Hans Sennholz’s essay, originally published in an edited collection in 1971 and digitally republished in 2011, examines Chicago monetary economics from the standpoint of Austrian theory. It begins by welcoming Milton Friedman’s challenge to Keynesian orthodoxy: Chicago economists restored money to economic debate, reconstructed the quantity theory, and exposed the failures of monetary management. Yet Sennholz’s central contention is that this achievement leaves intact the methodological and political premises responsible for instability:
In our judgment, it is built on the quicksand of macro-economic analysis; it misinterprets the business cycles and therefore is bound to fail as policy guide for economic stability; it is inherently inflationary as it makes government the guardian of our money.
The argument proceeds through an intellectual genealogy, an account of the Chicago tradition, and an Austrian critique of its method, cycle theory, and monetary institutions. Sennholz’s organizing move is to shift attention from the familiar opposition between Keynesians and monetarists to their shared commitment to government-directed stabilization. Their disagreement over policy instruments, he argues, conceals a deeper agreement about economic aggregates and monetary authority.
The genealogy begins with Jevons’s proposals for a tabular standard and Marshall’s search for a unit of constant purchasing power. Sennholz identifies Marshall’s separation of individual price determination from aggregate monetary determination as a decisive conceptual step. Once the price level becomes a distinct object governed by money supply and velocity, stabilization invites government manipulation. Hawtrey then explains cycles through credit movements imperfectly regulated by gold reserves, while Fisher locates depression in deflation and advocates reinflation, a compensated dollar, and full cash backing for demand deposits. These figures establish the tradition’s recurring aspiration: replace an allegedly defective commodity standard with deliberately stabilized money.
Henry Simons connects that inheritance to Chicago. Despite his fierce opposition to Keynes, Simons likewise condemns the gold standard and regards depressed aggregate activity as requiring governmental action. The difference is between discretionary intervention and binding rules, not between monetary control and monetary freedom. Friedman develops the rule-based alternative through a relatively stable demand for money, evidence linking monetary changes to prices and income, and a prescribed annual monetary expansion of 3 to 5 percent. His emphasis on uncertain policy lags supports rejection of fiscal fine-tuning; his explanation of the Great Depression assigns principal responsibility to the Federal Reserve’s failure to prevent monetary contraction. Flexible exchange rates would free domestic policy from constraints imposed by gold movements.
Sennholz’s objection begins with the status of economic knowledge. He characterizes Chicago economics as empirical and predictive, whereas Austrian praxeology derives economic propositions from the logic of human action. Historical statistics can illuminate particular events, but cannot establish universally valid quantitative relationships:
Economics is not "quantitative" and does not measure human action because there are no constants in individual choice and preference.
This methodological divide governs his account of money. Rather than treating money principally as a measure whose purchasing power must be stabilized, Sennholz treats it as a marketable good held by particular individuals. Its purchasing power emerges from their choices, just as other exchange ratios do:
The quantity theory of money as understood by Austrian economists is merely another case of the general theory of demand and supply.
The distinction is therefore not between accepting and rejecting monetary quantity as relevant. It is between explaining monetary value through individual demand and supply and treating aggregate quantities as instruments of stabilization. In Sennholz’s presentation, the latter approach obscures the relative-price and investment effects through which newly created credit enters economic life.
His strongest substantive challenge concerns Friedman’s steady-growth rule. Drawing on Mises, Sennholz argues that even modest fiduciary credit expansion lowers interest rates below those warranted by real saving and induces investments that cannot be sustained. Price-level stability consequently does not establish economic coordination:
Even if most prices should decline while monetary authorities expand credit at a modest rate the injection of fiduciary funds falsifies interest rates and thereby causes erroneous investment decisions.
The resulting boom diverts resources toward capital goods; rising costs and insufficient saving eventually expose the malinvestments. Recession is the necessary process of liquidation and reallocation. Sennholz contrasts this causal account with Friedman’s acknowledged uncertainty about monetary transmission. In his judgment, monetarism mistakes contraction, a symptom of adjustment, for the originating cause and prescribes reinflation that prolongs the underlying distortions.
The Great Depression supplies the historical test. Sennholz attributes the initial boom and crash to Federal Reserve credit expansion during the Coolidge administration. He then distinguishes that downturn from the prolonged depression, which he explains through subsequent interventions: the Hawley-Smoot tariff, the 1932 tax increases, and New Deal industrial, labor, and fiscal restrictions. These policies, he argues, obstructed adjustment and private enterprise. His historical interpretation thus separates the monetary origins of the boom from the governmental barriers to recovery, rather than explaining the entire episode through a shrinking money stock.
The conclusion makes monetary institutions central to the dispute. Sennholz defends gold as a market-originating medium whose quantity is independent of political wishes. He argues that genuine freedom to hold gold and contract in it would produce a parallel standard without requiring a comprehensive monetary reform. The essay’s relevance lies in its challenge to the assumption that predictable monetary rules are sufficient to secure market coordination. Its ultimate dividing line is institutional, not merely technical:
It would merely be another chapter in the age-old struggle between monetary freedom and governmental control.
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