Is It Really Rothbard?

MONEY AND NATION STATE
Kevin Dowd and Richard H. Timberlake, Jr., Editors
Transaction Publishers, 1998, viii + 453 pgs.

When I received this book, I turned first to the contribution of Murray N. Rothbard, "The Gold Exchange Standard in the Interwar Years" (pp. 105-65). It is a characteristically brilliant piece, showing in detail how Benjamin Strong and Montagu Norman used the gold exchange standard to further their schemes of monetary manipulation.

But as I read the essay, several passages startled me. They did not seem genuinely Rothbardian; the Murray I knew would not have written them.

As I read the passages that aroused these misgivings, a remark that Murray made in conversation several years ago came back to me. He complained that he had been asked by the editors of this volume to make a number of changes in his essay. He was not disposed to accede to this request: if the editors insisted, he intended to withdraw his essay from the collection. I understand that he made similar statements to others.

Now, after his death, the essay has appeared; and it includes the "un-Rothbardian" passages. What was I to do? With typical timidity, I decided to ignore the matter: after all, suspicion is not proof.

Meanwhile, I have obtained a copy of Murray's original manuscript for his article. When I compared it with the version in this book, I was shocked. The distortions far exceed what I had feared. I do not know who is responsible for them, so I shall refer in the following to the "editors" or "redactors," meaning by these terms whoever has made the changes about which I complain. These terms do not refer to Professors Dowd and Timberlake, whose role, if any, in the distortions I do not know.

Let us begin, appropriately for this topsy-turvy product, at the end. The essay, in its present rendition, finishes in this way: "Although it is unlikely in the near future that the world will return to gold, its history and the history of its decline remains [sic] instructive for all of us" (p. 156).

The mood here is elegiac: as we contemplate the failure of past politicians to restrain through "discipline" their "human weakness," we shake our heads in dismay and move on. This, I suggest, is un-Rothbardian: our author did not at all regard the imminent return of gold as a futile dream. We must do more than regret past mistakes, in his view. We must restore the correct monetary system as soon as possible, and this may be very soon indeed.

You may reply that I have read too much into this sentence: it need not be taken as meaning that success in the fight for gold is at best far away. True enough. But it can be read this way and Rothbard would not have so expressed himself. In fact, he did not: his manuscript concludes with an ac-count of the New Deal. The sentence I have quoted does not occur in it, nor does anything else remotely like it.

To grasp the next point at issue, some background must be sketched. Contemporary Austrian economists differ sharply about banking. Some do not object to fractional-reserve banking, so long as it is private banks that engage in this practice. Competition among banks, so it is claimed, prevents inflation: if one bank overexpands, other banks and their customers will demand redemption, and so bring the reckless bank back into line. Kevin Dowd, an editor of this volume, and Lawrence White, one of the contributors, support this view.

Rothbard thought otherwise. He regarded fractional-reserve banking as fraudulent, and he dismissed out of hand the alleged need for the quantity of money to rise as production ex-pands. I do not wish here to assess the competing positions: I want only to call attention to Rothbard's opposition to "free" fractional-reserve banking.

Several passages that in Rothbard's manuscript manifested his position have in the editors' rendition been altered to disguise this. Rothbard's manuscript stresses the widespread use, under the classical gold standard, of gold in ordinary transactions and the pressure exerted on financial policy by the prospect of an immediate demand for redemption: "[G]old coin was used in everyday transactions by the general public...governments or central banks were, on the gold standard, restricted in their issue of paper or bank deposits by the iron necessity of immediate redemption in gold, and particularly in gold coin on demand" (Rothbard ms., pp. 3-4, emphasis added).

Wide use of gold coin and immediate redemption are not what we want in "free" fractional-reserve banking, are they? Accordingly, the passage I have quoted is amended: "[G]old coin could be used in everyday transactions by the general public.... But governments, central banks, and private issuers on the gold standard were constrained in their issue of paper or bank deposits by the ultimate necessity of redemption in gold coin" (p. 107, emphasis added). Rothbard's comment has been weakened, and a reference to "private issuers" not in the original has been inserted.

