A History of Money and Banking in the United States

Notes

Introduction

The endeavors to mislead posterity about what really happened and to substitute a fabrication for a faithful recording are often inaugurated by the men who themselves played an active role in the events, and begin with the instant of their happening, or sometimes even precede their occurrence. To lie about historical facts and to destroy evidence has been in the opinion of hosts of statesmen, diplomats, politicians and writers a legitimate part of the conduct of public affairs and of writing history.

Mises concludes that one of the primary tasks of the historian, therefore, “is to unmask such falsehoods.” Mises, Theory and History, pp. 291–92.

Part 1

[Previously published in a volume edited by U.S. Representative Ron Paul (R-Texas) and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Washington, D.C.: Cato Institute, 1983), pp. 17–118.—Ed.]

the Federalists had saddled the government with a military and interest budget that threatened to topple the structure of federal finances. Despite the addition of tax after tax to the revenue system, the Federal Government’s receipts through the decade of the ‘90s were barely able to cling to the skirts of its expenditures. (William J. Schultz and M.R. Caine, “Federalist Finance,” in Hamilton and the National Debt, G.R. Taylor, ed. , pp. 6–7)

a regime where note-issuing banks are allowed to set up in the same way as any other type of business enterprise, so long as they comply with the general company law. The requirement for their establishment is not special conditional authorization from a government authority, but the ability to raise sufficient capital, and public confidence, to gain acceptance for their notes and ensure the profitability of the undertaking. Under such a system all banks would not only be allowed the same rights, but would also be subjected to the same responsibilities as other business enterprises. If they failed to meet their obligations they would be declared bankrupt and put into liquidation, and their assets used to meet the claims of their creditors, in which case the shareholders would lose the whole or part of their capital, and the penalty for failure would be paid, at least for the most part, by those responsible for the policy of the bank. Notes issued under this system would be “promises to pay,” and such obligations must be met on demand in the generally accepted medium which we will assume to be gold. No bank would have the right to call on the government or on any other institution for special help in time of need.... A general abandonment of the gold standard is inconceivable under these conditions, and with a strict interpretation of the bankruptcy laws any bank suspending payments would at once be put into the hands of a receiver. (Ibid., pp. 148–49)

Florence, like most medieval states, made bimetallism and trimetallism a base of its monetary policy... it committed the government to the Sysiphean labor of readjusting the relations between different coins as the ratio between the different metals changes, or as one or another coin was debased.... Genoa on the contrary, in conformity with the principle of restricting state intervention as much as possible did not try to enforce a fixed relation between coins of different metals.... Basically, the gold coinage of Genoa was not meant to integrate the silver and bullion coinages but to form an independent system. (Robert Sabatino Lopez, “Back to Gold, 1252,” Economic History Review [April 1956]: 224; emphasis added)

See also James Rolph Edwards, “Monopoly and Competition in Money,” Journal of Libertarian Studies 4 (Winter 1980): 116. For an analysis of parallel standards, see Ludwig von Mises, The Theory of Money and Credit, 3rd ed. (Indianapolis: Liberty Classics, 1980), pp. 87, 89–91, 205–07.

The Civil War which has changed the current of our ideas, and crowded into a few years the emotions of a lifetime,” Fowler wrote, “has in measure given to the preceding period of our history the character of a remote state of political existence.” Fowler described the way in which the war, a triumph of nationalism and a demonstration of “the universal tendency to combination,” had provided the coup de grace for the Jefferson philosophy of government with its emphasis on decentralization and the protection of local and individual liberties. (George Frederickson, The Inner Civil War: Northern Intellectuals and the Crisis of the Union [New York: Harper and Row, 1965], p. 184)

See also Merrill D. Peterson, The Jeffersonian Image in the American Mind (New York: Oxford University Press, 1960), pp. 217–18.

Part 2

[Originally published as “The Origins of the Federal Reserve,” Quarterly Journal of Austrian Economics 2, no. 3 (Fall): 3–51.—Ed.]

It was surely no accident that Warburg himself was the principal beneficiary of this policy. Warburg became chairman of the board, from its founding in 1920, of the International Acceptance Bank, the world’s largest acceptance bank, as well as director of the Westinghouse Acceptance Bank and of several other acceptance houses. In 1919, Warburg was the chief founder and chairman of the executive committee of the American Acceptance Council, the trade association of acceptance houses. See Murray N. Rothbard, America’s Great Depression, 4th ed. (New York: Richardson and Snyder, 1983), pp. 119–23.

