A History of Money and Banking in the United States: The Colonial Era to World War II

by Murray N. Rothbard

  35Mises makes a similar point:

  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.

  36Rothbard, “Economic Determinism,” p. 4.

  37Ibid.

  38See, for example, David Eakins, “Business Planners and America’s Postwar Expansion,” in Corporations and the Cold War, David Horowitz, ed. (New York: Modern Reader, 1969), pp. 143–71.

  39Rothbard, “Economic Determinism,” p. 4.

  40Murray N. Rothbard, Conceived in Liberty, vol. 1, A New Land, A New People: The American Colonies in the Seventeenth Century, 2nd ed. (Auburn, Ala.: Mises Institute, 1999), p. 9.

  41Mises, Human Action, pp. 47–48.

  42For expositions of the view of the origin and nature of the state as a coercive organization of the political means for acquiring income, see Franz Oppenheimer, The State (New York: Free Life Editions, [1914] 1975); Albert J. Nock, Our Enemy, The State (New York: Free Life Editions, [1935] 1973); and Murray N. Rothbard, For a New Liberty: The Libertarian Manifesto, 2nd ed. (San Francisco: Fox and Wilkes, 1996), pp. 45–69.

  43Rothbard, For a New Liberty, pp. 49–50; and idem, “Economic Determinism,” pp. 4–5.

  44One of the first expositions of the operation of this law, within the context of social democratic political parties can be found in Robert Michels, Political Parties: A Sociological Study of the Oligarchical Tendencies of Modern Democracy (New York: Dover Publications, [1915] 1959).

  45Rothbard, “Economic Determinism,” p. 5.

  46On the alliance between intellectuals and the State, see Rothbard, For a New Liberty, pp. 54–69. A particularly graphic example of this alliance can be found in late-nineteenth-century Germany, where the economists of the German Historical School were referred to as “Socialists of the Chair,” because they completely dominated the teaching of economics at German universities. They also explicitly viewed their role as providing an ideological shield for the royal line that ruled Germany and proudly proclaimed themselves to be “the Intellectual Bodyguard of the House of Hohenzollern.” Ibid., p. 60.

  47So-called “neoconservatism,” which dominates the conservative movement and the Republican Party in the United States, is merely a variant of modern liberalism. Its leading theoreticians envision a slightly smaller and more efficient welfare state, combined with a larger and more actively interventionist global-warfare state.

  48Rothbard, “Economic Determinism,” p. 5.

  49For examples, see, respectively, George J. Stigler, “The Theory of Economic Regulation,” in The Citizen and the State: Essays on Regulation (Chicago: University of Chicago Press, 1975), pp. 114–41; and James M. Buchanan, “Politics without Romance: A Sketch of Positive Public Choice Theory and Its Normative Implications,” in The Theory of Public Choice—II, James M. Buchanan and Robert D. Tollison, eds. (Ann Arbor: University of Michigan Press, 1984), pp. 11–22.

  50Buchanan, “Politics without Romance,” p. 13.

  51Stigler, “Theory of Economic Regulation,” p. 140.

  52Murray N. Rothbard, “Only One Heartbeat Away,” The Libertarian Forum 6 (September 1974): 5.

  53Mises, Theory and History, p. 183.

  54Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963).

  55See, for example, North, Growth and Welfare in the American Past, p. 11, n. 6.

  56Friedman and Schwartz, A Monetary History, p. xxii.

  57Ibid., p. 3. As doctrinaire positivists, Friedman and Schwartz consistently refer to the “stock” or “quantity” of money rather than to the “supply” of money, presumably because the former is the observable market outcome of the interaction of the unobservable money supply and money demand curves. However, it is likely that Friedman and Schwartz conceive the money stock as a good empirical proxy for the money supply, because they view the latter as perfectly inelastic with respect to the price level. On this point, compare Peter Temin’s interpretation. Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: W.W. Norton, 1976), p. 18.

  58Friedman and Schwartz, A Monetary History, pp. 89–188.

  59Ibid., p. 115, n. 40.

  60Ibid., p. 171.