Again, Rothbard claims that "in fractional-reserve banking, paper and bank notes pyramid as a multiple of gold reserves" (Rothbard ms., p. 4). In the book, it is only in "government fractional-reserve central banking" that notes pyramid (p. 107). And a paragraph in which Rothbard claims that "central banking and fractional-reserve banking allowed play for a boom-bust cycle" has been excised altogether (ms., p. 5). Rothbard's argument in the missing paragraph is that the classical gold standard limits the instability caused by fractional-reserve banking.

As readers of Rothbard's delightful The Case Against the Fed will recall, Rothbard believed that the Federal Reserve System was conceived in sin. It was, from the start, a conspiracy aimed at financial manipulation. Accordingly, he states in his manuscript: "The purpose of the Federal Reserve was to cartelize the nation's banking system, and to enable the banks to inflate together" (ms., p. 18).

Our redactors did not find this to their liking. They changed Rothbard's sentence to this: "Whatever the publicly stated purposes were for the [Federal Reserve] system, the result was the cartelization of the nation's banking system" (pp. 115-16, emphasis ad-ded). What right have they to weaken Rothbard's assertion in this way?

Readers familiar with Rothbard's views on praxeology will be startled to encounter the following: "Those who have looked to politically controlled money as some sort of panacea, placing in the bargain their faith in those institutions to do solely what is good for the public as a whole, have been too often rewarded with consequences as bad--and often worse--than the financial situations such institutions were designed ostensibly to correct. While disagreements over the gold standard and historical and theoretical effects of private banking will undoubtedly continue, the empirical record of government manipulations of credit and currency is not contestable" (p. 128).

The contrast between debatable theory and "the empirical record," that cannot be denied is thoroughly unpraxeological. And would Roth-bard, even ironically, say that governmentally controlled money was "as bad--and often worse" than the previous states of affairs? Surely he would write more emphatically.

Has Rothbard converted to empiricism and modified his temperament to boot? Otherwise, how can we account for this aberrant paragraph? I am happy to assure readers that they need not revise their picture of Rothbard. The explanation for the "changes" lies in a more predictable quarter. This paragraph corresponds to nothing in Rothbard's manuscript.

And now we touch bottom. The paragraph I have just quoted begins as follows: "In his own way, Keynes, as he so often did, saw to the heart of things. The issue of the 'trust' that can be placed in governmentally controlled financial institutions is precisely the crucial issue" (p. 128).

The view of Keynes as an insightful, if skewed, thinker, is not without a certain interest. But it is the very midsummer of madness to impute the notion to Rothbard. Need I say that the sentences cited are not to be found in Rothbard's manuscript?

In the section of the original manuscript which immediately precedes the inserted encomium to Keynes, Rothbard's tone is mocking: "Keynes managed to bully it [the Royal Commission on Indian Finance] into including his appendix.... In addition, in his work on the Commission, Keynes managed to enchant his doting mentor, Alfred Marshall" (ms., p. 39).

What to do? Would not readers, having encountered such disparagement, be jarred at finding Keynes praised for his insight? The solution is obvious--eliminate Rothbard's words that interfere with the message the higher authorities wish to convey. Keynes now "manages to convince" the commission to include his book's appendix in their report, and the sentence on Marshall goes out altogether (p. 128).

The artful way the editors substitute their view of Keynes for Roth-bard's displays some ingenuity; and, like an artist hiding away his initials on his canvas, they leave a mark by which their presence may be identified and credit duly assigned. On the preceding page, they refer to the "then India-posted John Maynard Keynes...when finally leaving the Indian [sic] office for Cambridge" (p. 127).

