Greetings and salutations, my fellow plebs. My name is Walker and this is The Bitcoin Podcast.
It's Monday, August 7th, 2023. At the time of recording, the Bitcoin block height is 802-111.
And the value of one Bitcoin is still one Bitcoin.
Today's episode is Bitcoin Out Loud, where I read you a Bitcoin or Bitcoin adjacent piece.
Today's read is Choice in Currency, A Way to Stop Inflation by F.A. Hayek.
Friedrich August von Hayek was an influential economist and political philosopher known for his defense of classical liberalism and free market capitalism.
Born in Vienna, Austria in 1899, he was a central figure in the Austrian School of Economic Thought.
In the context of monetary theory, Hayek was highly critical of central banks, viewing them as the primary cause of boom and bust cycles due to their manipulation of interest rates and money supply.
His works such as Prices and Production, 1931, and Monetary Theory in the Trade Cycle, 1929, present his business cycle theory and his critiques of central banking.
However, it's perhaps his later work, A Choice in Currency, A Way to Stop Inflation, 1976, that most radically encapsulates his monetary philosophy.
Here, Hayek argues the need for the denationalization of currency and proposes that competition and currency issuance could prevent inflation and provide monetary stability.
His work on complex systems, including economic structures and monetary systems, earned him the Nobel Prize in Economic Sciences in 1974, shared with Gunnar Murdoch.
In a 1984 interview, Hayek stated that, while Friedrich Hayek passed away in 1992, long before the discovery of Bitcoin in 2009,
we can fairly safely infer his potential thoughts on Bitcoin based on his writings and his views on money and economic systems.
As you'll hear in today's read, Hayek was a strong proponent of competition and currency and advocated for the denationalization of money.
He believed that governments and central banks often mismanaged monetary policy, leading to inflation and financial instability.
In his view, allowing private entities to issue their own currencies would create a competitive market where only the most reliable and stable forms of money would thrive.
Bitcoin aligns with many of Hayek's theories.
It's a decentralized money not issued or controlled by any government or central bank.
Its supply is regulated by open source code rather than human decisions.
And it is open to competition with other cryptocurrencies and traditional forms of money.
I wish Hayek could have lived to see Bitcoin as his words continue to inspire countless Bitcoiners around the world who have found the Austrian School of Economics.
So today, as I read you some of Hayek's words, think about how prescient he was in his identification of the problems with fiat money and his proposed solution.
With that said, let's get into today's read.
Choice in currency, a way to stop inflation by F.A. Hayek.
1. Money, Keens and History
The chief root of our present monetary troubles is, of course, the sanction of scientific authority which Lord Keens and his disciples have given to the age-old superstition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment.
It is a superstition against which economists before Keens had struggled with some success for at least two centuries.
It had governed most of earlier history. That history indeed has been largely a history of inflation.
Significantly, it was only during the rise of the prosperous modern industrial systems and during the rule of the gold standard that over a period of about 200 years, in Britain from about 1714 to 1914, and in the United States from about 1749 to 1939,
prices were at the end about where they had been at the beginning.
During this unique period of monetary stability, the gold standard had imposed upon monetary authorities a discipline which prevented them from abusing their powers, as they have done at nearly all other times.
Experience in other parts of the world does not seem to have been very different. I have been told that a Chinese law attempted to prohibit paper money for all times, of course, ineffectively, long before Europeans ever invented it.
Keensian Rehabilitation
It was John Maynard Keens, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized.
He had attempted by a succession of new theories to justify the same superficially persuasive, intuitive belief that had been held by many practical men before, but that will not withstand rigorous analysis of the price mechanism.
Just as there cannot be a uniform price for all kinds of labor, an equality of demand in supply for labor in general cannot be secured by managing aggregate demand.
The volume of employment depends on the correspondence of demand and supply in each sector of the economy, and therefore on the wage structure and the distribution of demand between the sectors.
The consequence is that over a longer period, the Keensian remedy does not cure unemployment, but makes it worse.
The claim of an eminent public figure and brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment, conquered public opinion, and, after his death, professional opinion too.
Sir John Hicks has even proposed that we call the third quarter of this century, 1950 to 1975, the Age of Keens, as the second quarter was the Age of Hitler.
I do not feel that the harm Keens did is really so much as to justify that description.
