Mr Issing’s speech entitled “Hayek – currency competition and European monetary union”*
Text of the Annual Hayek memorial lecture delivered by Mr Otmar Issing, a member of the Executive Board of the European Central Bank, hosted by the Institute of Economic Affairs in London on 27 May 1999.
"...As Hayek himself put it: “If the law makes two kinds of money perfect substitutes for the payment of debts and forces creditors to accept a coin of smaller content of gold in the place of one with a larger content, debtors will, of course, pay only in the former and find a more profitable use for the substance of the latter”.14 And: “(Gresham’s Law) is not false, but it applies only if a fixed rate of exchange between the different forms of money is enforced” (italics in original15). The bad (i.e. overissued and inflation-prone) money would start to drive out the good (i.e. well-managed and maintaining stable purchasing power) money. More of the bad money would be produced at the expense of the good money and inflation would accelerate.
In principle, Hayek’s proposal also works with national currencies produced monopolistically by central banks, provided the currencies in question are convertible and can be freely exchanged against each other on foreign exchange markets. In such settings, good national currencies will tend to increase in importance relative to bad, inflation-prone, national currencies. This naturally constrains the ability of national governments to use “their exclusive power to issue money in order to defraud and plunder the people” (op. cit.). In this context, I think it is fair to say that the widespread use of the Deutschmark, for example, as an international investment currency is symptomatic of the enduring success of the Bundesbank in maintaining, in relative terms, the internal purchasing power of the Deutschmark. However, as long as national currencies remain legal tender only within their own national boundaries, the scope for good national currencies to drive out bad national currencies may not be as complete as in the Hayek world of competing private currencies where none of these currencies has the status of legal tender. In other words, Hayek’s competition between currencies goes beyond the limited competition we have seen on foreign exchange markets between national currencies..."