Why Didn't Hayek Favor Laissez Faire in Banking?

Abstract

Historians of economic thought have in recent years devoted a fair amount of critical discussion to F. A, Hayek's work on business cycle theory, and some to his views on monetary policy, but they have scarcely mentioned the banking theory underpinning his business cycle model, or the banking policy conclusions Hayek drew,' The present article reconstructs and critically appraises Hayek's banking theory and policy. The chief questions it addresses are why Hayek declined to endorse laissez faire or banking as a policy ideal, and whether the theoretical arguments he offered for his position are well founded. In his inaugural lecture at the London School of Economics, Hayek (1933, 28) explained that he had chosen to work on capital theory because it was an area where he found that the coordinating processes of the market were underappreciated. It is noteworthy that he did not say the same thing about his work on money and banking. Given that his mentor, Ludwig von Mises ([1912] 1980, [1928] 1978), had strongly supported free banking and the gold standard, and given Hayek's own