Hans F. Sennholz, “The Asian Crisis” (2000)

This file is a short single-author economic essay. Sennholz’s subject is the late-1990s Asian financial crisis, interpreted through a hard-money, free-market critique of fixed exchange rates, central-bank intervention, and international rescue policy. The essay’s main thesis is that the crisis was not caused by foreign speculators but by governments that pegged currencies to the dollar while inflating domestic money, credit, and asset markets.

Sennholz begins by attacking the political search for scapegoats. He treats denunciations of speculators as a way for officials to evade responsibility for policies that made currencies vulnerable in the first place.

Confused and confounded, they offer simple explanations that exculpate them from any responsibility but castigate investors and speculators.

The central conceptual move is his distinction between a market exchange rate and an official exchange rate. The crisis, in his account, arises when political authorities try to hold a currency at a level that no longer corresponds to its purchasing power.

The currency turmoil that is engulfing several Asian countries actually springs from the continual conflict between the market rate of currency and the official rate, that is, between economic principle and government edict.

The essay then explains the appeal and danger of the “dollar standard” adopted by several Asian economies. Pegging to the U.S. dollar attracted foreign capital and reduced exchange-rate uncertainty, but it also concealed accumulating inflationary pressure. Sennholz’s argument is not that pegs fail accidentally; they fail when monetary authorities expand credit faster than the anchor currency while pretending that the exchange relation remains unchanged.

Pegged exchange rates eliminate the exchange risk and thus encourage international trade and investment. But they are always precarious because the peg may not hold.

His most vivid image presents fixed rates as storing rather than removing instability.

Fixed exchange rates act like “coiled springs;” growing compression finally releases the energy.

The structure of the essay moves from diagnosis to transmission mechanism. Once currencies fall, Sennholz argues, the damage is not limited to foreign-exchange markets. Devaluation reduces international purchasing power, raises import prices, weakens consumers, and accelerates inflation. More importantly, it exposes bad lending and overinvestment that had been hidden during the boom.

The worst effect of currency pegging together with asset inflation is the weakening of the financial system.

This banking-centered account links Southeast Asia to Japan’s earlier asset bubble. Credit expansion, foreign borrowing, and inflated property or equity values create a fragile boom; when the currency peg breaks, debts denominated in dollars or yen become much harder to service. The crisis therefore becomes a balance-sheet crisis: firms owe in strong currencies while earning in devalued local currencies and holding assets whose prices have collapsed.

Sennholz’s policy conclusion is uncompromising. Tariffs, exchange controls, new taxes, and bailouts treat symptoms while worsening the underlying monetary disorder. Against explanations centered on “rogue speculators,” he insists that the crisis is endogenous to state-managed money.

The currency turmoil clearly is the making of governments and their central banks.

The final section broadens the target to the International Monetary Fund and to American complacency. Sennholz rejects the IMF’s support for dollar pegs as a stabilizing doctrine and argues that repeated crises demonstrate the opposite: official exchange-rate management generates recurring breakdowns. He also warns that the United States should not assume immunity simply because its inflation appears low and its financial indicators look strong.

The essay’s relevance lies in its clear Austrian-style interpretation of financial crisis: political exchange-rate fixing, monetary expansion, and credit-fueled asset inflation produce apparent prosperity, but the eventual market correction is severe. Its core conceptual moves are to replace moral blame of speculators with institutional blame of monetary authorities; to distinguish market prices from official decrees; and to treat currency collapse, banking distress, and recession as linked phases of the same interventionist cycle.

Yet, the danger always is greatest when we complacently accept such assurances.