Hans F. Sennholz · 1978
This file is a single-author public lecture/pamphlet, delivered in 1978, with notes and statistical tables rather than chapters by multiple contributors. Although its title glances toward the United States after 1970, the substantive scope is Germany from the Depression to the 1948 Deutsche Mark reform. Sennholz’s thesis is that the second destruction of the mark was a political process: fiscal pressure, fiat credit, price suppression, and central-bank subordination hid inflation for a time but converted it into shortages, black markets, and flight into real goods.
The Great Depression in Germany provided a fertile soil for the tragic events that were to follow.
He rejects the Keynesian habit of blaming Brüning-era collapse merely on deflation while admiring Nazi full employment. The 1933–1936 revival is granted as fact—employment rose, production recovered—but reinterpreted as coerced cost reduction and disguised finance. Unions were abolished, wages and employer burdens frozen, and special intermediaries issued bills that could be discounted without appearing straightforwardly as budgetary deficits.
This remarkable revival of economic activity was achieved by an ingenious combination of dictatorial methods that greatly lowered the real costs of labor and otherwise reduced business costs.
The structure follows the inflation’s institutional deepening: full-employment policy, finance under full employment, war economy, occupation, and reform. By 1936 excess demand produced shortages; price controls, rationing, customer lists, and raw-material allocation displaced market coordination. Armament spending dominated, and the Reichsbank was transformed from guardian of the mark into fiscal instrument.
The Reichsbank was to undergo a radical change that made it an integral instrument of government.
Sennholz uses Schacht’s fall to state a general monetary law. Once the state commands the bank, technical monetary prudence cannot restrain political spending.
“No central bank can safeguard the currency from the inflationary expenditures of government.”
War finance supplies the pamphlet’s central conceptual move: inflation need not first appear as rising official prices. Money, deposits, Treasury bills, forced savings, insurance reserves, occupied-country levies, and tax prepayments were channelled into Reich debt while rationing and prosecutions defended posted prices. The currency had become pure political paper.
The German currency now was de facto and de jure a fiat currency, free of any restraint and limitation.
Sennholz’s Austrian argument is that controls can falsify price signals but cannot abolish scarcity. A money surplus emerged because income could not buy goods through official channels. It fed black markets, hoarding, and alternative monies. After 1945 the Allies, by retaining price controls, rationing, military marks, and punitive taxation, prolonged rather than cured the disorder. The cigarette became the clearest refutation of legal-tender formalism.
It was an expensive currency, but more dependable and honest by far than the various issues of government fiat.
The 1948 reform is judged ambivalently. Sennholz describes its mechanics—new Deutsche Marks, head money, conversion of deposits, cancellation of public balances, debt conversion, and a new issuing bank—but denies that fiat replacement alone caused recovery. Its success depended on Ludwig Erhard’s simultaneous liberalization, removal of controls, and return of competitive exchange.
The currency reform of 1948 was probably the most comprehensive and incisive reform in the history of fiat money.
The closing counterfactuals sharpen the lecture’s relevance. Sennholz imagines immediate repeal of Nazi controls, free foreign exchange, gold and silver coinage, a Misesian gold-bullion conversion, or abolition of legal-tender privilege. These alternatives reveal the normative core beneath the history: honest money is a function of free exchange and property rights, not expert currency management.
The victors of World War II chose to replace a defunct fiat currency with a new fiat system.
The work remains a warning against equating full employment with prosperity, price controls with stability, or nominal savings with real wealth. Its governing distinction is between command order and market order: the former can postpone inflation’s symptoms, but only the latter can restore money’s economic meaning.
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