Hayek vs. Rothbard on Free-Market Money
Money & Macro5

Hayek vs. Rothbard on Free-Market Money

Among Austrian economists, there is a fundamental philosophical split between the “evolutionists” following Hayek, and the “moralists” following Rothbard. The former see the world in terms of dynamic, spontaneously ordering evolution of norms, where the latter see the world in terms of fixed and universally applicable ethical norms. This is perhaps a simplification, but the fact remains that for Hayekians, Rothbardian morality appears in principle as constructed as any socialist’s,1 if less destructive in practice. Hayekians, similarly, seem to the Rothbardians to be compromisers, failing to defend liberty as such and stopping short of a strictly Libertarian vision for society.2

This rift can be clearly seen in the debate on the best way to achieve sound money. While both agree that our current central-banking system is far from ideal and certainly the cause of the distortions in price structures and thus recurrent business cycles,3 4 each takes a very different approach – both methodologically and consequentially – to the question of the ideal monetary system.

Hayek, keeping with the major themes in his work, is less interested in the question of “what is good money” than “how do we find out what is good money”. The position he arrived at later in life was that “if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise”.5 By “decent money” both mean, more or less, a standard of exchange which retains its value well across time – i.e., a noninflationary standard.

So far there is no disagreement except perhaps on emphasis. Rothbard agrees that “a free market economy and a devotion to the right of private property requires that everyone be permitted to issue whatever proposed currency names and tickets they wish.”6 Rothbard, however, despite a token nod to the selecting power of the market,7 categorically rules out token money.8

Rothbard does not rule out the use of paper in exchange. But for him paper can only ever be a “money substitute” – a legally enforceable claim on a deposit of actual specie – a “warehouse receipt” (Rothbard 1963b, ch. 12). Under such a restricted concept of money, he then characterizes fractional reserve banking as “fraud”.9 10

It should be obvious that the “warehouse receipt” model is not the only possible kind of monetary arrangement, nor even necessarily the only beneficent one. In principle, fractional reserve banking is no different than a parking lot which rents out more tickets than it has spaces, on the assumption that not everyone will park there at once.11 It is therefore difficult to imagine as “inherently fraudulent” an arrangement of which the depositor knows the full details well in advance of depositing. It would certainly be fraudulent if the bank tried to pass off its paper as a warehouse receipt, but no bank does this, because this is simply not what the dollar is.

Hayek furthermore points out many problems with a strict metallic standard which Rothbard seems to merely wish away.12 Gold inflow through mining, for example, disarranges prices in the same way that a government printer might.13 Furthermore the use of a hard commodity as specie tends to divert more resources towards its production than might be socially desirable, an issue which I have not seen Rothbard address. Presumably it is irrelevant to his consideration.

This is, of course, not to argue that token money is inherently superior to gold; only that gold is not a total remedy for the pathologies of monetary monopoly. Hayek as we have already seen readily admits that our current system of centrally-issued paper money is “one of the most unstable arrangements imaginable”. But to suggest that gold is therefore ideal is a false dichotomy. It is a second-best – a safeguard where we cannot (or have not thought to) divest the government of its monopoly over money issue.14

Rothbard was, of course, familiar with these arguments. And despite his categorical insistence on 100% reserves, he readily admits that a spontaneously ordered fractional-reserve “free-banking” system would constrain banks enough in their issue to eliminate the business cycle (Rothbard 1963b, pp. 46ff; 1963a pp. 26ff). Rothbard’s choice of 100% commodity reserves then appears simply to be a result of his ethical system.

However, despite his ethical system, there is plenty of evidence and logic to suggest that Rothbard’s rigid system is vitiated by the weaknesses of a strict commodity standard described above. Rothbard responds directly to Hayek on these points in The Case for a Genuine Gold Dollar. He does not argue that competitive token money would be necessarily distortive or inflationary – rather, his essential argument is that the market would not accept Hayek’s money, citing Mises’ account of how a commodity is chosen to serve money.

But this chiding suggests Rothbard is either a disingenuous or a careless reader. Hayek is not unaware of Mises’ regression theorem.15 He in fact paraphrases it in his prediction that, suddenly faced with a free market in money, people will initially flock to what they know to be a safe store of value – i.e. gold.16 It is only as the disadvantages of gold become apparent and as the market matures that trust in particular institutions and strong competitive checks will be built up to the point that competitive token money becomes possible. Hayek does not expect anyone to accept private token money right off the bat. Rather, as governments in recent history have shown, token money will be accepted after a period of convertibility brings it into general use.

