Hans Sennholz, The Federal Reserve System

Sennholz’s essay argues from a libertarian perspective that central banking gives political authorities command over money through institutions presented as monetary technique. He begins with the post-1907 call for reform, taking the reformers’ slogan as the key to the institutional problem he identifies:

"We need a more flexible currency," the advocates of a reorganization of the American banking system asserted; "a currency that can be made to expand or contract in accordance with the needs of business."

For Sennholz, flexibility means legalized discretion rather than market responsiveness. The Federal Reserve borrowed the prestige of European central banking, especially lender-of-last-resort doctrine and elastic note issue, yet translated these models into a system able to suspend market restraint, expand reserves, and concentrate monetary authority. The fact that member banks hold Reserve Bank stock does not make the system private in any meaningful economic sense:

But in the age of radical interventionism and socialism a sharp distinction must always be made between economic control that is decisive, and legal ownership that is empty and meaningless.

The essay’s central sections explain how this control operates. Rediscounting was advertised as a way to tie money creation to real commercial needs, allowing currency and credit to expand only with legitimate business activity.

This arrangement was to make money "neutral," smoothly rendering the vital service of a medium of exchange without itself affecting prices.

Sennholz rejects this as the characteristic illusion of monetary planning. The rediscount rate is itself an administered price of credit; change it, and the volume of paper presented by banks changes with it. Later amendments widened eligible collateral beyond short-term commercial bills to agricultural paper, government securities, loans to nonbanks, and direct federal borrowing. What begins as emergency accommodation becomes, in his account, a permanent channel for inflation.

Open-market operations represent an even more direct power. Here the Fed need not wait for banks to borrow; it buys or sells securities to alter reserves, interest rates, and the volume of credit. Sennholz emphasizes the simple act beneath the technical vocabulary:

For in payment for securities the Federal Reserve merely draws, on itself, a check which constitutes newly created money.

That check becomes a reserve base for further bank lending. Reserve requirements add still another lever, since changing the required fraction of deposits alters the multiple by which reserves support loans. Sennholz’s numerical examples are meant to strip central banking of its mystery: the Board can expand or contract the credit pyramid by administrative decision.

The essay’s central normative claim is that views of the Federal Reserve depend on one’s view of government control. Sennholz argues that a defender of government control may praise the Fed as an instrument of social management, while a defender of capitalism must see it as the governing board of a socialized monetary industry. He blames it for dollar depreciation, boom-and-bust cycles, New Deal controls, and the broader logic by which inflation invites further intervention. In his account, planners expand money in pursuit of prosperity, then seek controls to suppress the price consequences of their own policy.

The Fed’s deepest political importance is fiscal. It helps government spend beyond taxation by supporting bond markets, easing debt refunding, and making deficits more financeable.

The Federal Reserve System facilitates the government's own inflationary financing "in periods of emergency."

The later emergency-powers discussion extends the argument: if deposits can be blocked and banking redirected to approved uses during crisis, then central credit culminates in administrative command over ordinary exchange. Sennholz closes by placing the Federal Reserve in a genealogy of collectivization, invoking centralized credit as a revolutionary measure. His conclusion is abolitionist: the danger is not merely bad policy by particular officials, but discretionary control over money itself.