Monetarism and hyper-inflation
LETTERS TO THE EDITOR
From Professor F.A. Hayek, FBA
Sir, - The newfangled word monetarism means, of course, no more than the good old name "quantity theory of money", as it was formulated in modern times by the late Professor Irving Fisher, and reformulated by Professor Milton Friedman. Of this I said nearly 50 years ago in the first lecture I delivered in this country that "from a practical point of view, it would be one of the worst things which could ever befall us if the general public should ever again cease to believe in the elementary propositions of the quantity theory". This was, however, unfortunately brought about by the seductive theories of Lord Keynes. I then said that it was in many respects a crude oversimplification, but the irrefutable chief content is still that inflation is always and everywhere the effect of an excessive supply of money and that it can be cured only by a restriction of its supply. The problem is that in its crude form it provides no adequate measure of what is the supply of money and that not only the supply of all kinds of money but also the demand for them determines its value. This, however, does not alter the fact that its value can be controlled and can be adequately restricted only by limiting the basic cash, supplied under the existing system by the central bank. Since this is a government institution, all inflation is made by government and nobody else can do anything about it. It does, however, make impracticable the Friedmanite plan of fixing by law the rate at which the quantity of money may and should increase. This would probably produce the greatest financial panic of history.
I trust nobody doubts today that Inflation must be stopped. The chief issue is how far this can and ought to be done. On this, I am afraid, my difference from Friedman makes me take an even more radical view than he and most of my friends take. The reason is that the artificial stimulus which inflation gives to business and employment lasts only so long as it accelerates, that is so long as prices turn out to be generally higher than expected. It clearly cannot accelerate indefinitely. But as soon as it ceases to accelerate all the windfalls which kept unprofitable businesses and employments going disappear. Every slowing dawn of inflation must produce temporary conditions of extensive failure unemployment. No inflation has yet been terminated without a "stabilizat.ion crisis". To believe that it can be slowed down gradually over a period of years means accepting a prolonged misery. No government could stand such a course of prolonged depression. If we want to stop inflation we must do it here and now. It can be done. After World War One the United States brought prices down in six months (August, 1920-Febuary 1921) by one third! The suffering was great but another six months later a new book [sic: boom] was under way! There is no question now of bringing prices actually down, but merely of stopping all further rise. If this is not done by a determined Government like the present it will not be done before, after a vain attempt of concealing inflation by price controls, the pound finally, collapses entirely.
Yours faithfully
F. A. HAYEK, Urachstrasse 27, D-7800, Freiburg (Breisgau), Federal Republic of Germany.
February 26.