This file is a short monetary-economics essay. Sennholz writes in the Austrian/free-market tradition, treating the contemporary U.S. monetary system as an unstable political construction rather than a neutral technical apparatus. Its central thesis is that rapid monetary expansion, even when not immediately visible in consumer-price indexes, distorts production, weakens savings, subsidizes government debt, and prepares the conditions for renewed inflation or boom-bust crisis.
Fear of deflation – that feeling of concern about declining prices--is slowly giving way to the dread of inflation.
The essay opens by shifting attention from the early-2000s fear of deflation to the older danger of inflation. Sennholz’s governing metaphor is the “giant inverted pyramid” of Federal Reserve money supporting a much larger superstructure of bank deposits. He cites then-current Federal Reserve figures—$692 billion in Federal Reserve notes and $8.9 trillion in deposits—to argue that the monetary base and credit structure are expanding together at alarming rates.
His first conceptual move is institutional: inflation is not merely a price phenomenon but the product of a managed money regime. The Federal Reserve’s tools—security purchases, lending, reserve requirements, discount rates, open-market operations, and regulation—are presented as attempts to “juggle” an inherently unmanageable system.
To manage the monetary affairs of millions of people exceeds the ability of any committee of twelve wise men, no matter how many regulatory powers the U.S. Congress may bestow on them.
From here Sennholz turns the critique from competence to legitimacy. The problem is not only that central bankers may err, but that the system is grounded in political privilege and coercive authority. This is the essay’s core Austrian move: money should arise from market choice, not administrative command.
Built on politics and resting on the police powers of government, the pyramid is a warped and hollow structure.
The middle section explains why visible consumer-price inflation remains muted despite enormous monetary growth. Sennholz argues that official indexes understate depreciation because they emphasize relatively stable consumer goods while ignoring major price increases in real estate, raw materials, and commodities. Low Treasury yields, he adds, compound the problem for banks: their reserves earn little, depreciate faster than their nominal return, and are then taxed. Credit expansion becomes a defensive strategy against monetary loss.
But things are seldom what they seem; in affairs of state they rarely are.
The essay’s most important explanatory passage concerns globalization. Sennholz maintains that imports from lower-cost producers such as China, India, and Malaysia temporarily suppress U.S. consumer prices, while foreign demand for Treasury securities helps finance federal deficits and restrain interest rates. In this way, foreign production and foreign savings mask the inflationary consequences of American monetary expansion.
Never before have so many foreigners labored so diligently to serve the economic interests of the American people.
The final section warns that this arrangement is historically exceptional and politically fragile. Foreigners may not indefinitely exchange real goods for U.S. government promises. If confidence weakens, Sennholz expects higher interest rates, a falling dollar, rising goods prices, and possibly another boom-bust cycle.
We must not plan the future by the past.
The essay closes by contrasting fiat money with “real economic goods” such as precious metals. Its relevance lies in its early-2000s diagnosis of asset inflation, trade imbalances, deficit finance, and central-bank credit expansion—issues that became still more prominent after later financial crises. Sennholz’s final moral judgment condenses the whole argument: fiat money enables political excess by severing money from market discipline.
The love of money, fiat money that is, is the root of much evil.
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