MODULE 6 COMMENTARY ON PUBLISHED PAPERS                   last edit: 22nd December 2016

Please check this out.

There are very few more intelligently written pieces on financial stability but still it makes fundamental mistakes and omissions. These are pointed out below. One in particular is, as mentioned below, handed down from generation to generation.

It is assumed that readers of this page have done the course or have at least understood the basics of Macro-economic Design and Management.

This is module 6. It is open to the public.

Edward Ingram's commentary follows:


One quotation worthy of repetition is taken from this script by Friedrich A Hayek

[A lecture delivered at the Gold and Monetary Conference, New Orleans, November 10, 1977. It made its first appearance in print in the Journal of Libertarian Studies, Volume 3, Number 1.]

" The public at large have learned to understand, and I am afraid a whole generation of economists have been teaching, that government has the power in the short run by increasing the quantity of money rapidly to relieve all kinds of economic evils, especially to reduce unemployment. Unfortunately this is true so far as the short run is concerned. The fact is, that such expansions of the quantity of money which seems to have a short run beneficial effect, become in the long run the cause of a much greater unemployment. But what politician can possibly care about long run effects if in the short run he buys support?"

IN THE INGRAM ECONOMIC MODEL: The Money Supply Authority, the MSA, must not be an arm of treasury or government policy. Money created by the MSA must not be given to government. Money must be created based upon some independent algorithm / guidelines.

Further on he writes:
"The gold standard requires a constant observation by government of certain rules which include an occasional restriction of the total circulation which will cause local or national recession, and no government can nowadays do it when both the public and, I am afraid, all those Keynesian economists who have been trained in the last thirty years, will argue that it is more important to increase the quantity of money than to maintain the gold standard."

CONCLUSION: We share the same opinion: a restricted money stock leads to a slowing of demand. It could lead to a recession.

Further on - some disagreement with me here:
" The gold standard is a mechanism which was intended and for a long time did successfully force governments to control the quantity of the money in an appropriate manner so as to keep its value equal with that of gold. But there are many historical instances which prove that it is certainly possible, if it is in the self-interest of the issuer, to control the quantity even of a token money in such a manner as to keep its value constant."


1. Keeping the value equal to that of gold does not seem to me to be either practical or appropriate.

2. Keeping the value of money constant is by definition the act of keeping all asset values, savings values and debt values, all earnings and all goods and services at the one and the same price.

3. This will not permit the pricing effects of competition and it requires some way of dealing with the pricing of innovations - new goods and services. But maybe those adjustments could be allowed for by some complex calculation and some complex mechanism - very doubtful. How would the feedback loop (the control mechanism) work?

4. Interest rates would need to be free to adjust to balance the supply with the demand whilst not making any adjustments for the changing value of money since those would not exist.

5. How would this deal with changing populations, changing demographics, and international trade? This is not something which would be easily or even possibly resolved.

Further on Hayek writes that:
It was found that by limiting the quantity of silver coins in circulation in Austria (1879) and then in British India, (1893), the value of money (coins) stopped declining - well changed less quickly. No measure of value was offered to assert that the outcome was a full stop in the declining value of the coinage. The implication is that coinage was the entire stock of money - all debt-free.

It is likely that the huge lending and savings industries which operate today and the huge volume of international trade were not a part of the system. Money was not lent into circulation in the same way as it is done today. That we can call debt-based money.

Further on he writes:
After pointing to a third example involving Sweden and Gold coinage Hayek writes:
"I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind."

MY COMMENT: It is not possible to have a form of money which does this. The essence of this is saying that the value of savings and deposits needs to rise to offset any fall in the value of money. There is no need for any new form of money to achieve something like this.

The interest rate earned or the indexation of accounts is a practical option. When money falls in value the free market rate of interest should adjust to compensate/to offset this fall. This is something which interest rates can do if they are free to do so. 

The mechanism only works if the lending and savings contracts involved are suitably re-written and as just stated, if there is a free market in credit, as suggested in my tracts.

The interest rate pricing mechanism is that if a rate of interest fails to adjust to offset the higher or lower rate of devaluation of money, then either the cost of credit will be too high or it will be too low. Either way demand levels will adjust upwards or downwards. Given a limited stock of credit, even if somewhat variable as savings and other uses for money vary in volume, this will force the cost of credit, the rate of interest, to adjust.

