This post was most recently updated on April 25th, 2020

Friedrich August Hayek was more successful than anyone else in spreading Austrian ideas in the English-speaking world. Among the mainstream economists, he is known mainly for his popular “Road to enslavement” (1944). Today we will focus on further analysis of his book titled “Denationalisation of Money”.

The author’s considerations are about what would happen if the government allowed everyone to use the currency of their choice. Hayek tries to convince readers of the idea that the government would allow entrepreneurs to innovate in the monetary sector. The new changes would be based on creating digital currencies or other assets that could be considered money. Basically, every individual would have the freedom to create and use new goods.

In the field of economics, Hayek opposed the proponents of the planned economy as early as the 1920s. History has shown that although most economists succumbed to the charms of a planned economy, actually Hayek was right. This model of running the state has proven to lead to bankruptcy. The best example of this was the collapse of the Soviet Union.

What is inflation?

Friedrich Hayek in the book “Denationalisation of Money” explains many economic phenomena and indicates their causes. One of the important phenomena affecting the corruption of traditional money is inflation. It is defined as a permanent increase in the average level of prices of goods and services. It can be measured as an annual percentage increase.

As inflation increases, we’ll buy less goods and services for every dollar we have. Iin other words it is called “purchasing power”. This shows us the real value of our money. For example, if the inflation rate is 2% per year, theoretically a product for 100 USD will cost 102 USD after a year. This example shows how the money we keep in our portfolio is losing value every year. This happens every time there is inflation.

As we mentioned earlier, inflation is a general increase in prices. In a market economy, prices of goods and services may vary. Some prices are rising, others are falling. We are talking about inflation when there is a general rise in prices, not just for certain products. The currency you choose is simply worth less than before. It is worth noting that some prices differ more than others. The calculation of average price increases is usually attributed to the prices of products representing a significant proportion of our expenses – for example, electricity. This has more weight in the inflation basket than products on which we spend less – for example, sugar or postage stamps.

Each household has different spending habits. Some own a car and eat meat, others use public transport and are vegetarian. The average spending habits of all households determine the importance of various products and services for measuring inflation.

Hayek and the monetary system

By analyzing the monetary system, Friedrich Hayek opposed the single currency’s dominance. He claimed that it was necessary for different assets to compete with each other. This would increase the transparency of the system while giving each of us a choice.

The economist explains, therefore, that we must get out of the dogma, according to which money and its creation are a privilege belonging only to power. This concept, which seems obvious to us today, has been a kind of standard for centuries. Let us remember that since the Middle Ages currency control belonged to the royal power. The king testified and guaranteed that the coin was equal to the given amount of gold or silver. The ruler spoke and the rest had to take his word for it. The money supply in circulation was strictly controlled by the king. Over the years, throughout many dynasties, this has always resulted in the same, that is, spoiling money.

In the mid-seventies, Hayek’s preoccupation with inflation, which reached 15% in Europe and the United States, gave him the ground for diversion regarding money issues. For the Austrian economist, there are two ways to stop the inflationary spiral. The first was a return to the gold standard, which allows, due to the finite amount of precious metal, to limit the reckless creation of money.

The second idea was the currency competitiveness model. To this end, it is necessary to allow private entities to create and develop their own currency, to cut off the monopoly of countries that use the currency as a printing press in order to artificially revive the economy. We are now witnesses of how this may look. All this happens in the digital world, and it is Bitcoin and its derivatives that lead the way in how competitive (crypto) currencies can be with each other.

Cryptocurrencies – a cure for all evil?

The appearance of cryptocurrencies in the everyday life of each of us would therefore fulfill the dream of Friedrich Hayek. For the thinker, currency competition is a great idea. It is a process of discovering different currencies, based on trial and error. Everything to choose the asset that is right for us at the moment. Thanks to this, the currencies that would best meet the expectations and needs of given users would be maintained. Rigid rules of central banks, which often on the way to average Joe, would cease to matter.

Hayek’s vision can not only make the world a better place but also systematically makes people aware that currencies can be decentralized and private. Thanks to this, governments do not control them. In many developing countries, the central banking system has failed its citizens. As a result, people’s wealth diminished even over days or weeks. Bitcoin and other cryptocurrencies have become a tool there that allows many people to survive the current crises that they face every day. All these innovative currencies, as well as the payment systems associated with them, are a perfect example of the ideas of Hayek, which he presented in his book Denationalisation of Money.

Friedrich Hayek believes that it is the monopoly of power over the issue of money that makes economies fall into crises on a regular basis. People who lose their savings suffer because of this.