It is, furthermore, a useless argument that “such a market-basket currency has never emerged spontaneously from the workings of the market”. It is exactly Hayek’s point that we have never had the chance to see what would emerge from the market. “The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money” (Hayek 1977, p. 20). Rothbard has failed to separate prescription from prediction in Hayek’s work. The “market basket” based money against which he writes is the latter. It is nothing more than a sketch of what a truly free market in money could look like. Nor does he rule out hard money: no doubt he would expect hard and token money to coexist for a long time, possibly indefinitely. And if the particulars of the “market basket” tokens could not, as Rothbard suggests, be realized except by imposition from the top down,17 it is the prediction that is revised, not the prescription.

Were it simply a difference of opinion as to what the market would accept given full freedom, then there is no practical difference between the programs of the two men. But an ideal Rothbardian regime would deprive us of the discovery process no less than a central bank does today: a fractional-reserve free-banking system is the key transitional step from the initial “hard” private currencies to sound token money, which is perhaps the reason why Rothbard cannot fathom how it might come to be accepted in a free market. His identification of fractional-reserve banking with fraud rules out from the get-go much of the experimentation Hayek foresees.

The fundamental prescriptive difference between the two then, is that Hayek believed money to be a technical problem, best solved by the market, where Rothbard believed it to be an institutional problem, best solved by an economist. This is why the vagueness of Hayek’s predictions and their allowance for human discretion in regulating monies seemed distasteful to Rothbard. And this is why, even though it comports with neither of their predictions, Hayek would welcome something like Bitcoin into the market, where Rothbard would scorn it. Bitcoin indeed should demonstrate the impossibility of deducing ideal monetary arrangements a priori. No mid-century economist could have predicted its emergence. A priori deduction can only be applied to a given monetary arrangement: the economist can no more talk about the absolute “best” type of money than he can about the “best” type of computer chip. Innovation is always possible. And of course, a state monopoly is no better at solving technical monetary problems than it is at solving technical industrial problems. Things can plod along passably well, as economies have done since the rise of central banking, but it’s still no substitute for market innovation and competition.

Bitcoin demonstrates that a private token money can indeed be issued and accepted. But if in fact public distrust of private money had been so strong as to never accept an inconvertible currency, then Rothbard’s theoretical acuity would be demonstrated without enforcing his particular definition of fraud. If his monetary theory holds, there will be no reason to force all money contracts into the warehouse receipt model. And if it doesn’t, then imposing his model will be the exact sort of sclerotic regulation which he fought so stridently against in the rest of his system.


  1. Hayek, F.A. The Fatal Conceit (1988), p. 68:

    While it is true that traditional morals, etc. are not rationally justifiable, this is also true of any possible moral code, including any that socialists [and presumably, the Rothbardians] might ever be able to come up with. (emphasis in original)

    Contrast with Rothbard, Murray. “The Spooner-Tucker Doctrine: An Economist’s View,” reprinted in Egalitarianism as a Revolt Against Nature and Other Essays, p. 208:

    [I]t would not be very difficult for Libertarian lawyers and jurists to arrive at a rational and objective code of libertarian legal principles and procedures based on the axiom of defense of person and property.

  2. Anyway, this is the takeaway in Daniel Klein’s “Mere Libertarianism: Blending Hayek and Rothbard.” in Reason Papers vol. 27 (1994).
  3. Hayek, F.A. Monetary Nationalism (1937), p. 77: “I am not certain whether the compromise we have chosen, that of national central banks which have no direct power over the bulk of the national circulation but which hold as the sole ultimate reserve a comparatively small amount of gold, is not one of the most unstable arrangements imaginable.”
  4. Rothbard, Murray. America’s Great Depression (1963a), p. 24: “Government is an inherently inflationary institution, and consequently has almost always triggered, encouraged, and directed the inflationary boom.”