Further on he writes:
"...people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.
I have not got time here to describe in detail what I mean by being stable in purchasing power, but briefly, I mean a kind of money in terms which it is equally likely that the price of any commodity picked out at random will rise as that it will fall. Such a stable standard reduces the risk of unforeseen changes in the prices of particular commodities to a minimum, because with such a standard it is just as likely that any one commodity will rise in price or will fall in price and the mistakes which people at large will make in their anticipations of future prices will just cancel each other because there will be as many mistakes in overestimating as in underestimating. If such a money were issued by some reputable institution, the public would probably first choose different definitions of the standard to be adopted, different kinds of index numbers of price in terms of which it is measured; but the process of competition would gradually teach both the issuing banks and the public which kind of money would be the most advantageous."
COMMENT: I have arrived at a somewhat similar conclusion - in respect of the choice of index. There can be some competition over this, but the tax rate can only select one of these as a tax exemption for interest or indexation.

My preferred choices are all a function of National Average earnings, NAE, or related indices.

Remember: the value of money changes as everything which money can  be exchanged for varies in price / value. As long as the financial framework of contracts like these and the operation of currency pricing distorts price changes, the measure itself will be unstable.

My selection is made after having changed the savings and lending contracts as a part of making that choice.

We get into a situation of successive approximation. The more pricing distortions we remove, the nearer any choice for an index to offset the falling value of money gets to being the right choice: the more unified the pricing changes in all forms of pricing, asset values, earnings, goods and services, and the value of the currency, become the more price changes which offset the falling value of money unify across all price changes. Yes you have to include currency price changes if you are seeking financial stability.

Hayek has now, by implication abandoned that idea of fixing the quantity of money. In doing so he has also seemed to abandon the idea that money stock will not be increased to avoid a slowdown which spirals down into a recession or worse.

Hayek has not mentioned that there are two kinds of money in need of management in this sense.

There used to be just debt-free coinage according to his writings. Today most of the money created is debt-based money which is lent into circulation and gets taken out of circulation when it is repaid. His model has not dealt with that. My model includes this.

Further on he writes:
"The interesting fact is that what I have called 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."

COMMENT: Here he overlooks the fact that the quantity of money of both kinds can only be managed by a single entity. He says that any entity can create money in competition with others. You cannot get a free market price of credit if any entity can create money. The stock of money will be out of control. If you do not have that managed stock of money you cannot have a free market price of money: the rate of interest. When interest is added to an account, it needs to be adjusting the account to offset the falling value of money. Indexation is only an option. The index chosen needs to mimic the rate of interest in this aspect. Remember this is only one component of the price of credit. The other component which allows for costs, risks, and profits, exists independently.

Further on he writes:
"At present the prospects are really only a choice between two alternatives: either continuing an accelerating open inflation, which is, as you all know, absolutely destructive of an economic system or a market order; 

COMMENT: When he says we all know that inflation is absolutely destructive he is assuming that the savings and lending contracts and the currency markets have not been adapted and cannot be adapted. This is a great mistake which has been passed down from generation to generation and it continues. The first base of macro-economic design is changing this so that all of these distorted prices can adjust and cease to be distorted. Hayek is also trying to find a way of doing this.

A free economy does not just have indexed savings and loan accounts. It also has free market rates of interest. I am including both. The indexation aspect cannot be a perfect index. It can only be a whole lot better than no index. I have explored the ways in which it (NAE or similar) can be applied to contracts. See Module 2 for why it has been selected and how it can be used in practical ways.

Hayek also writes about his fear of totalitarian governments. By implication he is worried about the vulnerability of governments to the social costs of not having a stable, and adjustable financial framework for the economy.

It is absolutely in the best interest of governments to avoid social harm of great degree, so there is no reason to suppose that they cannot accept some independence in the mandate given to the money creating institution which I refer to as the Money Supply Authority, MSA.

Finally Hayek stresses that there is some urgency in making these changes and that the three hundred years which it may take without pressure is too long. Since then we have seen the emergence of extreme political movements and the fall of good governments to new parties. Why does this happen? In my opinion it is due to the social and economic cost of not taking action.

He writes that banks have experimented with issuing accounts in gold and silver but that these are not value stable. They are not a substitute and they are not going to solve the problem.


  1. Hayek is onto the right issues but he has not done as good a job as my own effort to solve the problems.
  2. He has not mentioned the two kinds of money.
  3. He has assumed that contracts cannot be re-written using the state issued money so as to maintain value. This is not so. It can be done and I have shown how it can be done.
  4. He has not tackled the currency issue.
  5. He has not suggested a free market in credit.
  6. He has overlooked the key principle for financial stability which is the creation of free markets at every level.


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