All Commentary
Monday, August 1, 1977

Free Choice of Currencies

Henry Hazlitt, noted economist, author, editor, reviewer and columnist, is well known to readers of the New York Times, Newsweek, The Freeman, Bar­ron’s, Human Events and many others. Best known of his books are Economics in One Lesson, The Failure of the “New Economics,” The Foundations of Morali­ty, and What You Should Know About Inflation.

In its issue of November, 1975, The Freeman published an article of mine entitled “The Search for an Ideal Money.” Let me summarize its main conclusions.


1.  “The first requisite of a sound monetary system is that it put the least possible power over the quan­tity or quality of money in the hands of the politicians.”

2.  “It is the outstanding merit of gold as the monetary standard that it makes the supply and purchasing power of the monetary unit inde­pendent of government, of office­holders, of political parties, and of pressure groups. The great merit of gold is precisely that it is scarce .. . It cannot be created by political fiat or caprice. It is precisely the merit of the gold standard, finally, that it puts a limit on credit expansion.”

3.  But there are two major kinds of gold standard. One is the fractional-reserve system, and the other the pure gold or 100 per cent reserve system. The fractional-reserve system “is what we now call the classical gold standard.” It per­mitted excessive credit expansion followed by forced contraction, and so “tended almost systematically to bring about the cycle of boom and slump.” The development of government-controlled central banks—in our own case of the Federal Reserve System—made the overexpansion of credit much worse.

4.  “The fractional-reserve sys­tem ought to be abandoned . . . The U.S. could then return to a sound currency and a sound gold basis.”

5.  But to expect this today, as long as governments are in control, “is to expect a miracle.” The schemes of the currency reformers have failed “because they have practically all begun with the same false assumption—the assumption that the creation and ‘management’ of a monetary system is and ought to be the prerogative of the State . . . . The real solution is just the op­posite. It is to get the government, as far as possible, out of the monetary sphere. And the first step libertarians should insist on is to get our government and the courts not only to permit, but to enforce, voluntary private contracts pro­viding for payment in gold or in terms of gold value . . . . Thus there would grow up, side by side with fiat paper money, a private domestic and international gold standard . . . ready to take over completely on the very day that the government’s paper money became absolutely worthless.”

Hayek’s Proposal        

Since that article appeared, Pro­fessor F.A. Hayek, the Nobel laure­ate, has published two remarkable pamphlets embodying similar pro­posals, but carrying them in some important respects further.

The first of these is Choice in Cur­rency. 1 I find this wholly admirable. Hayek begins by pointing out that the chief root of our recent mone­tary troubles is the scientific authority which the Keynesians seemed to give to the superstition that increasing the quantity of money can ensure prosperity and full employment. He then proceeds to point out the fallacies in this view. Inflation, however, he con­cedes, even before explicit Keyne­sianism, largely dominated mone­tary history until the emergence of the gold standard. The gold stan­dard brought two centuries of stable prices and made possible the development of modern in­dustrialism:

“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’ ,” he points out, “to make it impossible for the monetary authorities to capitulate to the pressure for more money.”

But under present world political conditions he does not believe that we can now remedy the situation 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 classical 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 certain immediately painful measures are occasionally neces­sary to preserve reasonable stabili­ty, we cannot hope that any author­ity which has the power to deter­mine the quantity of money will long resist the pressure for, or the seduction of cheap money.”

What Is the Remedy?

What, then, is the remedy? What is so dangerous and ought to be done away with, Dr. Hayek insists, is not the right of governments to issue money but their exclusive right to do so and their power to force people to use it and to accept it at a particular price. The legal tender laws should be repealed.

A great deal of confusion has ex­isted about this. It is necessary, of course, for the government to decide what kind of money it will ac­cept in payment of taxes, and it is necessary for the courts to be able to decide, in case of dispute, in what kind of money private debts should be paid. No doubt, in the absence of specification, courts would continue to decide that debts can be paid off in the official money of the country, no matter how much it may have depreciated. But if the debtor and creditor have expressly contracted for a payment to be made in gold, or in Swiss francs, or in D-marks, then the courts should hold that contract valid. The common law of enforce­ment of contracts should apply.

The immediate advantages of this should be obvious. A government would no longer be able to protect its money against competition. If it continued to inflate, its citizens would forsake its money for other currencies. Inflation would no longer pay.