  61Milton Friedman, “The Quantity Theory of Money—A Restatement,” in Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, [1956] 1973), p. 18.

  62Ibid., p. 168.

  63For more on the nature and use of the counterfactual method, see Robert William Fogel, “The New Economic History: Its Findings and Methods,” in The Reinterpretation of American History, Robert William Fogel and Stanley L. Engerman, eds. (New York: Harper and Row, 1971), pp. 8–10; and Donald N. McCloskey, “Counterfactuals,” in The New Palgrave: The New World of Economics, John Eatwell, Murray Milgate, and Peter Newman, eds. (New York: W.W. Norton, 1991), pp. 149–54.

  64Friedman and Schwartz, A Monetary History, pp. 156–68.

  65Ibid., p. 168.

  66Ibid., p. xix.

  67Mises, Theory and History, p. 285.

  68Mises, Human Action, p. 48.

  69Rep. Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Washington, D.C.: Cato Institute, 1982), pp. 17–118.

  70Murray N. Rothbard, “The Origins of the Federal Reserve System,” Quarterly Journal of Economics 2, no. 3 (Fall 1999): 3–51.

  71A version of this piece appeared as Murray N. Rothbard, “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.

  72Murray N. Rothbard, “The New Deal and the International Monetary System,” in Watershed of Empire: Essays on New Deal Foreign Policy, Leonard P. Liggio and James J. Martin, eds. (Colorado Springs, Colo.: Ralph Myles, 1976), p. 19.

  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.]

  1In the late seventeenth and early eighteenth centuries, the British maintained fixed mint ratios of from 15.1-to-1 of silver grains in relation to gold grains, to about 15.5-to-1. Yet the world market ratio of weight, set by forces of supply and demand, was about 14.9-to-1. Thus, silver was consistently undervalued and gold overvalued. In the eighteenth century, the problem got even worse, for increasing gold production in Brazil and declining silver production in Peru brought the market ratio down to 14.1-to-1 while the mint ratios fixed by the British government continued to be the same.

  2The name “dollar” came from “thaler,” the name given to the coin of similar weight, the “Joachimsthaler” or “schlicken thaler,” issued since the early sixteenth century by the Count of Schlick in Joachimsthal in Bohemia. The Joachimsthalers weighed 451 Troy grains of silver. So successful were these coins that similar thalers were minted in Burgundy, Holland, and France; most successful of these was the Maria Theresa thaler, which began being minted in 1751 and formed a considerable portion of American currency after that date. The Spanish “pieces of eight” adopted the name “dollar” after 1690.

  3Since 20 shillings make £1, this meant that the natural ratio between the two currencies was £l = $4.44.

  4Government paper redeemable in go
ld began in the early ninth century, and after three centuries the government escalated to irredeemable fiat paper, with the usual consequences of boom-bust cycles, and runaway inflation. See Gordon Tullock, “Paper Money—A Cycle in Cathay,” Economic History Review 9, no. 3 (1957): 393–96.

  5The only exception was a curious form of paper money issued five years earlier in Quebec, to become known as “card money.” The governing intendant of Quebec, Monsieur Mueles, divided some playing cards into quarters, marked them with various monetary denominations, and then issued them to pay for wages and materials sold to the government. He ordered the public to accept the cards as legal tender, and this particular issue was later redeemed in specie sent from France.

  6Donald L. Kemmerer, “Paper Money in New Jersey, 1668–1775,” New Jersey Historical Society, Proceedings 74 (April 1956): 107–44.

  7Before Massachusetts went back to specie, it was committed to accept the notes of the other New England colonies at par. This provided an incentive for Rhode Island to inflate its currency wildly, for this small colony, with considerable purchases to make in Massachusetts, could make these purchases in inflated money at par. Thereby Rhode Island could export its inflation to the larger colony, but make its purchases with the new money before Massachusetts prices could rise in response. In short, Rhode Island could expropriate wealth from Massachusetts and impose the main cost of its inflation on the latter colony.