Part 3

Upon seeing the Fed stray far from his expected policies, H. Parker Willis, in the 1920s and 1930s, was a tireless and perceptive critic of the inflationary policies of the Fed, whether in boom or depression. The criticism was particularly intense to the extent that the Fed engaged in open market operations on government securities, or discounted bank loans to corporate securities. On Willis, see Rothbard, America’s Great Depression.

After resigning as editor of the Journal of Commerce in May 1931, Willis continued to slam the inflationist policies of the Fed in the pages of the Commercial and Financial Chronicle during 1931 and 1932. A Willis article in a French publication in January 1932 upset George Harrison so much that he went so far as to plead with Senator Carter Glass to help put an end to “Willis’s rather steady flow of disturbing and alarming articles about the American position.” Harrison to Glass, January 16, 1932, cited in Milton Friedman and Anna J. Schwartz, A Monetary History of the United States (Princeton, N.J.: National Bureau of Economic Research, 1963), pp. 408–09, n. 162.

As for Hopkins, he was a friend of Harriman’s, who obtained the unanimous support of the BAC for Hopkins’s Cabinet appointment. Hopkins chose as his No. 2 man at commerce Edward J. Noble, who had been a board member in the early 1930s of the ambitious but ill-fated Aviation Corporation, set up by Harriman, and by Robert Lehman of Lehman Brothers. In 1933, the Aviation Corporation was reorganized, and most of its assets sold to the newly formed Pan American Corporation, on whose board sat both Robert Lehman and FDR’s cousin, Lyman Delano. It did not harm Hopkins that he was also a friend of John D. Hertz, partner in Lehman Brothers. Burch, Elites, 3, pp. 30–31, 59.

Norman Davis, son of a successful Tennessee businessman and a millionaire from financial dealings in Cuba before World War I, was known, correctly, as a longtime friend of the Morgans. Davis had been a close friend of key Morgan partner Henry P. Davison, and was made Morgan’s representative to Cuba in 1912, negotiating a $10 million Morgan loan to the Cuban government two years later. Davis became a financial adviser on foreign loans to Secretary of the Treasury McAdoo during World War I, and after the war worked with Morgan partner Thomas W. Lamont as a financial adviser to the American delegation to the Paris Peace Conference. During the Wilson administration, Davis had become undersecretary of state and was a director of the American Foreign Banking Corporation, headed by Albert Wiggin of Chase. See G. William Domhoff, The Power Elite and the State: How Policy Is Made in America (New York: Aldine de Gruyter, 1990), pp. 115–16.

When the Supreme Court ruled the NRA unconstitutional in the Schechter decision in May 1935, Landis promptly stepped in to try to reconstitute the code under the aegis of the SEC. The code committee, now reconstituted in an Investment Bankers Conference Committee, engaged in lengthy negotiations with the SEC, to try to replicate the SEC structure for the organized stock exchanges. Finally, in early 1938, Senator Frank Maloney (D-Conn.), a friend of Chairman Douglas, pushed through the Maloney Act, which provided that the over-the-counter industry could establish its own private association that would be invested with the power, under SEC supervision, to fine, suspend, or expel those dealers found in violation of rules jointly worked out with the SEC. This new association, so reminiscent of the NRA, was specifically declared exempt from the antitrust laws.

The over-the-counter industry happily responded to the Maloney Act by creating the National Association of Securities Dealers (NASD), a private association invested with government power. The NASD promptly fixed a uniform dealer commission rate of 5 percent—an open measure of cartelization—and, while no broker or dealer was required to join the NASD, nonmembers were prohibited by law from engaging in any securities underwriting. In effect, membership was compulsory, and the NASD “assumed the functions and structure of a regulatory agency.” At the SEC’s insistence, the NASD strengthened this regulatory function by hiring its own professional staff of several hundred examiners and investigators, and the SEC habitually ratified stern disciplinary measures, including suspension and expulsion, meted out over the years by the NASD. McCraw, Prophets of Regulation, pp. 197–200.

It is intriguing that one of Willkie’s two main rivals for the nomination, New York’s Thomas E. Dewey, was all his life virtually in the hip pocket of Winthrop W. Aldrich, the Rockefellers, and the Chase National Bank. Thus, see Harr and Johnson, Rockefeller Century, pp. 208–09, 405–06.

