America’s Money Machine

ON SEPTEMBER 30, 1913, at a moment when American attention was focused on the revolutionary monetary reform then under debate in Congress, the New York Times astounded and diverted its public by a bitter attack on a former president of the United States. The former president was Theodore Roosevelt who had, the year before, broken away from the Republican Party to run as the Progressive Party (Bull Moose) candidate for president. He had been defeated by Woodrow Wilson, but he had been a powerful candidate who had attracted the greater part of Republican Party votes, and his views on public questions still commanded a large following among the electorate.

What had aroused the mortal apprehensions of the Times’ editors was an article in the Century Magazine in which Roosevelt had outlined his proposals for a reorganization of government and society. The editorial attacked his blueprint as “super-socialism.” Without going so far as to charge Roosevelt with being a Marxist—this was before the Russian Revolution, but Marxism was even then anathema on these shores—it declared that he would in effect bring a Marxian redistribution of wealth in a “simpler and easier way.”

“He leaves,” the editorial went on to say, “the mines, the factories, the railroads, the banks—all the instruments of production and exchange—in the hands of their individual owners, but of the profits of their operations he takes whatever share the people at any given time may choose to appropriate to the common use. The people are going to say, We care not who owns and milks the cow, so long as we get our fill of the milk and cream. Marx left socialism in its infancy, a doctrine that stumbled and sprawled under the weight of its own inconsistencies. Mr. Roosevelt’s doctrine is of no such complexity. It has all the simplicity of theft and much of its impudence. The means employed are admirably adapted to the end sought, and if the system can be made to work at all, it will go on forever.”

The means by which Roosevelt would achieve these ends, the Times explained, drawing from the Century article, would be by a monolithic one-party political system, along with an indefinite expansion of government powers and functions. (“It will be necessary,” the Times quoted Roosevelt as saying, “to invoke the use of governmental power to a degree hitherto unknown in this country, and, in the interest of democracy, to apply principles which the purely individualistic democracy of a century ago would not have recognized as democratic”) Roosevelt would also abolish competition. (“The business world must change from a competitive to a cooperative basis.”) He would remove the restraints of an independent judiciary. (“The people themselves should . . . decide for themselves . . . what laws are to be placed upon the statute books, and what construction is to be placed upon the Constitution. . . .”) He would confiscate the great fortunes (by a “heavily progressive inheritance tax” and a “heavily graded income tax.”)

This was the Roosevelt who had been the idol of the Republican Party, then as now regarded as the citadel of plutocracy and special interest. This was the Roosevelt whose portrait, despite his 1912 defection from orthodoxy, still adorns the walls of the Union League Club and other Republican strongholds. And this is the New York Times which became the loyal supporter of Franklin D. Roosevelt, his New Deal, and the successor Fair Deal, New Frontier and Great Society administrations that have out-Roosevelted Roosevelt.

The Theodore Roosevelt article and the Times’ editorial are significant in disclosing how far the political economy of the country was even then being borne on the currents of authoritarian dogma. What Roosevelt failed to see was that these immense changes which he proposed were even then in course of execution. They were brought about by means far more subtle and invisible than those he proposed, and without the necessity “to invoke the use of government power to a degree hitherto unknown in this country,” without abolishing competition, or the independence of the judiciary, without quite confiscating the great fortunes. The succeeding years witnessed the extension of a system whereby government became the senior partner in most businesses, in which it determined what expenses should be incurred; at what prices the product should be sold; how much employees, from the lowest to the highest, should be paid, and how long they should work; how much of the income of the business should be retained and how much distributed; and what share should go to the senior partner. At the same time the government would undertake to create or modify the climate in which business was conducted; it would influence, if not determine, the general level of prices; it would determine the optimum rate of business activity, either to stimulate or retard as in its wisdom appeared most desirable; it would conclude what forms of business activity should be favored and developed, what forms should be discouraged; it would determine the costs of capital to those who would embark in enterprise, according to its judgment; and it would make such capital available or not available, and set the rate of interest to be paid. It would even, for a season, reach down into the household and decide the important questions of household finance: is an electric washing machine a capital investment or a convenience of luxury?

