Hayek Wants NOT a Constant Money Supply BUT a Neutral Money Supply Insuring that There Will Be NO Monetary Causes of Price Changes

The Mises-Hayek business cycle theory led Hayek to the conclusion that intertemporal coordination is best maintained by constancy of nominal spending or “the total money stream.” In terms of the variables of Irving Fisher’s equation of exchange (MV=PQ), nominal spending is the money stock times its velocity of circulation, MV. In Prices and Production Hayek recommended that to keep MV constant the money stock M should vary to offset changes in the velocity of money V, but should be constant in the absence of changes in V. The price level P should be allowed to fall with growth in real income Q. As Hansen summarized the prescription:

The supply of money should, therefore, be kept constant, except for such increases or decreases as may be necessary to offset . . . changes in the velocity of circulation . . . Hayek wants, therefore, not a constant money supply, but a neutral money supply — one which will insure that there will be no monetary causes of price changes.

—Lawrence H. White, “The Roaring Twenties and Austrian Business Cycle Theory,” in The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years (New York: Cambridge University Press, 2012), 83.