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On Hayek, Digital Currencies and Private Money

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By Maria Alejandra Madi

In the book Denationalisation of Money – the Argument Refined (1976), Hayek proposed the abolition of the government’s monopoly over the issue of fiat money in order to prevent price instability. In fact, his defense of a complete privatization of money supply stemmed from his disappointment with central banks’ management, which, in his opinion, had been highly influenced by politics. Thus, the ultimate objective of the denationalisation of money was related to avoiding political interference in monetary policy. Indeed, according to Hayek, a stable price level is, in principle, of central importance in ensuring that the three microeconomic functions which money provides are allowed to operate with maximum efficiency.

In fact, his defense of a complete privatization of money supply revealed his disappointment with political influence on central banks’ management. In this respect, the Austrian economist clearly expressed his discontent with the history of the government management of money – mainly because of the orientation of Keynesian ministers of finance. In particular, he noted that the popularity of ‘Keynesian’ economics was due to the fact that:

“… Ministers of finance were told by economists that running a deficit was a meritorious act, and even that, so long as there were unemployed resources, extra government expenditure cost the people nothing, any effective bar to a rapid increase in government expenditure was destroyed.” (Hayek, 1976: 118)

Hayek’s proposal

The denationalisation of money would be achieved by the complete abolition of the government monopoly over the issue of fiat money.  And he highlighted that, on behalf of the government monopoly of money, central banks accommodate the financial ‘needs’ of government by keeping interest rates low and, as a result central banks give their policies an inflationist bias. However, in his view, the use of money supply to achieve particular ends turns out to destroy the price mechanism equilibrium and, therefore, provokes major business fluctuations (Hayek, 1976: 119). Indeed, his underlying critique of Keynesian economics relied on what he understood to be arbitrary interventions in the economic order.

In the framework of a free market monetary regime, only those currencies that have a stable purchasing power would survive.  The basic idea is that the possibility of banks issuing different currencies would open the way to market competition. Banks could issue non-interest-bearing certificates and deposit accounts on the basis of their own distinct registered trade mark and the currencies of different banks would be traded at variable exchange rates. This proposal would leave the way open for a comprehensive privatisation of the supply of money.

Hayek underlined that the main advantage of the free market competitive order is that prices will convey to the acting individuals the relevant information to make decisions to adjust their activities in face of the competition of currencies. He highlighted the uses of money that would chiefly affect the choice among available kinds of currencies: i) as cash purchases of commodities and services, ii)  as reserves for future needs; iii) as deferred payments, and iv) as unit of account.   In his opinion, these uses are consequences of the basic function of money as a medium of exchange and the stability of the value of a currency as unit of account is the most desirable of all uses (Hayek, 1976: 67).

Competition and profit maximisation would lead to market equilibrium where only those banks that pay a competitive return on liabilities to their clients could survive. Since currency corresponds to non-interest-bearing certificates, the crucial requirement is the maintenance of the value of the currency.  Under Hayek’s theoretical framework, the market forces would determine the relative values of the different competing currencies. As a result, the exchange rates between the competing currencies would float freely. So, in the long-run equilibrium, only currencies guaranteeing a stable purchasing power would exist. According to Hayek, in the long run, a successful choice among alternative currencies to be used in production and trade might depend on the stability of the value of those currencies in terms of a standard of wholesale prices of commodities to be treated as the standard of the value of currencies (Hayek, 1976:76).

Indeed, people would not want to hold on to the currency of an issuer that was expected to depreciate relative to one that was expected to hold its value in terms of purchasing power over goods and services. The marginal costs of producing and issuing a currency (notes and coin) are rather low (close to zero) and the nominal rate of interest would be driven (close) to zero. Banks that failed to build up stability for the value of their currencies would lose customers and be driven out of financial business.

The Austrian economist Friedrich Hayek’s monetary theory contribution stimulates further discussion about the recent innovations in the financial products and services. In the context of a free market regime, he proposed two distinct although complementary reforms in the economic and the political order: the proposal about the private monetary system might be possible only under a limited government and the limitation of the government might require the end of its monopoly of issuing money.

Current concerns

After reading this proposal, the question that arises is: are current digital currencies bringing to reality Hayek’s ideas?

Throughout the last ten years, mainly after the 2008 global crisis, the increasing digitalization of financial transactions has also been related to changes in the banks’ competitive environment, where the intense growth of the startups called fintechs, especially since 2010, has revealed a new articulation between finance and technology.

As a result of the advance of new non-bank competitors (these fintechs), big banks have begun to establish collaborative partnerships with selected fintechs in order to produce new technological solutions in the areas of payment systems, insurance, financial consultancy and management, besides digital currencies.

Indeed, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the recent rapid growth of the fintech startups has revealed a new articulation between finance and technology. These fintechs are companies organized as digital platforms with business models focused on customer relationships in the areas of payment systems, insurance, financial consultancy and management, besides virtual coins. The advantages of their business models are low operating expenses, greater operational agility and the ability to generate data for the design of customized financial products and services.

In this digital environment, new technologies – such as advanced analytics, block chains and big data, in addition to the use of robotics, artificial intelligence, as well as new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services that could challenge current central banks’ patterns of policy and regulation.

Taking into account the global changes in the provision of financial products and services, Central Banks have closely followed the recent expansion of fintechs. Indeed, the transformations provoked by these startups in the financial markets have raised a relevant discussion about the impacts of recent technological innovations on the financial regulation agenda – mainly focused on the Basel Accords.

The intense advance of fintechs is raising new questions for regulators: How to deal with loan activities that are being performed by means of electronic platforms? How to regulate the fintechs’ activities related of consultancy and financial management that are characterized by the collection, treatment and custody of information from users? Which is the scope of the Central Bank and of other financial regulators when considering the surveillance over the fintechs?

Moreover, there are legal concerns related to information security practices, legal validity of electronic documents, digital signatures and data storage in the cloud. Besides, the increasing growth of the privatisation of money is also at stake.


HAYEK, F. A. von (1990 [1976]) Denationalisation of Money: The Argument Refined, 3rd. edition, London: Institute of Economic Affairs.

Madi, M.A.C (2017a) On Hayek and digital currencies,

Madi, M.A.C (2017b) Digital Banks and fintechs,

From: pp.11-12 of WEA Commentaries 7(4), August 2017

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