The construction of the Boulder Dam was also the occasion for Bechtel to save Stephen Bechtel’s old college chum John A. McCone’s Consolidated Steel from bankruptcy by awarding Consolidated a huge fabricated steel contract in constructing the dam. Bechtel and McCone soon began to collaborate closely with Standard Oil of California in worldwide construction contracts for refineries and oil complexes. McCone went on to become a high public official, including head of the Atomic Energy Commission and of the CIA. Laton McCartney, Friends in High Places: The Bechtel Story (New York: Simon and Schuster, 1988), pp. 34 and passim.

An ideal monetary system from the standpoint of control would be one in which expansions and contractions of the supply of money could be brought about easily and quickly to any required extent.... It appears to the writer that the most perfect control could be achieved by direct government issue of all money, both notes and deposits subject to check. (Ibid., p. 151)

A history of monetary theory by a leading early monetarist partially acknowledged the importance of Currie’s influence on economic theory. Lloyd W. Mints, A History of Banking Theory (Chicago: University of Chicago Press, 1945). Currie’s vital influence on Eccles and hence on banking legislation in the United States is shown in Hyman, Marriner Eccles, pp. 155 ff., and in Israelson, “Marriner S. Eccles,” p. 358. It is therefore all the more astonishing that there is not a single mention of Currie in Friedman and Schwartz, Monetary History.

It’s something that’s not generally known, but British bankers and German bankers have had world trade pretty well sewn up in their pockets for a long time.... Well, that’s not so good for world trade, is it?... If in the past German and British economic interests have operated to exclude us from world trade, kept our merchant shipping closed down, closed us out of this or that market, and now Germany and Britain are at war, what should we do? (Robert Freeman Smith, “American Foreign Relations, 1920–1942,” in Toward a New Past, Barton J. Bernstein, ed. [New York: Pantheon, 1968], p. 252)

See also Gabriel Kolko, The Politics of War: The World and United States Foreign Policy, 1943–45 (New York: Random House, 1968), pp. 248–49; and Rothbard, “New Deal and International Monetary System,” pp. 111–15.

Part 4

[Previously published in an edited version as “The Gold-Exchange Standard in the Interwar Years,” in Money and the Nation State: The Financial Revolution, Government and the World Monetary System, Kevin Dowd and Richard H. Timberlake, Jr., eds. (New Brunswick, N.J.: Transactions Publishers, 1998), pp. 105–63.—Ed.]

Cannan’s sentiment and passion for justice are admirable, but, in view of the antagonistic political climate of the day, it might have been the better part of valor to return to gold at a realistic, depreciated pound.

You can by inflation (a most vicious form of subsidy) enable temporary spending power to cope with large quantities of products. But unless you increase the dose continually there comes a time when having destroyed the credit of the country you can inflate no more, money having ceased to be acceptable as a value. Even before this, as your inflated spending creates demand, you have had claims for increased wages, strikes, lockouts, etc. I assume it will be admitted that with Germany and Russia before us [that is, runaway inflation] we do not think plenty can be found on this path.

Niemeyer concluded that employment can only be provided by thrift and accumulation of capital, facilitated by a stable currency, and not by doles and palliatives. Unfortunately, Niemeyer neglected to consider the crucial role of excessively high wage rates in causing unemployment. Ibid., p. 77.

A gold-coin standard provides the people with direct control over the government’s use and abuse of the public purse.... When governments or banks issue money or other promises to pay in a manner that raises doubts as to their value as compared with gold, those people entertaining such doubts will demand gold in lieu of... paper money, or bank deposits.... The gold-coin standard thus places in the hands of every individual who uses money some power to express his approval or disapproval of the government’s management of the people’s monetary and fiscal affairs. (Walter E. Spahr, Monetary Notes [December 1, 1947], p. 5, cited in Palyi, Twilight of Gold, p. 122)

The Morgans, in the 1928 Republican presidential race, were torn three ways: between inducing, unsuccessfully, President Coolidge to run for a third term; Vice President Charles G. Dawes, who had been a Morgan railroad lawyer and who dropped out of the 1928 race; and Herbert Hoover. On Hoover’s worries before the nomination about the position of the Morgans, and on Lamont’s assurances to him, see the illuminating letter from Thomas W. Lamont to Dwight Morrow, December 16, 1927, in Ferguson, “From Normalcy to New Deal,” p. 77.

Part 5

[Originally published in Watershed of Empire: Essays on New Deal Foreign Policy, Leonard P. Liggio and James J. Martin, eds. (Colorado Springs, Colo.: Ralph Myles, 1976).—Ed.]