  8If Rhode Island was the most inflationary of the colonies, Maryland’s monetary expansion was the most bizarre. In 1733, Maryland’s public land bank issued £70,000 of paper notes, of which £30,000 was given away in a fixed amount to each inhabitant of the province. This was done to universalize the circulation of the new notes, and is probably the closest approximation in history of Milton Friedman’s “helicopter” model, in which a magical helicopter lavishes new paper money in fixed amounts of proportions to each inhabitant. The result of the measure, of course, was rapid depreciation of new notes. However, the inflationary impact of the notes was greatly lessened by tobacco still being the major money of the new colony. Tobacco was legal tender in Maryland and the paper was not receivable for all taxes.

  9Roger W. Weiss, “The Colonial Monetary Standard of Massachusetts,” Economic History Review 27 (November 1974): 589.

  10Ibid., p. 591.

  11During the sixteenth century, before the rise of the scriveners, most English money-lending was not even conducted by specialized firms, but by wealthy merchants in the clothing and woolen industries, as outlets for their surplus capital. See J. Milnes Holden, The History of Negotiable Instruments in English Law (London: Athlone Press, 1955), pp. 205–06.

  12Once again, ancient China pioneered in deposit banking, as well as in fractional reserve banking. Deposit banking per se began in the eighth century A.D., when shops would accept valuables, in return for warehouse receipts, and receive a fee for keeping them safe. After a while, the deposit receipts of these shops began to circulate as money. Finally, after two centuries, the shops began to issue and lend out more receipts than they had on deposit; they had caught on to fractional reserve banking. Tullock, “Paper Money,” p. 396.

  13On the Massachusetts Land Bank, see the illuminating study by George Athan Billias, “The Massachusetts Land Bankers of 1740,” University of Maine Bulletin 61 (April 1959). On merchant enthusiasm for inflationary banking in Massachusetts, see Herman J. Belz, “Paper Money in Colonial Massachusetts,” Essex Institute, Historical Collections 101 (April 1965): 146–63; and Herman J. Belz, “Currency Reform in Colonial Massachusetts, 1749–1750,” Essex Institute, Historical Collections 103 (January 1967): 66–84. On the forces favoring colonial inflation in general, see Bray Hammond, Banks and Politics in America (Princeton, N.J.: Princeton University Press, 1957), chap. 1; and Joseph Dorfman, The Economic Mind in American Civilization, 1606–1865 (New York: Viking Press, 1946), p. 142.

  14For an excellent biographical essay on colonial money and banking, see Jeffrey Rogers Hummel, “The Monetary History of America to 1789: A Historiographical Essay,” Journal of Libertarian Studies 2 (Winter 1978): 373–89. For a summary of colonial monetary experience, see Murray N. Rothbard, Conceived in Liberty, vol. 2, Salutary Neglect, The American Colonies in the First Half of the Eighteenth Century (New Rochelle, N.Y.: Arlington House, 1975), pp. 123–40. A particularly illuminating analysis is in the classic work done by Charles Jesse Bullock, Essays on the Monetary History of the United States (New York: Greenwood Press, [1900] 1969), pp. 1–59. Up-to-date data on the period is in Roger W. Weiss, “The Issue of Paper Money in the American Colonies, 1720–1774,” Journal of Economic History 30 (December 1970): 770–84.

  15Edmund Cody Burnett, The Continental Congress (New York: W.W.Norton, 1964), p. 83.

  16As one historian explained, “Currency and certificates were the ‘common debt’ of the Revolution, most of which at war’s end had been sunk at its depreciated value. Public opinion... tended to grade claims against the government according to their real validity. Paper money had the least status.” E. James Ferguson, The Power of the Purse: A History of American Public Finance, 1776–1790 (Chapel Hill: University of North Carolina Press, 1961), p. 68.

  17In Virginia and Georgia, the state paper was redeemed at the highly depreciated market rate of 1,000-to-1 in specie.

  18As Morris candidly put it, this windfall to the public debt speculators at the expense of the taxpayers would cause wealth to flow “into those hands which could render it most productive.” Ferguson, Power of the Purse, p. 124.

