Reason: So trade cycles are caused solely by government monetary authorities?
Hayek: Not that directly. As you put it, it would seem that it results from deliberate mistakes made by government policies. The mistake is the creation of a semi-monopoly where the basic money is controlled by govemment. Since all the banks issue secondary money, which is redeemable in the basic money, you have a system which nobody can really control. So it's really the monopoly of government over the issue of money which is ultimately responsible. Nobody in charge of such a monopoly could act reasonably.
Reason: You have written that the period from about 1950 to 1975 will go down in history as the Great Prosperity. If the Keynes thesis is incorrect, why the tremendous economic success? Why, for instance,haven't we experienced a hyperinflation on the order of Germany in 1922?
Hayek: Because the inflation in Germany was not for the purpose of maintaining prosperity but was forced upon them due to financial difficulties. If you inflate for the purpose of maintaining prosperity you can do so at a much more moderate rate.
The prosperity did last longer than I anticipated. I always expected its breakdown, but I thought it would come much sooner. I was thinking in terms of the collapse of the inflationary booms during past trade cycles. But those collapses were due to the gold standard, which put a brake on those expansions after a few years. We never had a time where a policy of deliberate expansion was unlimited by any framework of monetary order. We've come to an end only when it has been seen we cannot accelerate inflation so fast that we can still maintain prosperity.
Reason: The United States has cut inflation from 12 percent to 4.8 percent, Britain from 30 percent to 13 percent—both without Depression-type setbacks. Doesn't this offer hope that economic adjustments can be made without massive unemployment?
Hayek: I don't know why you suggest this. It has been accomplished, very much, through extensive unemployment. I think it is certainly true that ending an inflation need not lead to that long-lasting period of unemployment like the 1930s, because then the monetary policy was not only wrong during the boom but equally wrong during the Depression. First, they prolonged the boom and caused a worse depression, and then they allowed a deflation to go on and prolonged the Depression. After a period of inflation like the past 25 years, we can't get out of it without substantial unemployment.
Reason: How does inflation cause unemployment?
Hayek: By drawing people into jobs which exist only because the relative demand for the particular things is temporarily increased, and these employments must disappear as soon as the increase in the quantity of money ceases.
Reason: Yet, if the United States, for example, went through a period of temporarily high unemployment—say we have double the current rate of unemployment for one to two years—wouldn't all the automatic income-maintenance programs, such as unemployment insurance, welfare, etc., run up such an enormous bill as to bankrupt the federal government, which already runs a deficit of $50 billion or $60 billion in a so-called recovery period?
Hayek: Yes, they probably would. There would be an enormous political struggle on the question of whether social security benefits ought to be adapted to inflation or cut down. I don't think that you can effect a permanent cure without a substantial alteration of the social security system.
Reason: Will the horror of financing this colossal welfare bureaucracy prove the stimulus to "shock" us into a more rational government framework?
Hayek: No. My only hope really is that some minor country or countries which for different reasons will have to construct a new constitution will do so along sensible lines and will be so successful that the others find it in their interest to imitate it. I do not think that countries that are rather proud of their constitutions will ever really need to experiment with changes in it. The reform may come from, say, Spain, which has to choose a new constitution. It might be prepared to adopt a sensible one. I don't think its really likely in Spain, but it's an example. And they may prove so successful that after all it is seen that there are better ways of organizing government than we have.
Reason: To avoid inflation, your prescription has been to advocate that monetary policy be pursued with the goal of maintaining stability in the value of money. Is it necessary to trust the politicians to regulate the money supply? Can't market forces adjust to correct for a gradual deflation?
Hayek: Yes, they do occasionally. The trouble is, in the mechanical system what forces politicians is the gold standard. The gold standard, even if it were nominally adopted now, would never work because people are not willing to play by the rules of the game. The rules of the game that the gold standard requires [say] that if you have an unfavorable balance of trade, you contract your currency. That's what no government can do—they'd rather go off the gold standard. In fact, I'm convinced that if we restored the gold standard now, within six months the first country would be off it and, within three years, it would completely disappear.
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