The means by which these ends would be accomplished without the strong arm of the state police were then in process of formation through two legislative enactments of the year in which Roosevelt penned his Century article. The first of these was the income tax; the other was the Federal Reserve Act. Our concern here is with the latter, and for that purpose a thumbnail sketch of the monetary system as conceived by the founding fathers and as developed through the first one hundred and twenty years of our history is necessary.

Nevertheless, explicit provisions of the Constitution have never been modified, and despite the subsequent withdrawal of all gold and silver intrinsic coin from circulation, and the cessation of mintage, the dollar is still defined by statute in terms of a weight of precious metal.

The Constitution gave Congress the power to coin money and “to regulate the value thereof.” Actually, the question is relevant whether, regardless of the Constitution, or any other authoritarian decree, government is able to regulate the value of money. Certainly the early experience with coinage would dispute that view (and the later experience with paper money will be examined in the pages to follow). The first coinage act provided for silver dollars weighing 416 grains, .89243 fine1 and they were given a legal tender parity with the current Spanish milled dollar, which then formed the bulk of the circulation. However, as the silver was undervalued at this rate, U. S. dollars began to disappear into the melting pot, and the government was compelled to suspend the coinage of dollars in 1805.

At the same time a corresponding effort to regulate the value of the gold dollar also failed under the realities of the market place. The original coinage act had set the content of the gold dollar at 27 grains, .916 2/3 fine (24.75 grains) but as this undervalued gold in relation to silver, the content was altered in 1834 to 25.8 grains, .900 fine (23.22 grains).

While the impotency of legislative fiat in regard to coinage is well demonstrated by both U. S. and universal history, in the case of paper money the operation of public influence is less obvious. In the case of paper the power of the state to obtain acceptance of its fiat is bolstered by a system of sophistries that deceive the most astute. We shall observe the subtleties of argument in the debates over monetary reform leading to the Federal Reserve System.

Almost from the first, monetary discussion, and with it monetary policy, became clouded by a confusion of terminology among money, specie, cash, lawful money, legal tender, and in recent times M1 M2, etc. Today the word money is commonly used to designate any form of purchasing power—an error into which our discussion here may occasionally lapse. Money, however, as we have noted, properly refers only to coinage, as do specie and cash. The terms lawful money and legal tender arose after the establishment of a mint in 1793. Before then foreign coins were common currency, particularly the Spanish milled dollar, and the first U. S. dollars were struck at the equivalent of the Spanish dollar. After the mint was set up foreign gold and silver coins continued to circulate and were, until 1857, “legal tender” at various rates according to their precious metal content; but they were not “lawful money,” and only U. S. coinage was the “money of account” for all public records. Until the Civil War only coinage was legal tender, although from as early as 1812 the Treasury from time to time issued interest-bearing bonds of low denomination that were receivable for government dues (limited legal tender); state bank notes redeemable in “specie” or “cash” were also in general circulation but without legal-tender quality. With the Civil War crisis bank notes were turned in for cash in such quantity that toward the end of 1861 all banks suspended convertibility. In 1862 Congress authorized the issue of Treasury notes (“greenbacks”), which were declared legal tender for all payments public and private except imports, and by a peculiar inconsistency also “lawful money.” They were inconvertible into coin but could be exchanged for interest-bearing bonds.

In addition to the greenbacks, as a further means of war finance Congress in 1863 authorized a national bank system by which federally chartered banks could issue circulating notes redeemable in coin against the deposit of U. S. Treasury bonds to the equivalent of 90 per cent of the value of the notes. The notes were declared to “circulate the same as money” but had limited legal tender; i.e., they were not receivable for import dues, nor payable as interest on the public debt nor in redemption of the “national currency” (greenbacks).

The legality of the legal-tender provisions was at first denied by the Supreme Court but later upheld in a series of decisions in which the Court practically abdicated jurisdiction to Congress as a “political” question in which it would not intervene. Thus Congress was established in its right to issue paper currency without limit.

Other factors contributing to monetary confusion and leading to further experiments in state management of money and credit were the convenience, for large transactions, of paper currency over coinage, the divergence in the gold-silver ratio, and the phenomenon noted by Adam Smith in 1776 that “no cry is more common than that of a shortage of money.”