There is, in a sense, nothing novel about Hayek’s proposal. Toward the end of the German hyperinfla­tion of 1920 to 1923, people refused to accept the old paper marks on any terms, and began to do busi­ness with each other in gold, dol­lars, Swiss francs, and even in a multitude of private currencies. But in any country in which the legal tender laws did not exist, inflation would never again go to such tragic lengths—if, indeed, it could be con­tinued to any substantial extent at all.

If the present writer were to ven­ture a prediction, it would be that when the gold standard is restored —as I believe it eventually will be—it is far more likely to be restored first, not in countries that have been suffering the least, but in those that have been suffering the worst inflation. It will first happen, not by deliberate governmental policy, but by breakdown and default. No matter what the nom­inal legal penalties, people will cease doing business in the national paper money. (They did so not only in Ger­many in 1923, but in the assignat period in France, and in Soviet Russia in 1922.)


I should like to turn now to the second Hayek pamphlet that I referred to a few pages back. This is called Denationalization of Money.2

It followed eight months after the pamphlet on Choice in Currency, and it continues the argument put forward in the latter. That argu­ment is summarized in ten numbered points printed on the pamph­let’s back cover. I quote the first five:

1.       The government monopoly of money must be abolished to stop the recurring bouts of acute inflation and deflation that have become accentuated during the last 60 years.

2.       Abolition is also the cure for the more deep-seated disease of the recur­ring waves of depression and unemploy­ment attributed to “capitalism.”

3.  The monopoly of money by govern­ment has relieved it of the need to keep expenditure within its revenue and has thus precipitated the spectacular in­crease in government expenditure over the last thirty years.

4.  Abolition of the monopoly of money would make it increasingly im­possible for governments to restrict the international movement of men, money and capital that safeguard the ability of dissidents to escape oppression.

5.  These four defects—inflation, in­stability, undisciplined state expendi­ture, economic nationalization—have a common origin and a common cure: the replacement of the government monopo­ly of money by competition in currency supplied by private issuers who, to preserve public confidence, will limit the quantity of their paper issue and thus maintain its value. This is the “dena­tionalization” of money.

Most libertarians can endorse the first four of these points unre­servedly. About the fifth and those following I personally harbor grave doubts.

“Free” private currencies have been tried. In our early American history they were tried repeatedly in nearly all the existing states. Some of the states issued their own money, usually with disastrous results; and most of the private cur­rencies that they licensed met with little better fate. Panics and finan­cial collapses became a matter of course. To take one state at ran­dom, in Michigan, after 1836:

Fraudulent overissues were frequent and in many cases not even recorded. Before long a million dollars in worthless bank notes were in circula­tion, a bewildering variety of issues each circulating at its own rate of discount with a confusion that required corps of bookkeepers to keep the accounts of a firm straight. Merchants kept couriers by whom they hurried off to the banks the notes they were compelled to take, in order to exchange them—if possible—for something which had more value. Misery and bankruptcy spread over the state . . . The climax came in 1844 when, nearly all the “free banks” being in the hands of receivers, the state supreme court held that the general banking law had been passed in violation of the constitution and hence that even the receiverships had no legal existence!³

Other states made other provi­sions and other reserve require­ments for note issues by private banks, but the history of laxly con­trolled private note issue in all the states is depressingly similar. The interested reader can find a short but excellent account (pp. 180 to 193) in the book by Dr. Groseclose from which I have just quoted.

In the light of this history, I can only regard with astonishment the extraordinary optimism of Dr. Hayek regarding the outcome of unrestricted private note issue. He assures us that private competition in issuing money will lead us to a far sounder money than the classic gold standard was ever able to pro­vide. The private issuers, he seems to assume, will in all cases be scrupulously honest, and will have in mind only their long-run self-interest; and therefore “money is the one thing competition would not make cheap, because its attrac­tiveness rests on its preserving its `dearness.’ ”

“Abstract Units,” Not Convertible to Gold

Hayek does not seem to think that it is either necessary or desirable for the private issuers of currency to keep it convertible into gold. He suggests that their money could consist of “different abstract units” (p.25). How a currency could consist of a merely “abstract” unit, and how a private issuer could get it launched and accepted at a “pre­cisely defined” (p. 39) purchasing power, he does not explain.

If he were in charge of one of the major Swiss joint-stock banks, he tells us, he would issue a unit called, say, a “ducat.” “And I would an­nounce that I proposed from time to time to state the precise commodity equivalent in terms of which I intended to keep the value of the ducat constant, but that I reserved the right, after announcement, to alter the composition of the com­modity standard as experience and the revealed preferences of the public suggested” (p. 39).

