, in the formerly accepted framework guiding discretionary economic management ”. 4 hayek ’ s view about these developments becomes clear from, for example, an excerpt of his nobel lecture, delivered in december 1974 : “ economists are, at this moment, called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies that the majority of economists recommended or even urged governments to pursue. we have indeed at the moment little cause for pride : as a profession we made a mess of things. ” he expanded upon this in 1976 : 5 “ practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people ”. it was against this background that hayek proposed his radical solution. it called for no less than the complete abolition of the government ’ s monopoly over the issue of fiat money, leaving the way open for comprehensive competition in its supply by the private sector. in his hobart paper special no. 70, he spelt out his philosophy with respect to free competition in the supply of money : “ the purpose of this scheme is to impose upon existing monetary and financial agencies a very much needed discipline by making it impossible for any of them, or for any length of time, to issue a kind of money substantially less reliable and useful than the money of any other. as soon as the public became familiar with the new possibilities, any deviations from the straight path of providing an honest money would at once lead to the rapid displacement of the offending currency by others. and the individual countries, being deprived of the various dodges by which they are now able temporarily to conceal the effects of their actions by ‘ protecting ’ their currency, would be constrained to keep the value of their currencies tolerably stable ” ( p. 125 ). although his proposal was not implemented, his contribution kindled a lively and far - reaching debate on the role of government in the monetary system, a debate that addressed the choice between a free market monetary regime and government management of the monetary system via a central bank. the proposal was so profound and radical in its conception that some leading advocates of a laissez - faire approach to most aspects of economic life ( milton friedman, for example ) were put on the defensive. as it happened, hayek also held some pretty strong views on monetary union in europe, an idea which was still only in a rather embryonic

, free banking in britain, theory, experience, and debate, 1800 – 1845. institute of economic affairs, london, 1995 ). it should be noted that, in hayek ’ s proposal, equilibrium is assumed to exist and to be stable, and information is complete, symmetric and acquired at no cost. see charles goodhart, the evolution of central banks, mit press, 1988. this is the assumption made by milton friedman in his seminal paper, “ the optimum quantity of money ” in “ the optimum quantity of money and other essays ”, aldine publishing company, chicago, 1969. advantage of the market order is that prices will convey to the acting individuals the relevant information, only the constant observation of the course of current prices of particular commodities can provide information on the direction in which more or less money ought to be spent. money is not a tool of policy that can achieve particular foreseeable results by control of its quantity. but it should be part of the self - steering mechanism by which individuals are constantly induced to adjust their activities to circumstances on which they have information only through the abstract signals of prices. it should be a serviceable link in the process that communicates the effects of events never wholly known to anybody and that is required to maintain an order in which the plans of participating persons match ” ( p. 192 / 193 ). nevertheless, despite hayek ’ s claims for this discovery process, most economists would argue that free competition with respect to money couldn ’ t guarantee either a stable or an efficient outcome. this is the fundamental point. in order to try to understand and assess hayek ’ s proposal, it is essential to take a closer look at money and its role in the economy. this is best done by, as it were, first breaking money up into its constituent functions. the classic textbook treatment of the functions of money is still valid : money fulfils three functions, namely that of ( i ) a unit of account, ( ii ) a means of payment and ( iii ) a store of value. the use of money as a unit of account is, arguably, the most basic monetary function. it is the numeraire, that is, the unit for quoting prices, for drawing funds, for negotiating contracts, and for performing economic calculations. in this regard, money is a basic convention of society, such as the language and the standards for measurement. this seems to be a very hayek - like way of looking at money. indeed