Hans Sennholz’s 1965 essay treats inflation as a political instrument: hidden taxation, coerced redistribution, and a fiscal device by which the modern state finances promises it cannot openly tax into existence. Written against postwar Keynesian policy and welfare-state expansion, the essay frames monetary depreciation as a direct threat to liberal institutions.
Few policies are more calculated to destroy the existing basis of a free society than the debauchery of its currency.
Sennholz’s premise is Austrian and institutional. Sound money restrains government because it limits the ability of officials to spend without immediate public consent. Gold and silver may vary in supply, but the decisive danger comes from political management of paper money and bank credit. Inflation is therefore not a mysterious social condition; it is the result of government deficits, central-bank expansion, and legal privilege granted to money creation. Welfare programs intensify the problem because their promised benefits exceed politically tolerable taxation, making depreciation an attractive quiet levy.
The collectivistic state both breeds and in turn feeds on inflation.
The essay connects this process to labor intervention and Keynesian economics. Sennholz argues that unions and labor legislation push wages above market-clearing levels, producing unemployment that politicians refuse to cure through wage adjustment. Public works, relief spending, and credit expansion then appear as humane remedies, while Keynesian doctrine gives intellectual respectability to policies that maintain nominal demand by depreciating money. In his view, the theory does not overcome scarcity or maladjustment; it disguises them.
The Keynesian remedies for unemployment can all be summarized in a single term: inflation.
A central part of the essay is its account of who pays. Sennholz rejects the idea that inflation chiefly harms wealthy creditors while helping ordinary debtors. In a developed capitalist society, workers and middle-class families hold savings accounts, life-insurance policies, pensions, bonds, and fixed money claims. These assets lose purchasing power as money depreciates. By contrast, businesses and wealthier asset holders may own inventories, land, factories, equities, or debts that are easier to repay in cheaper dollars. Inflation thus redistributes wealth away from the prudent, the retired, salaried workers, regulated firms, and those bound by long contracts, while benefiting debtors and those nearest the creation of new money.
This redistribution has political consequences. The erosion of savings, pensions, and fixed incomes creates the very insecurity that welfare-state politics then invokes as justification for expanded benefits, subsidies, controls, and guarantees. Sennholz’s argument is circular in the strongest sense: inflation damages citizens; damaged citizens demand protection; protection requires more spending; and spending renews the pressure for monetary expansion. The quiet thief thereby becomes a builder of dependence.
The essay also presents inflation as the source of the business cycle. Credit expansion initially lowers interest rates, raises profits, stimulates investment, and creates an appearance of prosperity. But the signals are false. Projects begun under artificially cheap credit later confront rising costs, insufficient real savings, and narrowing margins. Recession is not caused by a sudden failure of consumers to spend; it is the correction of distortions created during the inflationary boom. Attempts to prevent the correction by further expansion only postpone and magnify the adjustment.
Sennholz extends this analysis to taxation and international money. Progressive income taxes confiscate more than legislatures visibly admit because nominal income gains push taxpayers into higher brackets even when real incomes have not risen. Business taxes likewise treat paper inventory gains and replacement-cost increases as real profits, undermining capital formation. The disappearance of silver coinage and pressure on American gold reserves are read as market judgments on depreciating paper. Foreign central banks may hold dollars and thereby postpone the reckoning, but accumulated claims on U.S. gold make the system fragile.
The essay closes as a defense of monetary responsibility against technocratic management. Stabilization cannot be achieved merely by central-bank technique; it requires restrained spending, lower burdens on production, freer wage and price adjustment, and abandonment of inflationary finance. Sennholz’s final allocation of blame is categorical:
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