Paper notes that were certificates of deposit for gold held by the Treasury to the account of the note holder were authorized in 1863 and 1882. Silver certificates, issued against standard silver dollars deposited, subsequently entered circulation along with the U. S. notes (greenbacks) of the Civil War. During the war these last named had fallen to a market low of 40 per cent of their gold value, but gradually recovered as the war waned and prosperity returned. A policy of redeeming them by the Treasury was at first commended by Congress, then suspended, and finally forbidden, with a minimum of $300 million to remain in circulation by reissue if necessary.

Since both gold and silver coin were lawful money, the divergence of market values of the two metals had created problems in making payments. The question was resolved in 1873 by ceasing the mintage of silver dollars (except for a “trade dollar” useful in foreign trade) and limiting legal tender of silver to $5. The demonetization of silver coincided with a general demonetization of silver in favor of gold in all the principal countries of Europe, a movement that hastened the market fall of silver and created agitation for government relief.

Although total monetary circulation was steadily growing and the Treasury was able in 1879 to effect convertibility of the greenbacks into gold, public pressure forced the resumption of silver coinage in 1878 and restoration of the bimetallic standard (silver dollars again full legal tender). As a further means to stem the drop in silver prices, the Treasury was directed to purchase and coin a minimum of 2 million silver dollars monthly—a figure increased to 4 1/2 million monthly in 1890.

The action of the British government in 1893, demonetizing silver in India, caused a further drop in silver prices, while the U. S. silver purchases had correspondingly weakened the international value of the dollar and led to gold exports; these developments, combined with a general overexpansion of bank and commercial debt, precipitated a crisis in 1893. The silver purchase acts were repealed, and in 1900 gold was declared the single standard of value.

Left unanswered, however, were the problems of the silver miners and the agricultural interest struggling to find markets for its surpluses, along with the voracious demands for credit for the development of the Great West. For all of these problems, manipulation of the monetary system appealed to the public as the easiest solution.

In the Democratic Party, William Jennings Bryan, a Nebraska lawyer, editor, and subsequently Congressman, became the champion of monetary expansion and a cheaper dollar. He so electrified the 1896 Democratic convention by his advocacy of a return to bimetallism (free coinage of silver at a fixed ratio) in an address known as the “Cross of Gold” speech (“You shall not crucify mankind upon a cross of gold”) that he was nominated for president and for the next sixteen years ruled as undisputed leader of his Party.

Within the Republican Party Roosevelt had demonstrated a hostility to Wall Street, and was advocating authoritarian controls over the economy with a vehemence that reached its crescendo in the Century article to which the Times took editorial exception.

Such was the nature of the tide upon which the monetary reform known as the Federal Reserve System was launched. Our purpose here is to narrate the events and explore the issues that led to its enactment and that subsequently modified it into its present form and structure. We will dwell but briefly upon the techniques by which it operates. Those aspects have already been so exhaustively examined as to leave the essential question buried in a debris of verbiage. In particular the later years that have witnessed the maturing and hardening of the System as a tool of Treasury, and latterly State Department, policy—will be briefly treated. By shortly after the end of World War II the ends so boldly set forth by the earlier Roosevelt had been largely achieved; the Federal Reserve, along with the great mass of the electorate, had become inured to authoritarian controls, and docilely acquiescent to the edicts from Washington.

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289,243/100,000 pure silver, with a fine silver content of 371 1/4 grains. Act of April 2, 1792. Actually, it appears that the first mintings were at a fineness of .900, giving them 374.4 grains of pure metal.

• 1*89,243/100,000 pure silver, with a fine silver content of 371 1/4 grains. Act of April 2, 1792. Actually, it appears that the first mintings were at a fineness of .900, giving them 374.4 grains of pure metal.
• 2The Constitution gave Congress the power to coin money and “to regulate the value thereof.” Actually, the question is relevant whether, regardless of the Constitution, or any other authoritarian decree, government is able to regulate the value of money. Certainly the early experience with coinage would dispute that view (and the later experience with paper money will be examined in the pages to follow). The first coinage act provided for silver dollars weighing 416 grains, .89243 fine* and they were given a legal tender parity with the current Spanish milled dollar, which then formed the bulk of the circulation. However, as the silver was undervalued at this rate, U. S. dollars began to disappear into the melting pot, and the government was compelled to suspend the coinage of dollars in 1805.