Hayek on Central Banking and Central Planning

Just to follow up my earlier post about the difference between central banking  and central planning, I would just like to post the following quotation from Hayek’s The Road to Serfdom pp.121-22.

There is, finally, the supremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them.  This is, of course, one of the gravest and most pressing problems of our time.  But, though its solution will require much planning (my emphasis) in the good sense, it does not — or at least need not — require that special kind of planning which according to its advocates is to replace the market (my emphasis).  Many economists hope, indeed, that the ultimate remedy may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth-century liberalism (my emphasis).  Others, it is true, believe that real success can be expected only from the skillful timing of public works undertaken on a very large scale.  This might (my emphasis) lead to much more serious restrictions of the competitive sphere, and, in experimenting in this direction, we shall have to carefully watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure.  But his is neither the only nor, in my opinion, the most promising way of meeting the gravest threat to economic security.  In any case, the very necessary effort to secure protection against these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom (my emphasis).

For good measure, here is Hayek in The Constitution of Liberty (pp. 324-25)

The experience of the last fifty years has taught most people the importance of a stable monetary system.  Compared with the preceding century, this period has been one of great monetary disturbances.  Governments have assumed a much more active part in controlling money, and this has been as much a cause as a consequence of instability.  It is only natural, therefore, that some people should feel it would be better if governments were deprived of their control over monetary policy.  Why, it is sometimes asked, should we not rely on the spontaneous forces of the market to supply whatever is needed for a satisfactory medium of exchange as we do in most other respects?

It is important to be clear at the outset that this is not only politically impracticable today but would probably be undesirable if it were possible.  Perhaps, if governments had never interfered, a kind of monetary arrangement might have evolved which would not have required deliberate control; in particular, if men had not come extensively to use credit instruments as money or close substitutes for money, we might have been able to rely on a self-regulating mechanism.   This choice, however, is now closed to us.  We know of no substantially different alternatives to the credit institutions on which the organization of modern business has come largely to rely; and historical developments have created conditions in which the existence of these institut9ions makes necessary some degree of deliberate control of the interacting money and credit systems (my emphasis).  Moreover, other circumstances which we certainly could not hope to change by merely altering our monetary arrangements make it, for the time being, inevitable that this control should be largely exercised by governments.


12 Responses to “Hayek on Central Banking and Central Planning”

  1. 1 rhmurphy August 9, 2011 at 11:30 pm

    And then in Denationalization of Money he recants his earlier position.


  2. 2 David Glasner August 10, 2011 at 9:02 am

    RH, Be careful. Hayek recanted the idea that a government withdrawal from the monetary sphere was not practical. That was the result of a new theoretical insight on his part that he had not conceived of in his earlier work. But his new insight into monetary theory does not at all mean that he recanted his explicit statements that government involvement in the monetary system was not the kind of central planning that he had warned against in the Road to Serfdom or his earlier theoretical writings on central planning or that such involvement was in any way inconsistent with nineteenth century liberalism.

    I myself have written a book on free banking, arguing that under certain conditions, a free banking system under a kind of indirect convertibility, would allow us to do away with any discretionary authority on the part of the Fed or any central bank. So I am by no means an unqualified supporter of the Fed or of central banks in general. But just because someone opposes an institution, it doesn’t give him the right to accuse it of being engaging in an activity that is far more sinister than the function that it is, necessarily or not, performing.

    Hayek, by the way, was one of my inspirations in writing my book, but despite my admiration for him, I think that I showed that he was mistaken in his claims that a competitive process could be relied on to establish a standard or multiple standards in terms of which the value of different privately produced competing monies would be determined. He simply assumed that banks could give their liabilities value without specifying some outside asset in terms of which their money could be evaluated and he also failed to see that there are powerful network effects that would force the convergence of multiple standards on a single standard, and that the convergence would not necessarily result in the choice of an optimal standard.


  3. 3 Dave Brewitz August 10, 2011 at 10:03 am

    I am admittedly rather new to the different monetary ideas that exist. I have been initially siding with a full-reserve perspective on monetary issues but you have made some good arguments and interesting points so, along with reading freebanking.org, I will continue to follow along with your blog in pursuit of other persuasive ideas that are still consistent with liberty and prosperity. BTW, I put your site in my bloglines after I saw a shout out for you from Freebanking.org.

    It also seems like Hawtrey may have been on to something and you have certainly peaked my interest in his work. Especially his framework for how the monetary policies, in relation to the gold reserves, should have been handled following WWI that would have possibly allowed us to keep the gold standard intact (I got that little bit of info based on your response to an Amazon.com review of your book). I would certainly like to read more about that topic as part of my general interest in economic history.


  4. 4 John Hawkins August 10, 2011 at 11:12 am


    I have a very hazy understanding of Hayek’s free banking ideas, but wasn’t his notion that the issuer would promise to keep a certain bundle of goods at a certain price in its own fiduciary media (like keeping a bundle of certain grocery goods below 5 notes worth of value) by controlling the quantity of notes issued, and that this bundle would be in a way the “outside asset”?

    Free banking has always seemed the strangest and most interesting part of libertarian economics to me simply because it’s such a foreign concept. I think Hayek said it quite well in his own humble way:

    “The interesting fact is that what I have called the monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money.”

    I’m hooked on your blog, by the way. Keep up the great work!


  5. 5 Benjamin Cole August 10, 2011 at 11:14 am

    Look, we could have a debate about Afghanistan, where one side says, “We should have never gone in.” Right. But we are there now, and the question is, “What do we do now?” Will there be mass liquidations if we leave? It is a horrible but legitimate question.

