Hans F. Sennholz’s essay, written just after the 1971 suspension of dollar-gold convertibility, treats the breakdown of Bretton Woods not as a temporary diplomatic problem but as evidence of a deeper institutional failure. The search for a “new monetary order” is, for him, misdirected if it remains a search for better official management of paper currencies. The crisis begins in policy, but its roots lie in the political control of money.
Ever since President Nixon suspended gold payments, on August 15, 1971, the question of realistic par values of the world's currencies has become a vexing international political issue.
Sennholz’s theoretical frame is Austrian and market-centered. He rejects explanations that begin with national aggregates or official exchange-rate targets, arguing instead from individual valuations, cash balances, expectations, and purchasing power. Money is demanded because individuals want command over goods; its value changes as supply and demand change. Expectations matter because people alter their willingness to hold money when they anticipate depreciation or appreciation.
An expected fall tends to reduce the demand for money and thus its purchasing power; an expected rise brings about the opposite.
From this account of money’s purchasing power, Sennholz explains exchange rates as market ratios among monies. Currencies do not acquire stable relations because governments announce parities; they tend toward parity when their purchasing powers are brought into line through exchange, arbitrage, and the choices of holders. This makes political exchange-rate fixing fragile whenever domestic inflation undermines the currency being defended.
Market forces tend to establish the parity between the purchasing powers and thus their exchange ratios.
The historical contrast is central to the essay. Sennholz presents the classical gold standard as an international monetary order grounded in a common commodity rather than in conference agreements. Gold and silver coins could circulate across borders because their weight and fineness were ascertainable; exchange rates were chiefly translations between metallic contents. In that setting, international money did not require continuous diplomatic redesign.
Silver was generally used for small transactions and gold in all larger exchanges.
Bretton Woods, by contrast, appears in the essay as a managed compromise that preserved the language of gold while concentrating real discretion in governments and central banks. The gold-bullion and gold-exchange systems replaced coin redemption and private discipline with official reserves, reserve currencies, and political promises. Once the dollar became the main reserve asset, world monetary stability depended on American fiscal and monetary restraint. Sennholz argues that this restraint failed under deficits, welfare-state spending, credit expansion, and the accumulation of dollar claims abroad.
His discussion of balance-of-payments crises follows from this diagnosis. Gold outflows and currency pressures are not mysterious national events; they are the visible result of people reducing their holdings of depreciating money. The suspension of gold payments therefore appears not as technical modernization but as default on a promise that inflation had made impossible to honor. Foreign governments are not the principal culprits; domestic monetary policy is.
The essay’s conclusion is institutional and moral as much as economic. Managed currencies invite political manipulation because governments face constant pressure to spend, redistribute, and cheapen credit. International conferences can rearrange parities, controls, and reserve devices, but they cannot create durable stability while monetary authorities retain the power to depreciate money. Sennholz’s alternative is a return to gold, especially the gold-coin standard, not because it is administratively elegant but because it removes money from discretionary political manufacture. The essay thus reads the 1971 crisis as a warning: a stable international order cannot be built on managed inflationary paper, but only on money disciplined by markets and beyond the ordinary reach of the state.
This work was divided into 10 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 10 sections and cites the passage.
Ask the Librarian