But it is true that, so long as his prescriptions seem to work, they operated as an orthodoxy which it appeared useless to oppose.
Personal Confession
I have often blamed myself for having given up the struggle after I had spent much time and energy criticizing the first versions of Keens' theoretical framework.
Only after the second part of my critique had appeared did he tell me that he had changed his mind and no longer believed what he had said in the Treaties on Money of 1930,
somewhat unjustly towards himself, as it seems to me, since I still believe that Volume 2 of the Treaties contained some of the best work he ever did.
At any rate, I felt it then to be useless to return to the charge, because he seemed so likely to change his views again.
When it proved that this new version, the general theory of 1936, conquered most of the professional opinion,
and when in the end even some of the colleagues I most respected supported the wholly Keensian-Bretton Woods Agreement, I largely withdrew from the debate.
Since to proclaim my dissent from the near unanimous views of the orthodox phalanx would merely have deprived me of a hearing on other matters about which I was more concerned at the time.
I believe, however, so far as some of the best British economists were concerned, their support of Bretton Woods was determined more by a misguided patriotism,
the hope that it would benefit Britain in her post-war difficulties, than by a belief that it would provide a satisfactory international monetary order.
2. The Manufacture of Unemployment
I wrote 36 years ago on the crucial point of difference. It may perhaps be pointed out that it has, of course,
never been denied that employment can be rapidly increased and a position of full employment achieved in the shortest possible time by means of monetary expansion,
least of all by those economists whose outlook has been influenced by the experience of a major inflation.
All that has been contended is that the kind of full employment which can be created in this way is inherently unstable and that to create employment by these means is to perpetuate fluctuations.
There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it only be for a short period.
Perhaps the situation in which Dr. Bruning found himself in Germany in 1932 was such a situation in which desperate means would have been justified.
But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy
is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space.
To this I would like to add in reply to the constant deliberate misrepresentation of my views by politicians who like to picture me as a sort of bogey whose influence makes conservative parties dangerous.
What I regularly emphasize and stated nine months ago in my Nobel Memorial Prize lecture at Stockholm in the following words,
the truth is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from reappearing.
Not because as my view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation,
but because it is now bound to appear as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.
Unemployment via full employment policies
This manufacture of unemployment by what are called full employment policies is a complex process.
In essence it operates by temporary changes in the distribution of demand, drawing both unemployed and already employed workers into jobs which will disappear at the end of inflation.
In this periodically recurrent crisis of the pre-1914 years, the expansion of credit during the preceding boom served largely to finance industrial investment,
and the over-development and subsequent unemployment occurred mainly in the industries producing capital equipment.
In the engineered inflation of the last decades, things were more complex.
What will happen during a major inflation is illustrated by an observation from the early 1920s which many of my V&E's contemporaries will confirm.
In the city, many of the famous coffee houses were driven from the best corner sites by new bank offices and returned after the stabilization crisis.
When the banks had contracted or collapsed and thousands of bank clerks swelled the ranks of the unemployed.
The Lost Generation
The whole theory underlying the full employment policies has by now of course been thoroughly discredited by the experience of the last few years.
In consequence, the economists are also beginning to discover its fatal intellectual defects which they ought to have seen all along.
Yet I fear the theory will still give us a lot of trouble.
It has left us with a lost generation of economists who have learned nothing else.
One of our chief problems will be to protect our money against those economists who will continue to offer their quack remedies,
the short-term effectiveness of which will continue to ensure them popularity.
It will survive among blind doctrinearies who have always been convinced that they have the key to salvation.
The 1863 Penny
In consequence, though the rapid descent of Keynesian doctrine from intellectual respectability can be denied no longer,
it still gravely threatens the chances of a sensible monetary policy.
Nor have people yet fully realized how much irreparable damage it has already done, particularly in Britain, the country of its origin.
The sense of financial respectability which once guided British monetary policy has rapidly disappeared.
From a model to be imitated, Britain has in a few years descended to be a warning example for the rest of the world.
This decay was recently brought home to me by a curious instant.
I found in a drawer of my desk a British penny dated 1863, which is short 12 years ago, that is, when it was exactly 100 years old.
I had received as a change from a London bus conductor and had taken back to Germany to show to my students what long-run monetary stability meant.
I believe they were duly impressed, but they would laugh in my face if I now mentioned Britain as an instance of monetary stability.