It is clear that Hayek has in mind that private issuers could and should adopt a “commodity reserve” or “market basket” stan­dard. (He has advocated such a standard for a long time. For exam­ple, in The Constitution of Liberty, published in 1960, he tells us (p. 335): “A commodity reserve stan­dard which has been worked out in some detail appears to me still the best plan for achieving all the ad­vantages attributed to the gold standard without its defects.” And he refers there to an essay ad­vocating such a currency that he published as early as 1943.)

A Problem of Conversion

But Hayek is bafflingly vague concerning how a private issuer would maintain the value or pur­chasing power of such a currency. He says that “the issuing institu­tion could achieve this result by regulating the quantity of its issue” (p. 43) and by keeping it “scarce” (p. 85). But quantity and scarcity mean nothing in this context except in relation to the liquid assets of the particular issuer and his demon­strated ability and readiness to keep his currency unit convertible on demand into the precise weight of the concrete commodity that his unit is supposed to be worth. He can make it convertible into a gram of gold or an ounce of silver or a pound of tobacco or a bushel of wheat. But there is no feasible way in which he could make it converti­ble into, say, a specified amount of each of the 400 or so commodities and services that enter into the of­ficial Consumers Price Index, not to speak of the 2,700 commodities in the official Wholesale Price Index. And no holder of his currency would in any case want to load himself down with these and give himself the problem of disposing of them.4

Others before Dr. Hayek have had a similar yearning for a com­modity standard, but have been aware of this practical problem. The most prominent is Irving Fisher, who in the 1920′s proposed his “compensated dollar.” This is a dollar that would have been conver­tible into a constantly changing quantity of gold, to keep it fixed in value in relation to an average price of commodities as determined by an official index.

Fisher’s compensated gold dollar would have solved the problem of the utter impracticability of any direct conversion of a currency unit into a trainload or shipload of assorted commodities, but it would have solved it at a prohibitive cost. As Benjamin M. Anderson5 and others pointed out, it would have enabled international speculators to speculate with impunity against the dollar and the American gold reserve, and would have had other self-defeating and confidence-undermining effects.

What is strangest about the fascination that a commodity or “fixed-purchasing-power” standard has exercised over some otherwise brilliant minds is that such a stan­dard is quite unnecessary. As Mur­ray N. Rothbard has put it: “If creditors and debtors want to hedge against future changes in purchas­ing power, they can do so easily on the free market. When they make their contracts, they can agree that repayment will be made in a sum of money adjusted by some agreed-upon index number of changes in the value of money. “6

This whole discussion of a private commodity-reserve currency may seem like a diversion which I could have avoided. I have made it chiefly because Dr. Hayek’s deservedly great authority might otherwise lead some persons to advocate a false remedy and others to reject the whole idea of a private currency as chimerical.

But we can safely return to the recommendations of Hayek’s earlier Choice in Currency pamphlet of 1976 and to my own suggestion of a private gold standard in 1975. Both are entirely valid.

Let us not reject the gold stan­dard because governments once em­braced it. After all, it was the end-product of centuries of experience. It was the survival of the fittest against the early competition of oxen, sheep, hides, wampum, tobac­co, iron, copper, bronze, and finally of silver. It was the outcome of com­petition in the market place, as I am confident it would be again. It was only after its victory in private use that governments took it over, exploited it for their own purposes, diluted it, perverted it, and finally destroyed it.

Private Coinage; Notes Fully Redeemable

Let us see where this leads us: Governments should be deprived of their monopoly of the currency-issuing power. The private citizens of every country should be allowed, by mutual agreement, to do busi­ness with each other in the currency of any other country. In addition, they should be allowed to mint pri­vately gold or silver coins and to do business with each other in such coins. (Each coin should bear the stamp, trademark or emblem of its coiner and specify its exact round weight—one gram, 10 grams, or whatever. It would be preferably referred to by that weight—a gold-gram, say, and not bear any more abstract name like dollar or ducat.) Still further, private institutions should be allowed to issue notes payable in such metals. But these should be only gold or silver certifi­cates, redeemable on demand in the respective quantities of the metals specified. The issuers should be required to hold at all times the full amount in metal of the notes they have issued, as a warehouse owner is required to hold at all times everything against which he has issued an outstanding warehouse receipt, on penalty of being prose­cuted for fraud. And the courts should enforce all contracts made in good faith in such private currencies.

