A History of Money and Banking in the United States

A H M B ISTORY OF ONEY AND ANKING U S : IN THE NITED TATES T C E W W II HE OLONIAL RA TO ORLD AR The Ludwig von Mises Institute dedicates this volume to all of its generous donors and wishes to thank these Patrons, in particular: George W. Connell (cid:91) James L. Bailey, James Bailey Foundation; Robert Blumen; Christopher P. Condon; John William Galbraith; Hugh E. Ledbetter; Frederick L. Maier; Mr. and Mrs. R. Nelson Nash (cid:91) Richard Bleiberg; John Hamilton Bolstad; Mr. and Mrs. J.R. Bost; Mr. and Mrs. Willard Fischer; Douglas E. French; Albert L. Hillman, Jr.; L. Charles Hilton, Jr.; Mr. and Mrs. Truman Johnson; Neil Kaethler; Robert Kealiher; Dr. Preston W. Keith; David Kramer; Mr. and Mrs. William W. Massey, Jr.; Hall McAdams; Dr. Dorothy Donnelley Moller; Francis Powers, M.D.; Donald Mosby Rembert; James M. Rodney; Joseph P. Schirrick; James Whitaker, M.D. (cid:91) J. Terry Anderson, Anderson Chemical Company; Mr. and Mrs. Ross K. Anderson; Toby O. 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Wood; Steven Lee Yamshon; Jeannette Zummo A H M B ISTORY OF ONEY AND ANKING U S : IN THE NITED TATES T C E W W II HE OLONIAL RA TO ORLD AR M N. R URRAY OTHBARD Cover art: Wall Street, 1886. Permission for use of this print is granted to the Ludwig von Mises Institute by Old World Prints, Ltd. Copyright © 2002 by the Ludwig von Mises Institute All rights reserved. Written permission must be secured from the publisher to use or reproduce any part of this book, except for brief quotations in crit- ical reviews or articles. For information, write the Ludwig vonMises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36849-5301; www.mises.org. ISBN: 0-945466-33-1 CONTENTS Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Joseph T. Salerno PART 1 TheHistory ofMoney and Banking Before the Twentieth Century . . . . . . . . . . . . . . . . . . . . . . . 45 PART 2 The Origins of the Federal Reserve . . . . . . . . . . . . . . . . . . . . . 179 PART 3 From Hoover to Roosevelt: The Federal Reserve and the Financial Elites . . . . . . . . . . 259 PART 4 The Gold-Exchange Standard in the Interwar Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 PART 5 TheNew Deal and the International Money System . . . . . . . . . . . . . . . . . . . . . . . . 431 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491 5 INTRODUCTION In this volume, Murray Rothbard has given us a comprehen- sive history of money and banking in the United States, from colonial times to World War II, the first to explicitly use the interpretive framework of Austrian monetary theory. But even aside from the explicitly Austrian theoretical framework under- girding the historical narrative, this book does not “look” or “feel” like standard economic histories as they have been writ- ten during the past quarter of a century, under the influence of the positivistic “new economic history” or “cliometrics.” The focus of this latter approach to economic history, which today completely dominates this field of inquiry, is on the application of high-powered statistical methods to the analysis of quantita- tive economic data. What profoundly distinguishes Rothbard’s approach from the prevailing approach is his insistence upon treating economic quantities andprocesses as unique and com- plex historical events. Thus, he employs the laws of economic theory in conjunction with other relevant disciplines to trace each event back to the nonquantifiable values and goals of the particular actors involved. In Rothbard’s view, economic laws can be relied upon in interpreting these nonrepeatable histori- cal events because the validity of these laws—or, better yet, their truth—can be established with certainty by praxeology, a science based on the universal experience of human action that is logically anterior to the experience of particular historical 7 8 A History of Money and Banking in the United States: The Colonial Era to World War II episodes.1 It is in this sense that it can be said that economic theory is an a priori science. In sharp contrast, the new economic historians view history as a laboratory in which economic theory is continually being tested. The economic quantities observed at different dates in history are treated like the homogeneous empirical data gener- ated by a controlled and repeatable experiment. As such, they are used as evidence in statistical tests of hypotheses regarding the causes of a class of events, such as inflations or financial crises, that are observed to recur in history. The hypothesis that best fits the evidence is then tentatively accepted as providing a valid causal explanation of the class of events in question, pend- ing future testing against new evidence that is constantly emerging out of the unfolding historical process. One of the pioneers of the new economic history, Douglass C. North, a Nobel Prize-winner in economics, describes its method in the following terms: It is impossible to analyze and explain the issues dealt with in economic history without developing initial hypotheses and testing them in the light of available evidence. The ini- tial hypotheses come from the body of economic theory that has evolved in the past 200 years and is being continually tested and refined by empirical inquiry. The statistics pro- vide the precise measurement and empirical evidence by which to test the theory. The limits of inquiry are dictated by the existence of appropriate theory and evidence. . . . The evidence is, ideally, statistical data that precisely define and measure the issues to be tested.2 1For good discussions of praxeology, see Ludwig von Mises, Human Action: A Treatise on Economics, Scholar’s Edition (Auburn, Ala.: Mises Institute, 1998), pp. 1–71; Murray N. Rothbard, The Logic of Action I: Method, Money, and the Austrian School(Cheltenham, U.K.: Edward Elgar, 1997), pp. 28–77; and Hans-Hermann Hoppe, Economic Science and the Austrian Method (Auburn, Ala.: Mises Institute, 1995). 2Douglass C. North, Growth and Welfare in the American Past: A New Economic History (Englewood Cliffs, N.J.: Prentice-Hall, 1966), pp. 1–2(emphasis in original). Introduction 9 This endeavor of North and others to deliberately extend the positivist program to economic history immediately con- fronts two problems. First, as North emphasizes, this approach narrowly limits the kinds of questions that can be investigated in economic history. Those issues which do not readily lend themselves to formulation in quantitative terms or for which statistical data are not available tend to be downplayed or neg- lected altogether. Thus the new economic historians are more likely to seek answers to questions like: What was the net con- tribution of the railroad to the growth of real GNPin the United States? Or, what has been the effect of the creation of the Federal Reserve System on the stability of the price level and real out- put? They are much less likely to address in a meaningful way the questions of what motivated the huge government land grants for railroad rights-of-way or the passage of the Federal Reserve Act. In general, the question of “Cui bono?”—or “Who bene- fits?”—from changes in policies and institutions receives very little attention in the cliometric literature, because the evidence that one needs to answer it, bearing as it does on human motives, is essentially subjective and devoid of a measurable or even quantifiable dimension. This is not to deny that new eco- nomic historians have sought to explain the ex post aggregate distribution of income that results from a given change in the institutional framework or in the policy regime. What their method precludes them from doing is identifying the ex ante purposes as well as ideas about the most efficacious means of accomplishing these purposes that motivated the specific indi- viduals who lobbied for or initiated the change that effected a new income distribution. However, avoiding such questions leaves the quantitative data themselves ultimately unexplained. The reason is that the institutions that contribute to their for- mation, such as the railroads or the Fed, are always the complex resultants of the purposive actions of particular individuals or groups of individuals aimed at achieving definite goals by the use of specific means. So the new economic history is not his- tory in the traditional sense of an attempt to “understand” the