisher, Gustav Cassel, and Ralph Hawtrey who promoted stabilization policy as a second best option. This was due to the unwillingness of many nations to establish exchange rates that reflected the impact of money printing during World War I. Hayek viewed these nations as the culprits the gold standard’s degradation whereas nations whose monetary authorities sterilized incoming gold flows tended to receive praise from Hayek. In 1935 Hayek’s opinion began to change, reflecting sentiment that sounds much like the arguments of Cassel and Hawtrey. Hayek quickly abandoned the dream of reestablishing the gold standard. His later work on money provides theoretical underpinnings for systems that would promote the same sort of stability and predictability that the gold standard provided.

Keywords: Hayek, Hawtrey, Cassel, Gold Standard, Monetary Theory,, Great Depression, Central Banking

JEL Classification: B22, B25, B31, B53, E14