On Hayek and Digital Currencies

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 advocated by Hayek was related to avoid political interference on monetary policy.

Therefore, the denationalisation of money would be achieved by the complete abolition of the government monopoly over the issue of fiat money.  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 ash 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. In other words, the exchange rates between the competing currencies would float freely. So, in equilibrium, only currencies guaranteeing a stable purchasing power would exist. 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.

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

In the last ten years, mainly aftyer the 2008 global crisis, the increasing digitalization of financial transactions is also 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 (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.

In this digital environment, new technologies – such as advanced analytics, blockchains and big data, in addition to the use of robotics, artificial intelligence, besides 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.



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

7 thoughts on “On Hayek and Digital Currencies

  1. Once again Hayek proves just how naive he was. “Thus, the ultimate objective of the denationalisation of money advocated by Hayek was related to avoid political interference on monetary policy.” As I tell my clients, the only time humans and politics are separated is when the humans are dead. Hayek’s absurd notions like this are one more reason to be concerned that those who preach Hayek’s ideas are really doing it for their own reasons, and believe as I do that Hayek was at best a simpleton who could not deal with the world he encountered. Hayek prefers the free markets he touted don’t involve any humans. On a more practical note, but still displaying Hayek’s naiveté, markets can’t operate without secure money as an exchange medium. If money is just another market, controlled by, to use Keynes’ phrase, “animal spirits,” how is this possible? To control some of this chaos money must be set and controlled by something that is not a market and that at least ostensively has no interest in how market transactions turn out.

  2. Dear Ken ,

    Many thnaks for your comments. Ia gree. It is not a naive proposal. In the context of a free market regime, Hayek 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.

    However, as Minsky said “Finance cannot be let to the free markets!”

    1. Frankly, I believe Hayek’s naiveté is an essential part of how he views and deals with all events and actors he encounters. Not just money and economics. He shows little understanding of the history of the cultural developments that created economies, money, and government. For example, the creation of governments preceded the creation of economies by about 5,000 years, emerging when humans moved from nomadic hunter-gatherer life to permanent settlements in towns and villages. Money was invented as economies grew larger and complex. The currency we see is not money. Money is the arrangement of beliefs and rules which humans create to give stability, durability, and credibility to the currency. In simple terms, money is a cultural artefact. The kind of money, and thereby culture Hayek supports is different from the money provided by a central bank or directly from a government ministry. The first is neither stable nor durable, and thus not credible for many of the transactions buyers and sellers wish to produce. The transactions can’t be completed because buyer or seller, or both don’t know what price to set. Since setting a price is the heart of capitalism; capitalism can’t exist with so called “market” money. Hayek bases his contentions on the belief that competition and profit maximization provide the information necessary for transactions to complete. The history of markets does not support his contention.

  3. Consider Hayek half way there. It’s been many years since I read his work. He did not have ideas of cosmic scale interactions that create the sea upon which economies float. Hayek had no idea that monetary reform might be centered around examining the energy flows that support life. He disguised an economy created by capitalists who forcefully expropriated what they wanted from nature as a free lunch gained through force in a free market that used the planet as a dumping ground and forced nature accept the pollution for their personal gain.

    In a modern era the state will not have control over money as nature will calculate how close an economy tracks with a healing planet. This calculation will be done by thousands upon thousands of young graduates accounting with kilocalories.

  4. Hi Garnett,

    I also think the control on money is one of the economic myths. However, the explanations for the Myth differ.


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