This short monetary essay analyzes the surprising strength of the U.S. dollar in 2001 despite aggressive Federal Reserve easing, rapid U.S. money growth, and a large trade deficit. Sennholz’s main thesis is that the dollar’s strength is not a sign of sound fundamentals but a symptom of special demand: first from the euro cash changeover, and more broadly from a fragile global credit system built on dollar reserves. The essay moves from recent exchange-rate history, to the euro transition, to a broader Austrian-style account of fiat-credit instability.
Sennholz begins by recalling earlier episodes of dollar strength: the interest-rate-driven peak of 1985 and the Asian crisis of 1997, when capital fled into dollars. The 2001 case is more puzzling because U.S. rates are being cut faster than European rates and U.S. money aggregates are expanding more rapidly than euro aggregates. Yet the dollar rises.
Facing such odds, no other currency has ever shone so brightly.
His immediate explanation is institutional and historical: the euro’s arrival as physical currency creates a temporary liquidation of old European cash holdings, including untaxed and illicit holdings unlikely to be deposited openly for conversion. This produces demand for dollars even while U.S. monetary policy is inflationary.
This economist is rather skeptical about the mighty dollar’s enduring strength, but is confident that the dollar will show surprising resilience in the months ahead.
The dollar, then, is “mighty” only in a relative and provisional sense. Its role as reserve currency and refuge allows it to strengthen even while its purchasing power is being eroded. Sennholz uses the euro changeover to illustrate a broader claim: distrust of governments and banks in monetary matters drives private actors toward the dollar as the least distrusted alternative.
Throughout Europe, farmers, merchants, and manufacturers presently are exchanging their own currencies for U.S. dollars.
The essay then weighs the effects of a strong dollar. It benefits dollar holders, lowers the cost of imports, attracts foreign capital, and can raise productivity through greater capital investment. But it also weakens American exporters, encourages imports, and contributes to domestic industrial strain. Sennholz’s conceptual move is to distinguish market exchange rates from managed “dirty” rates, arguing that free money markets tend toward purchasing-power parity.
In unhampered money markets the rates are determined solely by the interaction of foreign trade, capital movements, speculation and even arbitrage.
From this point the essay broadens into a theory of global credit fragility. The dollar’s strength is not simply evidence of American vigor; it also reflects dependence on the dollar at the base of an expanding world credit structure. Crises abroad increase demand for dollar liquidity.
The dollar gains in strength whenever a financial crisis looms on the horizon.
Sennholz’s central metaphor is the inverted pyramid: Federal Reserve credit and dollars form the narrow base, while bank credit, securitized loans, derivatives, offshore dollar markets, and foreign central-bank credit form widening upper layers. Each layer depends on the credibility and liquidity of the dollar beneath it.
The global credit system resembles an inverted pyramid which continues to grow sporadically.
His discussion of securitization is especially important because it shows how credit expansion can escape traditional reserve controls. Loans can be converted into securities, removed from reserve requirements, and replaced by new lending capacity.
A bank can lend, securitize, sell, and lend in an unending process of credit expansion.
The final section turns cautionary. The Fed may try to prevent recession by lowering rates and encouraging more credit, but for Sennholz recessions are not arbitrary downturns; they are the necessary liquidation of earlier distortions. Monetary intervention can postpone adjustment only by worsening the underlying imbalance.
Recessions, after all, are the corrections of the preceding excesses and maladjustments; they may be delayed for a while, but cannot be avoided once the harm has been done.
The essay’s relevance lies in its diagnosis of reserve-currency privilege as both power and vulnerability. The United States can run persistent current-account deficits because the world demands dollars and Treasury securities, but this same structure ties global stability to the Fed’s “precarious balancing act.” Sennholz concludes that defending inflated asset prices, corporate leverage, consumer debt, and mortgage credit will likely produce renewed inflation, rising interest rates, and a deeper recession. The mighty dollar is therefore presented not as a foundation of stability, but as the bright surface of a dangerously overextended fiat-credit order.
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