Hayek on the Creation of Moral Hazard by Central Banks

Some years ago I published a paper on the banking theory and policy views of the important twentieth-century economist Friedrich A. Hayek, entitled “Why Didn ’t Hayek Favor Laissez Faire in Banking?”[1] Very recently, working on a new paper on Hayek ’s changing views of the gold standard, I discovered an important but previously overlooked passage on banking policy in a 1925 article by Hayek entitled “Monetary Policy in the United States After the Recovery from the Crisis of 1920.” I missed the passage earlier because the full text of Hay ek’s article became available in English translation only in 1999, the same year my article appeared, in volume 5 of hisCollected Works. Only an excerpt had appeared in translation inMoney, Capital, and Fluctuations, the 1984 volume of Hayek ’s early essays.[2]Hayek wrote the article in December 1924,very early in his career. In May 1924 he had returned from a post-doctoral stay in New York City and had begun participating in the Vienna seminar run by Ludwig von Mises. It is safe to say that the passage I am about to quote reflects Mises ’ influence, since the article cites him, and in many ways takes positions opposite to those Hayek had taken in an earlier article that he wrote while still in New York.The main topic of the 1925 article is the Federal Reserve ’s policies in the peculiar postwar situation in which, as Hayek put it, the US “emerged from the war … as the only country of importance to have retained the g...

Source: Cato-at-liberty - December 7, 2017 Category: American Health Authors: Lawrence H. White Source Type: blogs