    See also, Rothbard, Murray. What has Government Done to Our Money? (1963b), p. 56: “A final indictment of inflation is that whenever the newly issued money is first used as loans to business, inflation causes the dread ‘business cycle.’”
  5. Hayek, F.A. A Free-Market Monetary System (1977), p. 7. He continues: “…because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject.”
  6. Rothbard, Murray. “The Case for a Genuine Gold Dollar” (1985). In The Gold Standard: Perspectives in the Austrian School (1992).
  7. Rothbard, Murray. What has Government Done to Our Money? (1963b), p. 26: “It is up to the market, and not to us, to decide the best commodity to use as money.” (emphasis mine)
  8. Ibid., p. 15f: “Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a “claim on society”; it is not a guarantee of a fixed price level.”
  9. America’s Great Depression, p. 27: “Banks that issue receipts to non-existent gold are really committing fraud, because it is then impossible for all property owners (of claims to gold) to claim their rightful property.”
  10. This is a similar semantic sleight of hand with the word “fraud” to that which Ayn Rand used with the word “property” to justify her opinion on intellectual property laws. See Stephan Kinsella’s blog post Objectivists: “All Property is Intellectual Property” (2009). For both Rand and Rothbard, their ethical system was the gate through which pet policy preferences entered their programs.
  11. Rothbard somewhat anticipates this analogy in footnote 28 of America’s Great Depression (p. 27) by drawing a distinction between the provision of a service and a claim on property. The distinction is, however, specious. As far as human action from the perspective of the consumer is concerned, the examples are no different.
  12. Rothbard attempts to exalt commodity money as neutral in Ibid., p. 35:

    One crucial distinction between a credit expansion and entry of new gold onto the loan market is that bank credit expansion distorts the market’s reflection of the pattern of voluntary time preferences; the gold inflow embodies changes in the structure of voluntary time preferences.

    Hayek however regards this ideal as perhaps desirable in theory, but ultimately “fictitious”, even under a gold standard. In Denationalisation of Money (p. 88) he writes that “no real money can ever be neutral in this sense, and that we must be content with a system that rapidly corrects the inevitable errors.”
  13. Ludwig von Mises, whom both men held in high regard, notes in Human Action (1949, 1996), p. 414, that “changes in the money relation are not only caused by governments issuing additional paper money. An increase in the production of the precious metals employed as money has the same effects.”
  14. Denationalisation of Money, p. 109: “Though the regulations achieved by those automatic controls [of the gold standard] were far from ideal or even tolerably satisfactory, so long as currencies were thus regulated they were much more satisfactory than anything the discretionary powers of governmental monopolies have ever achieved for any length of time.”
  15. Denationalisation of Money, p. 31: “It is probably impossible for pieces of paper or other tokens of a material itself of no significant market value to come to be gradually accepted and held as money unless they represent a claim on some valuable object.”

    See also p. 112: “Some people apparently find it difficult to believe that a mere token money which did not give the holder a legal claim for redemption in terms of some object possessing an intrinsic value (equal to its current value) could ever be generally accepted for any length of time or preserve its value. They seem to forget that for the past 40 years in the whole Western World there has been no other money than such irredeemable tokens. The various paper currencies we have had to use have preserved a value which for some time was only slowly decreasing not because of any hope of ultimate redemption, but only because the monopolistic agencies authorised to issue the exclusive kind of currency of a particular country did in some inadequate degree restrict its amount.”
  16. Ibid., p. 130: “It may be that, with free competition between different kinds of money, gold coins might at first prove to be the most popular.”
  17. In “The Case for a Genuine Gold Dollar”: “It would have to be imposed (to use a derogatory term from Hayek himself) as a ‘constructivist’ scheme from the top, from government to be inflicted upon the market.”


Bitcoin, Free banking, Money, F.A. Hayek, Murray Rothbard


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  • 1


    May 22, 2011 at 0:00 | Reply

    I have read this post twice but don’t quite get the last 2 paragraphs. Nevertheless some thoughts.

    I am not certain the government needs to set the money standard though I think that they may have a role in enforcing it (prosecuting fraud).

    I prefer the warehouse philosophy over the carpark one. I think the parking lot analogy fails as you are selling an _available_ carpark. If money represents property (I think it should) then more than one person cannot have claims on the same property (ie. I am not talking about joint ownership). So a house is a better example, I don’t expect to go to a different house every night or different room, ie. I am not paying for there to be a bed available. So I oppose fractional reserve banking. Further, FRB distorts the market by making it appear there is more money available than there really is thus driving up prices by competition.