At first glance this proposal would seem to be much more re­stricted and hampering than the Hayek scheme. But it would, in fact—if it could be achieved—lead to an almost revolutionary mone­tary reform. The competition of foreign currencies and of private coins and certificates would bring almost immediate improvement in most national currencies. The governments would have to slow down or halt their inflations to get their own citizens to continue to use their government’s money in prefer­ence to the most attractive foreign currencies, or to private gold or silver certificates.

But something far more impor­tant would happen. As the use of the private currencies expanded, a private gold standard would develop. And because of the restric­tions placed on it, it would be a pure, a 100 per cent, gold standard. The government fractional-reserve gold standard—which was the “classic” gold standard—was final­ly stretched and abused to the point where, in my opinion, it can never be restored by any single nation or even by a “world authority.”

Worthy of Trust

But this, when one comes to think of it, will be ultimately a tremen­dous boon. For though people will probably again never trust a fractional-reserve gold standard, they will trust a full gold standard. And they will trust it the more if it is no longer in the exclusive custody of governments—consisting of vote-seeking politicians and vote-seeking officeholders—but also in private custody. The gold reserves will no longer be held solely in huge national piles—subject often to the overnight whim or ukase of a single man (Franklin D. Roosevelt or Richard Nixon). Gold coins will circulate, and be held by millions, and the gold reserves will be distributed among thousands of private vaults. The private certificate-issuers would not be allowed to treat—as governments have—this gold held in trust as if it had somehow become their own property. (In the U.S., that engine of inflation known as the Federal Reserve System would of course be abolished.)

Permitting private gold coinage and private gold-certificate issues will allow us to bring the world back to a pure gold standard. This has hitherto been considered an utterly hopeless project. As long as we were operating on a fractional-reserve gold standard, any attempt to return to a pure or 100 per cent gold standard would have involved a devastating deflation, a ruinous fall of prices. But now that not only the United States, but every other nation, has abandoned a gold stan­dard completely, the former prob­lem no longer exists. The beginning of the new reform would bring a dual system of prices—prices in gold, and prices in the outstanding government paper money. In the transition period, prices would be stated in both currencies, until the government paper money either became worthless, or the issuing government itself returned to a gold standard and accepted its outstanding paper issues at a fixed conversion rate. (An example of this was the German acceptance of a trillion old paper marks for a new rentenmark—and finally gold mark—after 1923.)

Subsidiary Coinage

Government-issued money did supply a uniform subsidiary coin­age. It is hard (though not impossi­ble) to see how a private currency could solve this problem satisfac­torily. Perhaps governments could be trusted to continue to mint a uniform subsidiary coinage and keep a 100 per cent gold reserve at least against this.

But apart from such compara­tively minor problems, I can see no great difficulties in the way of a private money. The main problem is not economic; it is political. It is how we can get governments volun­tarily to repeal their legal tender laws and to surrender their monopo­ly of money issue. I confess I cannot see how this political problem is go­ing to be solved. But it is the urgent and immediate goal to which every libertarian, and every citizen who can recognize the great jeopardy in which we all stand, should now direct his efforts.


1London: The Institute of Economic Affairs, 1976, 48 pp.

2London: The Institute of Economic Affairs, 1976,108 pp.

³Elgin Groseclose, Money and Man (Universi­ty of Oklahoma Press, fourth edition, 1976) p. 188.

4In the 194³ essay by Hayek that I previously mentioned, “A Commodity Reserve Curren­cy,” included in his Individualism and Economic Order (University of Chicago Press, 1948), he endorses a scheme by Benjamin Graham involving only 24 different commodi­ties. I need not discuss that plan in detail here, and will say only that I regard it as incredibly clumsy, complicated, costly, wasteful, un­settling, and altogether impracticable. It was in any case proposed as a government scheme, and would inevitably have become a political football.

5See his Economics and the Public Welfare (New York: Van Nostrand, 1949) Ch. 51.

6What Has Government Done to Our Money?

  • Henry Hazlitt (1894-1993) was the great economic journalist of the 20th century. He is the author of Economics in One Lesson among 20 other books. See his complete bibliography. He was chief editorial writer for the New York Times, and wrote weekly for Newsweek. He served in an editorial capacity at The Freeman and was a board member of the Foundation for Economic Education.