  19When Morris failed to raise the legally required specie capital to launch the Bank of North America, Morris, in an act tantamount to embezzlement, simply appropriated specie loaned to the U.S. by France and invested it for the government in his own bank. In this way, the bulk of specie capital for his bank was appropriated by Morris out of government funds. A multiple of these funds was then borrowed back from Morris’s bank by Morris as government financier for the pecuniary benefit of Morris as banker; and finally, Morris channeled most of the money into war contracts for his friends and business associates. Murray N. Rothbard, Conceived in Liberty, vol. 4, The Revolutionary War, 1775–1784 (New Rochelle, N.Y.: Arlington House, 1979), p. 392.

  20See ibid., pp. 409–10. On the Bank of North America and on Revolutionary War finance generally, see Curtis P. Nettels, The Emergence of a National Economy, 1775–1815 (New York: Holt, Rinehart, and Winston, 1962), pp. 23–34.

  21Nettels, National Economy, p. 82.

  22See Hammond, Banks and Politics, pp. 67, 87–88.

  23Nettels, National Economy, pp. 61–62. See also Hammond, Banks and Politics, pp. 77–80, 85.

  24As Jefferson put it at the time: “The unit or dollar is a known coin, and the most familiar of all to the mind of the public. It is already adopted from South to North, has identified our currency, and therefore happily offers itself a unit already introduced.” Cited in J. Laurence Laughlin, The History of Bimetallism in the United States, 4th ed. (New York: D. Appleton, 1901), p. 11, n. 3.

  25The text of the Coinage Act of 1792 may be found in ibid., pp. 300–01. See also pp. 21–23; and A. Barton Hepburn, A History of Currency in the United States with a Brief Description of the Currency Systems of all Commercial Nations (New York: MacMillan, 1915), pp. 43–45.

  26The current Spanish silver dollars in use were lighter than the earlier dollars, weighing 387 grains. See Laughlin, History of Bimetallism, pp. 16–18.

  27Golden half-eagles (worth $5) and quarter-eagles (worth $2.50) were also to be coined, of corresponding proportional weights, and, for silver coins, half-dollars, quarter-dollars, dimes, and half-dimes of corresponding weights.

  28Silver had declined in market value from the 14.1-to-1 ratio of 1760, largely due to the declining production of gold from Russian mines in this period and therefore the rising relative value of gold.

  29See Laughlin, History of Bimetallism, p. 14.

  30For a lucid explanation of the changing silver-g
old ratios and how Gresham’s Law operated in this period, see ibid., pp. 10–51. See also J. Laurence Laughlin, A New Exposition of Money, Credit and Prices (Chicago: University of Chicago Press, 1931), pp. 93–111.

  31These “Spanish” coins were almost exclusively minted in the Spanish colonies of Latin America. After the Latin American nations achieved independence in the 1820s, the coins circulated freely in the United States without being legal tender.

  32On the complex workings of fractional coins as against dollar coins in this period, see the excellent article by David A. Martin, “Bimetallism in the United States before 1850,” Journal of Political Economy 76 (May–June 1968): 428–34.

  33Schultz and Caine are severely critical of these operations: “In indebting itself heavily to the Bank of the United States, the Federal Government was obviously misusing its privileges and seriously endangering the Bank’s stability.” They also charged that

  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. [Boston: D.C. Heath, 1950], pp. 6–7)

  34Similar movements occurred in wholesale prices in Philadelphia, Charleston, and the Ohio River Valley. U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C.: Government Printing Office, 1960), pp. 116, 119–21.

  35Nettels, National Economy, pp. 121–22.

  36J. Van Fenstermaker, “The Statistics of American Commercial Banking, 1782–1818,” Journal of Economic History (September 1965): 401; J. Van Fenstermaker, The Development of American Commercial Banking 1782–1837 (Kent, Ohio: Kent State University, 1965), pp. 111–83; William M. Gouge, A Short History of Paper Money and Banking in the United States (New York: Augustus M. Kelley, [1833] 1968), p. 42.