    So it is with the US and global economies today. Maybe in a perfect world we would have devised private-sector monetary systems. I doubt it and it is not relevant premise anyway. We didn’t.

    What is happening today in the USA?

    We are getting Japanned.

    Yes, absolutely the United States can inflate. Sheesh, if we ran five percent inflation for five years, the value of the national debt outstanding would be reduced in value by a little more than 25 percent, while our economy expanded.

    Oh shocking, you mean the rates of inflation we had when Reagan was president? Oh, horrors!

    BTW, check out the CPI. From July of 2008 to June of 2011, the CPI-U rose from 219.964 to 225.722, or a 2.62 percent increase in three years.

    And this July is likely deflation, due to oil prices. Please bloggers, this August 20 (?) when July CPI figs come out, compane them to July 2008. I suspect we will be at about 2.5 percent inflation for the entire three-year period (annual about 0.8 percent).

    We are getting Japanned and hard!

    Why all the hysteria about minute rates of inflation in the right-wing? It speaks to a type of dementia. The Chicken Inflation Littles are running the right-wing roost.

    Ironically (and sadly) it was Milton Friedman who advocated aggressive and sustained use of QE in situations like we face today. He flat out told Japan to inflate. As did Bernanke!

    There are times when inflation is good, and now is one of those times.

    All the whimpering and pettifogging about debasing the currency comes from people with an unhealthy attachment to the symbols of money (gold or cash), as opposed to an appreciation of true wealth-building.


  6. 6 David Glasner August 10, 2011 at 11:39 am

    Dave, Thanks. I am glad to hear that you are finding this blog informative and educational. Although Benjamin Cole, who is a great guy to have reading your blog, gets annoyed with me when I stray from the immediate task of boosting the Fed’s inflation target, I think it is useful to provide some commentary about various approaches to monetary theory and policy and try to show where they are right or wrong or misguided or whatever. I am not exactly sure what the right mix is, it mostly depends on my mood and what I happen to be thinking about on a given day.

    John, You are right in your recollection of what Hayek said. I had two criticisms. First, without some sort of convertibility commitment, I did not see how Hayekian free banks could gain acceptance of their currencies in the first place. Second, if they were going to establish convertibility then they wouldn’t choose to create a brand new standard, they would choose an already existing asset (a standard) that people were already transacting in terms of. This takes us back to the discussion we had a couple of weeks ago about fiat money. I think that Hayek’s proposal doesn’t pass the Coase test from his Durability and Monopoly paper.

    Benjamin, I agree with you of course about inflation. I am sorry, but as I explained to Dave, you will just have to put with my straying from the straight and narrow every now and then.


  7. 7 rhmurphy August 12, 2011 at 11:44 am

    Quoting page 98 of Denationalization of Money, Lawrence White writes, “Economists searching through the years for a ‘sound monetary policy’ is impossible in the same way that ‘sound central planning’ is impossible. Hayek argues insightfully to the effect that central banking is a form of central planning: ‘A single monopolistic government agency can neither possess the information which should govern the supply of money nor would it, if it knew what it ought to do in the general interest, usually be in a position to act in that manner.” From “Gold, Dollars, and Private Currencies,” pages 128-129 of White’s Competition and Currency.

    Yes, the phrase “to the effect” softens this a little bit, but the argument gives here is identical to the one he made in the socialist calculation debate.

    Regarding competition in fiat currencies- I would agree that your argument is probably right (though it could only be tested in the market), but free banking people have long exited making that argument. I brought up Denationalization of Money because it shows that Hayek ultimately realized he was wrong in the places you are citing him. And as the quote from White shows, it was for *reasons* identical to Hayek’s problems with central planning. Whether we then call central banking “really” central planning is irrelevant, just as whether calling any nationalization of an industry (i.e. whether money creation or an oil monopoly in Venezuela) is “really” central planning is irrelevant. The information problems are the same.


  8. 8 David Glasner August 16, 2011 at 10:04 pm

    RH Thanks for providing me with the quotation from Larry White. I am sympathetic to the argument that the market should be allowed to determine what the quantity of money should be rather than the government or a central bank.; And I agree that it was an unwarranted assumption to suppose that a central bank could determine what the quantity of money ought to be. That was one of the reasons that I thought that Friedman’s x-percent rule for the money supply was so idiotic. But there is a difference in kind between the errors made by the monopolistic supplier of a single commodity in an economy in which resources are allocated for the most part by market forces and the errors made by a central authority that tries to suppress market forces entirely or to a very large extent and instead seeks to impose an allocation of resources on society that it has predetermined. I don’t understand why you and others can’t the difference between the two cases. At best, one can draw a certain analogy between the incompleteness of the knowledge required even for the monopolist to achieve its goals. But competitive firms are also sometimes forced to make decisions based on incomplete knowledge and as a matter of strict logic, there is no guarantee that the market solution in every case corresponds to the solution that would have resulted if their knowledge were more extensive than it actually was. So I remain puzzled why, apart from propagandistic and rhetorical motives, anyone would claim that the central supplier of a single commodity in an otherwise normally functioning market economy is comparable to the central planner controlling the allocation of all goods and resources in an economy.


  1. 1 Free Banking » Central banking is a form of central planning Trackback on August 12, 2011 at 8:36 pm
  2. 2 Central Banking and Central Planning, Again « Uneasy Money Trackback on September 5, 2011 at 12:25 am
  3. 3 Atlas Sound Money Project » Blog Archive » Is Central Banking Central Planning? Hayek vs. …Hayek? Trackback on October 24, 2011 at 11:32 am
  4. 4 Central banking is a form of central planning - Alt-M Trackback on March 29, 2015 at 2:21 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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