The Weakness of Political Control of Money
3. The Weakness of Political Control of Money
A wise man should perhaps have foreseen that less than 30 years after the nationalization of the Bank of England, the purchasing power of the pound sterling would have been reduced to less than one quarter of what it had been at that date.
As has sooner or later happened everywhere, government control of the quality of money has once again proved fatal.
I do not want to question that a very intelligent and wholly independent national or international monetary authority might do better than an international gold standard or any other sort of automatic system.
But I see not the slightest hope that any government or any institution subject to political pressure will ever be able to act in such a manner.
4. Group Interests Harmful
I never had much illusion in this respect, but I must confess that in the course of a long life, my opinion of governments has steadily worsened.
The more intelligently they try to act, as distinguished from simply following an established rule, the more harm they seem to do.
Because once they are known to aim at particular goals rather than merely maintaining a self-correcting spontaneous order, the less they can avoid serving sectional interests.
And the demands of all organized group interests are almost invariably harmful, except only when they protest against restrictions imposed upon them for the benefit of other group interests.
I am by no means reassured by the fact that, at least in some countries, the civil servants who run affairs are mostly intelligent, well-meaning, and honest men.
The point is that, if governments are to remain in office in the prevailing political order, they have no choice but to use their powers for the benefit of particular groups.
And one strong interest is always to get additional money for extra expenditure.
However harmful inflation is in general seen to be, there are always substantial groups of people, including some for whose support collectivist-inclined governments primarily look, which in the short run greatly gain by it.
Even if only by staving off for some time the loss of income, which it is human nature to believe, will only be temporary if they can tide over the emergency.
Rebuilding the resistances to inflation.
The pressure for more and cheaper money is an ever-present political force, which monetary authorities have never been able to resist, unless they were in a position to credibly point to an absolute obstacle which made it impossible for them to meet such demands.
And it will become even more irresistible when these interests can appeal to an increasingly unrecognizable image of St. Maynard.
There will be no more urgent need than to erect a new defences against the onslaughts of popular forms of kinsenism, that is, to replace or restore those restraints which, under the influence of his theory, have been systematically dismantled.
It was the main function of the gold standard, of balanced budgets, of the necessity for deficit countries to contract their circulation and of the limitation of the supply of international liquidity, to make it impossible for the monetary authorities to capitulate to the pressure for more money.
And it was exactly for that reason that all these safeguards against inflation, which had made it possible for representative governments to resist the demands of powerful pressure groups for more money, have been removed at the instigation of economists, who imagined that, if governments were released from the shackles of mechanical rules, they would be able to act wisely for the general benefit.
I do not believe we can now remedy this position by constructing some new international monetary order, whether a new international monetary authority or institution, or even an international agreement to adopt a particular mechanism or system of policy, such as the classic gold standard.
I am fairly convinced that any attempt now to reinstate the gold standard by international agreement would break down within a short time and merely discredit the ideal of an international gold standard for even longer.
Without the conviction of the public at large that the certain immediately painful pressures are occasionally necessary to preserve reasonable stability, we cannot hope that any authority which has power to determine the quantity of money will long resist the pressure for or the seduction of cheap money.
Protecting Money from Politics
The politician, acting on a modified Keynesian maxim that in the long run we are all out of office, does not care if his successful cure of unemployment is bound to produce more unemployment in the future.
The politicians who will be blamed for it will not be those who created the inflation, but those who stopped it.
No worse trap could have been set for a democratic system in which the government is forced to act on the beliefs that the people think to be true.
Our only hope for a stable money is indeed now to find a way to protect our money from politics.
With the exception only of the 200 year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.
There is less ground than ever for hoping that so long as the people have no choice but to use the money their government provides, governments will become more trustworthy.
Under the prevailing systems of government, which are supposed to be guided by the opinion of the majority, but under which in practice any sizeable group may create a political necessity for the government by threatening to withhold the votes it needs to claim majority support.
We cannot entrust dangerous instruments to it.
Fortunately, we need not yet fear, I hope, that governments will start a war to please some indispensable group of supporters.
But money is certainly too dangerous an instrument to leave to the fortuitous expediency of politicians. Or it seems, economists.
A dangerous monopoly
What is so dangerous and ought to be done away with is not governments right to issue money, but the exclusive right to do so and their power to force people to use it and to accept it at a particular price.
