I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments.
I bet you know Salma Hayek, one of the world’s most beautiful women in the world of her time. This is not an article about her, but about Friedrich Hayek, her grandfather (nah, bad joke, he was completely unrelated to Salma). We know that you might be slightly disappointed, as her artistic talent and appearance (Friedrich had a funny mustache and a large nose) are definitely more impressive. However, she loses when it comes to philosophical depth (try to guess who said that “I keep waiting to meet a man who has more balls than I do” versus “The mind cannot foresee its own advance”).
Ladies and gentleman, I present Friedrich August von Hayek, the author of 25 books and 130 articles, the Noble Laureate in Economics and the most prodigious classical liberal scholar of the 20th century. Hard to believe? So listen to Milton Friedman:
Over the years, I have again and again asked fellow believers in a free society how they managed to escape the contagion of their collectivist intellectual environment. No name has been mentioned more often as the source of enlightenment than Friedrich Hayek's.
Friedrich A. Hayek, often called F.A. Hayek, was born in 1899 in Vienna, Austria and died in 1992 in Freiburg, Germany. As one can see, his life spanned the twentieth century, being one of the greatest economists and philosophers of that time. He received his Ph.D. in law and political science from the University of Vienna in 1921 and 1923 respectively. In the late 1920s, Hayek founded and served as director of the Austrian Institute for Business Cycle Research. Working there, he predicted in early 1929 the Great Depression. In 1931, he joined London School of Economics, where he quickly was recognized as one of the leading economic theorists in the world. After the WWII, Hayek left the LSE, to become a visiting professor at the University of Arkansas and to become a professor in the Committee on Social Thought of the University of Chicago (later, he was also professor at the University of Freiburg and at the University of Salzburg). In 1974, Hayek was awarded the Nobel Prize for Economics “pioneering work in the theory of money and economic fluctuations and... penetrating analysis of the interdependence of economic, social and institutional phenomena.” Indeed, it was Hayek who developed the mature Austrian School’s theory of business cycle, which has gained much popularity after the Great Recession.
Hayek and Gold
What was Hayek’s impact on gold? Well, until Friedman’s monetarist counter-revolution, Hayek was a leading defender of the classical liberalism and the free-market economy. It was Hayek who formed the Mont Pèlerin Society, an international forum for libertarian economists. Although they were privately friends, Hayek was a lonesome critic of the Keynesian macroeconomics and Keynes’s view on fiscal policy and interventionism (see this movie, if you want to watch the funny but epic rap battle between Hayek and Keynes).
The Hayek’s famous book The Road to Serfdom was a great critique and warning of central planning and of totalitarianism. This book and subsequent works, such as Constitution of Liberty, were great inspiration of neoliberalism, i.e., Thatcherism in the UK and Reagonomics in America. The writings of Hayek (as well as of Friedman) were also a major influence on many of the leaders of the economic transformation during the collapse of the Soviet Union.
Hence, Hayek had significant indirect impact on the gold prices. Both Thatcher and Reagan fought with high inflation in the 1980s. The integration of the Central and Eastern Europe into global capitalist economy helped to curb global inflation in the 1990s. Therefore, the Hayek’s effect on the price of gold was, as in case of Friedman, rather negative, as one can see in the chart below.
Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $, monthly averages) and inflation annual rates (red line, right axis, in %) during the 1980s and the 1990s.
And what was Hayek’s stance on gold? His views on the bullion and the gold standard evolved over time. However, Hayek was generally skeptical about the national fiat currencies and easy monetary policy, as he was aware of the governments’ inherent inclination towards inflation. He wrote:
With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.
Therefore, Hayek initially supported the gold standard. Later, he changed his mind and opted for a broader basket of commodities as a reserve currency. He also supported the denationalization of money, i.e., the abolishment of legal tender laws and the private production of money. However, Hayek’s shift didn’t result from the theoretical rejection of the idea of the gold standard, but from the practical considerations. What we mean is that Hayek believed that gold standard failed not due to the gold, but due to the bad management. In short, the governments and the central banks did not want to follow the rules imposed by the gold standard:
I am not even convinced that a good deal of the harm which is just now generally ascribed to the gold standard will not by a future and better informed generation of economists be recognized as a result of the different attempts of recent years to make the mechanism of the gold standard inoperative.
Hence, although Hayek analyzed other monetary systems, he believed that they would promote the same sort of stability and predictability that the gold standard provided, but would be easier to implement and persists from the political point of view. In an interview, he gave at the end of his long life, Hayek said: “so although I must sympathize with the gold standard people, I don’t believe that is a possible way.”