Whoever concocted this evidently thought that the India Office was located in India. But of course the India Office was in London; and it was there, not in India, that Keynes worked on Indian finance. Rothbard correctly has: "Keynes, then in his first economic post at the India Office" (ms., p. 38), and does not move Keynes to India. Since the author of the line in the book pla-ces Keynes there, I conclude that Rothbard did not write the offending passage.

This, by the way, is not the only mistake introduced into Rothbard's text. Rothbard states that the Fed "obligingly doubled" the money supply in the spring of 1917 (ms., p. 21). This becomes in the book the nonsensical "the Fed doubled the money supply by 50 percent" (p. 117).

However critical I have been of the editors' manipulations of the text, I must acknowledge their achievement in one matter. For all too many, scholarly notes are dull, dreary matters. Not to our boys. For them, Rothbard's notes provide unlimited space for creative activity.

A long note distinguishes between older and newer uses of the word "inflation." In the older use, inflation meant an increase in the supply of money: in the newer it means an increase in the price-level. Although "I personally prefer the older approach," the newer, the note states, is adopted in the article. "In this article, the term used to denote an increase in the quantity of money is 'expansion.' Inflation is used solely to indicate an increase in the level of some price index" (p. 156). The note concludes by pointing out, regretfully, that the "direct definitional causal link" between an increase in the quantity of money and a rise in price is cut by the new definition. "Perhaps this is progress; perhaps not." (All quotations are from pp. 156-57, n. 3.)

Rothbard did indeed prefer the older usage, but this note is not to be found in his manuscript. The mildly ironic "perhaps this is progress, perhaps not" gives the game away: this is not Rothbard's tone of voice.

But am I not here grasping at straws? Why object to a mere clarification of terms, even if, ideally, the editors should have signaled that the note has been added by them? My objection is precisely to the note. In the first place, the note introduces a mistake. To characterize inflation as an increase in the supply of money does not create "a direct definitional causal link" between inflation and a subsequent price rise. It says nothing at all about a rise in prices. Use of the older definition does indeed make the analysis of price rises easier, but this is not a "definitional causal link." And whoever added the note has not bothered to coordinate his handiwork with the text. In the article, inflation is sometimes used in the older usage that the note claims to have abandoned. For example: "Meanwhile, despite the great inflation of money and credit in the United States, the massive increase in the supply of goods in the United States continued to create relative retail price stability" (p. 149).

If the editors had to substitute their own usage of "inflation" for Rothbard's, you would think they could have done a consistent job of it. And for the editors to state "I will adhere," as if it were Rothbard who spoke in the note they have themselves added, is chutzpah indeed.

I pass over a few oddities, e.g., the nonsensical "average level of existing relative prices" in the editorially in-vented note 33 (p. 160) and the citation of a "classic article" not to be found in the manuscript (p. 157, n. 11), to arrive at the piece de resistance.

Let us consider the following note: "Far from showing that moneys of account can be imaginary in relation to media of exchange, the historical research of Luigi Einaudi on 'imaginary' money in the Middle Ages reveals various countries experiences with various relationships between gold and silver, both commodity moneys (Einaudi 1953; Timberlake 1991)" (p. 157, n. 6).

Would not readers of this note assume that "Timberlake 1991" was one of Rothbard's sources for his claim about money in the Middle Ages? The manuscript tells a different story. The corresponding note begins: "Professor Timberlake misconstrues the historical researches of Luigi Einaudi on 'imaginary' money in the Middle Ages" (ms., p. 88, n. 4, emphasis added). By omitting a crucial sentence, Professor Timberlake has been transformed from the note's target to one of its sources. One wonders whether it is altogether a coincidence that Professor Timberlake is an editor of the volume.

Perhaps it may be claimed that the change avoids acrimony among the contributors and was for that reason acceptable. But this argument at most supports omission of the note entirely, rather than the distortion here perpetrated. And if controversy among contributors was to be concealed, why is Timberlake in his article allowed to criticize Rothbard (p. 189, n. 6)? Dr. Bowdler would have been very proud of this job.