This monopoly of government, like the postal monopoly, has its origin not in the benefit it secures for the people, but solely in the desire to enhance the coercive powers of government.
I doubt whether it has ever done any good except to the rulers and their favorites.
All history contradicts the belief that governments have given us a safer money than we would have had without their claiming an exclusive right to issue it.
Choice of money for payment in contracts
But why should we not let people choose freely what money they want to use?
By people, I mean the individuals who ought to have the right to decide whether they want to buy or sell for francs, pounds, dollars, d-marks, or ounces of gold.
I have no objection to governments issuing money, but I believe their claim to a monopoly or their power to limit the kinds of money in which contracts may be concluded within their territory or to determine the rates at which monies can be exchanged to be wholly harmful.
At this moment, it seems that the best thing we could wish governments to do is for, say, all members of the European Economic Community, or better still, all the governments of the Atlantic Community, to bind themselves mutually,
not to place any restrictions on the free use within their territories of one another's or any other currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books.
This, and not a utopian European monetary unit, seems to me now both the practicable and the desirable arrangement to aim at.
To make the scheme effective, it would be important, for reasons I state later, also to provide that banks in one country be free to establish branches in any other.
Government and Legal Tender
This suggestion may at first seem absurd to all brought up on the concept of legal tender. Is it not essential that the law designate one kind of money as the legal money?
This is, however, true only to the extent that, if the government does issue money, it must also say what must be accepted in discharge of debts incurred in that money, and it must also determine in what manner certain non-contractual legal obligations, such as taxes or liabilities for damage or torts, are to be discharged.
But there is no reason whatever why people should not be free to make contracts, including ordinary purchases and sales, in any kind of money they choose, or why they should be obliged to sell against any particular kind of money.
There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they have confidence.
Nor could there be a stronger inducement to government to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that the demand would tend to grow.
Therefore, let us deprive governments, or their monetary authorities, of all power to protect their money against competition.
If they can no longer conceal that their money is becoming bad, they will have to restrict the issue.
The first reaction of many readers may be to ask whether the effect of such a system would not, according to an old rule, be that the bad money would drive out the good.
But this would be a misunderstanding of what is called Gresham's Law.
This indeed is one of the oldest insights into the mechanism of money. So old that 2,400 years ago, Aristophanes, in one of his comedies, could say that it was with politicians, as it is with coins, because the bad ones drive out the good.
But the truth, which apparently even today is not generally understood, is that Gresham's Law operates only if the two kinds of money have to be accepted at the prescribed rate of exchange.
Exactly the opposite will happen when people are free to exchange the different kinds of money at whatever rate they can agree upon.
This was observed many times during the Great Inflations, when even the most severe penalties threatened by governments could not prevent people from using other kinds of money, even commodities like cigarettes or bottles of brandy rather than government money,
which clearly meant that the good money was driving out the bad.
Benefits of Free Currency System
Make it merely legal and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably, and they will make their dealings in a currency they trust.
Employers in particular would find it in their interest to offer in collective agreements, not wages anticipating a foreseen rise of prices, but wages in a currency they trusted and could make the basis of rational calculation.
This would deprive government of the power to counteract excessive wage increases and the unemployment they would cause by depreciating their currency.
It would also prevent employers from conceding such wages in the expectation that the National Monetary Authority would bail them out if they promised more than they could pay.
There is no reason to be concerned about the effects of such an arrangement on ordinary men who know neither how to handle nor how to obtain strange kinds of money.
So long as the shopkeepers knew that they could turn it instantly at the current rate of exchange into whatever money they preferred, they would be only too ready to sell their wares at an appropriate price for any currency.
But the malpractices of government would show themselves much more rapidly if prices rose only in terms of money issued by it, and people would soon learn to hold the government responsible for the value of the money in which they were paid.
Electronic calculators, which in seconds would give the equivalent of any price in any currency at the current exchange rate, would soon be used everywhere.
But, unless the national government all too badly mismanaged the currency it issued, it would probably be continued to be used in everyday retail transactions.
What would be affected mostly would not be so much the use of money in daily payments as the willingness to hold different kinds of money.
It would mainly be the tendency of all business and capital transactions rapidly to switch to a more reliable standard and to base calculations and accounting on it, which would keep national monetary policy on the right path.
