Hans F. Sennholz, “Is Inflation Dead?” (1996) — Summary

This file is a short polemical monetary essay, originally appearing as an August 1996 note. Its scope is global but compressed: Sennholz moves from falling headline inflation in developed economies to central-bank policy, developing-country inflation, asset markets, and finally the institutional foundations of fiat money. The central thesis is that inflation has not disappeared; it has been displaced, politically concealed, and redirected through credit expansion into financial assets.

Sennholz begins by acknowledging the empirical premise accepted by mainstream economists: measured consumer-price inflation had fallen sharply since the 1970s and 1980s. Developed countries averaged roughly 2.5 percent inflation in 1995, and many central banks appeared more cautious than before. Yet this apparent moderation does not alter the deeper monetary regime.

Despite the visible improvements in central bank behavior in recent years, it is certainly premature to say inflation is down for the count.

His first conceptual move is to separate reduced price-index inflation from the continued existence of inflationary monetary institutions. Central banks may have learned tactical restraint, but the legal monopoly over money remains intact. For Sennholz, inflation is not merely a statistical rise in consumer prices; it is a consequence of state-managed money and credit creation.

The monetary system that bred past inflations remains unchanged; the monetary thought that guided the monetary authorities is still popular, especially with government officials.

The essay then surveys central-bank behavior in the mid-1990s. The Bundesbank and Bank of Japan, once regarded as hard-money models, had lowered discount rates in response to stagnation and unemployment. The Federal Reserve, though apparently tighter, is portrayed as constrained by America’s low saving, high consumption, debt burden, and current-account deficit. Sennholz interprets these policy choices as evidence that anti-inflation credibility gives way when governments pursue full employment, deficit finance, and recession avoidance.

A second major move is geographical: Sennholz refuses to treat the developed-world experience as the whole story. Inflation remained severe in many developing and post-Soviet economies, with rates in Turkey and former Soviet republics showing that monetary disorder had not vanished globally. But his most important analytical turn concerns where inflation appears. If consumer prices are relatively calm, easy money may instead show itself in securities, leveraged speculation, acquisitions, and stock-market valuations.

Inflation is not dead but very much alive. It has moved from Main Street to Wall Street.

This sentence gives the essay its enduring relevance. Sennholz anticipates later debates about asset-price inflation, arguing that conventional price indexes can miss the effects of monetary expansion when new credit flows into capital markets rather than consumer goods. The “rising money velocity” of securitized debt and the boom in financial assets become, in his account, symptoms of the same inflationary process that earlier appeared as consumer-price escalation.

The final section broadens the argument from policy criticism to institutional indictment. Sennholz locates modern inflation in doctrines hostile to economic freedom, especially the denial of free monetary contract through legal tender laws and central-bank monopoly. The welfare state’s demand for deficit spending then turns that monopoly into a fiscal instrument. The decisive historical break is 1971, when the United States abandoned the last gold-reserve constraint and completed the paper-dollar standard.

Our age of inflation has deep roots in doctrines and theories that disparage economic freedom and deny the freedom of contract.

The essay’s structure is therefore cumulative: it begins with the mainstream claim that inflation is tame, accepts part of the evidence, then redefines the problem institutionally and financially. Sennholz’s conclusion is not a forecast based on transient indicators but a regime argument: so long as legislators and central bankers retain discretionary control over fiat money, inflationary pressures will recur in one form or another.

Depend on it, the legislators and regulators who gave us such a system will bring us more inflation in years to come.