Hans F. Sennholz, “The Fed, the Fed, the Fed” (2001)

This file is a single short monetary-political essay. Written in March 2001 amid the dot-com collapse, it is a polemical Austrian School critique of the Federal Reserve and of the public reverence surrounding Alan Greenspan. Sennholz’s central thesis is that the Fed is not the stabilizing power it is imagined to be, but a principal source of instability: by expanding fiat money and credit, it distorts interest rates, creates speculative booms, and then cannot painlessly undo the malinvestment it has fostered.

Sennholz begins by describing the “cult” of Greenspan-era central banking. The public, Wall Street, journalists, economists, and politicians all interpret market movements through the Fed’s actions, crediting it with rescues in 1987, 1997, and 1998, and with the long stock-market boom of the 1990s.

The boom of the 1990s, which many observers ascribe to the steadfast guidance and direction by the Greenspan Fed, has given rise to "the cult of the Fed."

The essay’s first conceptual move is to show that even criticism of the Fed reinforces this cult. Investors who lost fortunes in the NASDAQ crash blame Greenspan not for central banking itself, but for failing to cut rates fast enough. Sennholz argues that this demand for easier credit misunderstands the nature of the crisis. The Austrian counter-thesis reverses the common causal story: the Fed did not merely fail to prevent the bust; it helped generate the preceding boom.

Booms and recessions do not spring from the nature of the market order, they contend. Central banks and many financial institutions with central-bank backing and support create them by issuing fiat money and credit which falsify interest rates and distort the market structure.

On this view, artificially cheap credit draws entrepreneurs into projects that only appear profitable under falsified rates. The recession is therefore not an arbitrary collapse of demand but the painful liquidation of accumulated errors. Sennholz’s treatment of policy follows from this theory: once the errors exist, more rate-cutting cannot transform bad investments into sound ones.

Cuts in interest rates obviously cannot correct the mistakes made in the past.

The middle of the essay broadens from theory to institutional sociology. Sennholz lists the groups that want the Fed to act: stock sellers, indebted corporations, banks exposed to commercial loans, debt-burdened consumers, and politicians dependent on deficit finance. The Fed becomes the imagined rescuer of every overextended balance sheet.

All eyes, nevertheless, are on the Fed, the guardian of liquidity, defender of stability, and protector of prosperity.

For Sennholz, this dependence is structural. Fractional-reserve banking needs a lender of last resort; the Treasury benefits from a central bank able to facilitate vast public debt; and politicians dislike monetary systems that restrain spending. His contrast with commodity money is therefore political as well as economic.

The classical gold standard would have been an insurmountable obstacle to such heedless spending of the people’s savings.

The essay then turns to the intellectual foundations of central-bank legitimacy. Sennholz argues that the Fed’s authority is sustained by academic doctrine as much as by financial interest.

Ideas control the world, and monetary ideas shape monetary institutions.

He organizes this section around three schools: Keynesians, Supply-Siders, and Monetarists. Keynesians justify monetary expansion and deficit spending as remedies for inadequate demand. Supply-Siders promise tax cuts but, in Sennholz’s account, evade the deeper issue of spending.

Tax reductions without spending reductions are shams that may deceive the voters, but do not lower the burden of government.

Monetarists receive a more subtle criticism. Though they oppose Keynesian discretion, Sennholz argues that their rule-bound monetary expansion still presupposes fiat authority and legal-tender power. Their hostility to gold, in his view, helped legitimate the post-1971 dollar order, which elevated the Fed into a global monetary power.

The essay’s relevance lies in its early diagnosis of themes that would recur in later crises: asset bubbles, moral hazard, emergency rescues, central-bank prestige, and the social demand for cheap credit. Its conclusion is uncompromising. If fiat expansion causes the boom-bust cycle, then stability requires limiting or abolishing that power; yet nearly every organized interest demands more credit, not less.

Their voices are barely audible in the din of the public's call for more money and credit.