5. Long Run Monetary Stability
The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character.
The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product.
I do not believe there is any reason to fear that in such a competition for the most general acceptance of a currency, there would arise a tendency to deflation or an increasing value of money.
People will be quite as reluctant to borrow or incur debts in a currency expected to appreciate as they will hesitant to lend in a currency expected to depreciate.
The convenience of use is decidedly in favor of a currency which can be expected to retain an approximately stable value.
If governments and other issuers of money have to compete in inducing people to hold their money and make long-term contracts in it, they will have to create confidence in its long-run stability.
The Universal Prize
Where I am not sure is whether in such a competition for reliability, any government-issued currency would prevail or whether the predominant preference would not be in favor of some such units as ounces of gold.
It seems not unlikely that gold would ultimately reassert its place as the Universal Prize in all countries, in all cultures, in all ages, as Jacob Bronowski has recently called it in his brilliant book on the Ascent of Man,
if people were given complete freedom to decide what to use as their standard and general medium of exchange, more likely at any rate than as the result of any organized attempt to restore the gold standard.
The reason why, in order to be fully effective, the free international marketing currencies should extend also to the services of banks is, of course,
that bank deposits subject to check represent today much the largest part of the liquid assets of most people.
Even during the last hundred years or so of the gold standard, this circumstance increasingly prevented it from operating as a fully international currency because any inflow or outflow, in or out of a country,
required a proportionate expansion or contraction of the much larger superstructure of the national credit money, the effect of which falls indiscriminately on the whole economy,
instead of merely increasing or decreasing the demand for the particular goods which was required to bring about a new balance between imports and exports.
With a truly international banking system, money could be transferred directly without producing the harmful process of secondary contractions or expansions of the credit structure.
It would probably also impose the most effective discipline on governments if they felt immediately the effects of their policies on the attractiveness of investment in their country.
I have just read in an English wig tract more than 250 years ago, who would establish a bank in an arbitrary country or trust his money constantly there.
The tract, incidentally, tells us that yet another 50 years earlier, a great French banker, Jean Baptiste Tavernier, invested all the riches he had amassed in his long rambles over the world in what the authors described as the barren rocks of Switzerland.
When asked why by Louis XIV, he had the courage to tell him that he was willing to have something which he could call his own.
Switzerland, apparently, laid the foundations of her prosperity earlier than most people realize.
Free dealings in money better than monetary unions.
I prefer the freeing of all dealings in money to any sort of monetary union, also because the latter would demand an international monetary authority, which I believe is neither practicable nor even desirable, and hardly to be more trusted than a national authority.
It seems to me that there is a very sound element in the widespread disinclination to confer sovereign powers, or at least powers to command, on any international authority.
What we need are not international authorities possessing powers of direction, but merely international bodies, or rather international treaties which are effectively enforced, which can prohibit certain actions of governments that will harm other people, effectively to prohibit all restrictions on dealings in and the possession of different kinds of money or claims for money,
would at last make it possible that the absence of tariffs, or other obstacles to the movement of goods and men, will secure a genuine free trade area or common market, and do more than anything else to create confidence in the countries committing themselves to it.
It is now urgently needed to counter that monetary nationalism that I first criticized almost 40 years ago, and which is becoming even more dangerous when, as a consequence of the close kinship between the two views, it is turning into monetary socialism.
I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.
You may feel that my proposal amounts to no less than the abolition of monetary policy, and you would not be quite wrong.
As in other connections, I have come to the conclusion that the best the state can do with respect to money is to provide a framework of legal rules within which the people can develop the monetary institutions that best suit them.
It seems to me that if we could prevent governments from meddling with money, we would do more good than any government has ever done in this regard, and private enterprise would probably have done better than the best they have ever done.
And that's a wrap on this Bitcoin Outlaw episode of The Bitcoin Podcast. You can read the written version of this show with reference links and download a PDF version of A Choice in Currency at BitcoinPodcast.net.
You can find me on Noster by going to primal.net. If you want to follow The Bitcoin Podcast on Twitter, go to at.titcoinpodcast and at.walkeramerica.
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Bitcoin is scarce. There will only ever be 21 million. But Bitcoin podcasts are abundant, so thank you for spending your scarce time to listen to another fucking Bitcoin podcast.
Until next time, stay free.