“Up to this point I have treated the quantity of money in circulation and the number of payments effected during a given period of time as equivalent concepts, a method of procedure which implied the assumption that the velocity of circulation is constant. That is to say, the whole of my argument applies directly only to the amount of payments made during a period of time. It applies indirectly to the amount of money if we assume the ‘velocity of circulation’ to be constant. So long as we make that assumption, or so long as we are speaking only of the volume of payments made during a period of time, the case just discussed seems to me the only exception to the general rule that, in order that money should remain neutral towards prices, the amount of money or the amount of money payments should remain invariable. But the situation becomes different as soon as we take into account the possibility of changes in methods of payment which make it possible for a given amount of money to effect a larger or smaller number of payments during a period of time than before. Such a change in the ‘velocity of circulation’ has rightly always been considered as equivalent to a change in the amount of money in circulation, and though, for reasons which it would go too far to explain here, I am not particularly enamoured of the concept of an average velocity of circulation it will serve as sufficient justification of the general statement that any change in the velocity of circulation would have to be compensated by a reciprocal change in the amount of money in circulation if money is to remain neutral towards prices.This passage is selectively cited by White (2008: 755) as evidence that Hayek wished to stabilise the volume of nominal spending.
(10) Even now our difficulties are not at an end. For, in order to eliminate all monetary influences on the formation of prices and the structure of production, it would not be sufficient merely quantitatively to adapt the supply of money to these changes in demand, it would be necessary also to see that it came into the hands of those who actually require it, i.e., to that part of the system where that change in business organisation or the habits of payment had taken place. It is conceivable that this could be managed in the case of an increase of demand. It is clear that it would be still more difficult in the case of a reduction. But quite apart from this particular difficulty which, from the point of view of pure theory, may not prove insuperable, it should be clear that only to satisfy the legitimate demand for money in this sense, and otherwise to leave the amount of the circulation unchanged, can never be a practical maxim of currency policy. No doubt the statement as it stands only provides another, and probably clearer, formulation of the old distinction between the demand for additional money as money which is justifiable, and the demand for additional money as capital which is not justifiable. But the difficulty of translating it into the language of practice still remains. The ‘natural’ or equilibrium rate of interest which would exclude all demands for capital which exceed the real supply capital, is incapable of ascertainment, and, even if it were not, it would not be possible, in times of optimism, to prevent the growth of circulatory credit outside the banks.
Hence the only practical maxim for monetary policy to be derived from our considerations is probably the negative one that the simple fact of an increase of production and trade forms no justification for an expansion of credit, and that—save in an acute crisis—bankers need not be afraid to harm production by overcaution. Under existing conditions, to go beyond this is out of the question. In any case, it could be attempted only by a central monetary authority for the whole world: action on the part of a single country would be doomed to disaster. It is probably an illusion to suppose that we shall ever be able entirely to eliminate industrial fluctuations by means of monetary policy. The most we may hope for is that the growing information of the public may make it easier for central banks both to follow a cautious policy during the upward swing of the cycle, and so to mitigate the following depression, and to resist the well-meaning but dangerous proposals to fight depression by ‘a little inflation’. (Hayek 1935: 123–125).
But what Hayek says in this passage is that, even if, theoretically, a change in velocity of circulation should be compensated by a reciprocal change in the amount of money in circulation, in practice it is either impracticable or impossible: “it could be attempted only by a central monetary authority for the whole world: action on the part of a single country would be doomed to disaster.”
Moreover, although Hayek seems to be saying that “in an acute crisis” banks should be more loose in granting credit, credit expansion is no cure for increased demand to hold high-powered money in a crisis, so what value this would have in effectively stabilising the money supply is unclear.
Where is the explicit evidence from Prices and Production that Hayek supported central bank interventions to meet demand to hold high-powered money so that nominal spending would be stabilised?
Hayek, F. A. von. 1935. Prices and Production (2nd rev. and enl. edn.). G. Routledge, London.
White, Lawrence H. 2008. “Did Hayek and Robbins Deepen the Great Depression?,” Journal of Money, Credit and Banking 40.4: 751–768.