    I oppose token money as even if it can be kept stable, who runs it? And if more tokens are produced to maintain stability how does that get released into the market without the person controlling it gain essentially free money though releasing it by buying commodities or giving it to favoured persons. Of course notes that are promissory to real material (gold) are acceptable.

    As to which is the best monetary unit, why choose one? We can have gold, silver, platinum, oil, wheat. It does not matter that such things will change in value compared with each other, the same is the case with international currencies. The USD and Euro change rates continuously. Having a large number of currencies will help prevent exploration of the single money unit (eg. gold) and massive buy up in times of economic instability. Further, following several currencies for several years will allow estimates of which are the least volatile.

    • 2

      Cameron Harwick

      May 24, 2011 at 8:31

      I don’t buy the strict separation of money, money substitute, non-money. Money is a category of human action, and as far as that is concerned, money substitutes are the same as money. Rothbard argues this in AGD to assert that money substitutes should be counted as part of the money supply. And if they are praxeologically the same, the only way Rothbard can separate them is to make money something other than a category of human action.

      If Hayek’s system were realized, you still exercise property rights over your money, but your money is not necessarily a strict property right to specie. It’s a contractual right, which can be a lot more flexible. That can allow for non-fraudulent FRB, or even tokens, depending on the contract. And if people are ok with that, why not? As long as banks don’t misrepresent what their money is. It’s still money, as long as people use it as such.

      As far as the economic effects, FRB itself isn’t distortive in itself. Rothbard admits as much a few times. It’s FRB combined with central banking, when the money supply is pyramided from a single note issuer through multiple lenders. Hayek calls banks which would lend in another bank’s currency in a free market “parasitic” and potentially destabilizing, but concludes they would have a hard time surviving. In our system now, every bank acts this way by law.

      So, a strict commodity standard and a free banking market both serve as adequate checks on inflation. It’s only when you take both away that the doors are opened for cycle-inducing inflation.

      For the questions about token money, definitely read Denationalisation of Money. It’s pretty short, and Hayek explains it much better than I could.

      And finally, I definitely agree that there should not be just one currency. What I was trying to say in the last two paragraphs is that practically, it doesn’t matter what kind of money we predict will take over, so long as we’re both working towards freedom. Maybe token money won’t take over; maybe we’ll go to the oil standard. But to outlaw certain types of monetary contracts beforehand is not to be working towards liberty; it’s hindering the market.

  • 3


    Jun 25, 2011 at 10:21 | Reply

    Really think you’re misrepresenting Rothbard’s position. He was an anarchist first, and only said that fractional-reserve is fraud, not that the federal government should make a law on it.

    He would say a gold standard would naturally arise if this sort of fraud could not be perpetrated.

    Also on Hayek vis-a-vis “regulating monies”, Rothbard’s “distaste” would be for giving such authority to any central figure. I would have thought Hayek would share that view. So perhaps I misunderstand your use of the word “regulate”.

    • 4

      Cameron Harwick

      Jul 04, 2011 at 19:55

      If there wasn’t a law against it, who would prevent it from being perpetrated? It seems that it’s 100% reserve banks that need the force of the state to survive, not fractional reserve banks, which would suggest Rothbard just misread economic history. Though I also stumbled across Rothbard’s Vigilantes while looking up that last article, which is relevant to Rothbard’s force preference on that issue.

      And you’re right, both would be against central regulation of “the” money supply. But Hayek’s competitive currencies need (or at least allow for) discretionary regulation from the issuer to maintain price stability. It’s regulation subject to competition and without legal force, but regulation of the money supply nonetheless.

  • 5


    Dec 29, 2013 at 15:49 | Reply

    I think the author of this article may need to study Rothbard’s “Man, Economy and State” along with “Power and Action” and Hayek’s “Good Money” pts. I & II before continuing on this course on the subject of money. Especially if you are going to deal with Rothbard’s approach as an “ethical” one. This is a grave error and only directs me to point out that this comparison between Rothbard and Hayek, though well written and quite articulate, is incomplete in the understanding of both Hayek and Rothbard’s works on money.

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