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

by Murray N. Rothbard

  37Marshall, a disciple of Hamilton, repeated some of Hamilton’s arguments virtually word for word in the decision. See Gerald T. Dunne, Monetary Decisions of the Supreme Court (New Brunswick, N.J.: Rutgers University Press, 1960), p. 30.

  38On the quasi-Federalists as opposed to the Old Republicans, on banking and on other issues, see Richard E. Ellis, The Jeffersonian Crisis: Courts and Politics in the Young Republic (New York: Oxford University Press, 1971), pp. 277 ff.

  39Van Fenstermaker notes that there has been a tendency of historians to believe that virtually all bank emissions were in the form of notes, but that actually a large portion was in the form of demand deposits. Thus, in 1804, bank liabilities were $1.70 million in notes and $1.12 million in deposits; in 1811 they were $5.68 million and $5.27 million respectively. He points out that deposits exceeded notes in the large cities such as Boston and Philadelphia, sometimes by two- or threefold, whereas bank notes were used far more widely in rural areas for hand-to-hand transactions. Van Fenstermaker, “Statistics,” pp. 406–11.

  40Of the Bank of the United States’s liabilities, bank notes totaled $5.04 million and demand deposits $7.83 million. John Jay Knox, A History of Banking in the United States (New York: Bradford Rhodes, 1900), p. 39. There are no other reports for the Bank of the United States extant except for 1809. The others were destroyed by fire. John Thom Holdsworth, The First Bank of the United States (Washington, D.C.: National Monetary Commission, 1910), pp. 111ff., 138–44.

  41Holdsworth, First Bank, p. 83. See also ibid., pp. 83–90. Holdsworth, the premier historian of the First Bank of the United States, saw the overwhelming support by the state banks, but still inconsistently clung to the myth that the Bank of the United States functioned as a restraint on their expansion: “The state banks, though their note issues and discounts had been kept in check by the superior resources and power of the Bank of the United States, favored the extension of the charter, and memorialized Congress to that effect.” Ibid., p. 90 (italics added).

  42Van Fenstermaker, “Statistics,” pp. 401–09. For the list of individual incorporated banks, see Van Fenstermaker, Development, pp. 112–83, with Pennsylvania on pp. 169–73.

  43For a perceptive discussion of the nature and consequences of Treasury note issue in this period, see Richard H. Timberlake, Jr., The Origins of Central Banking in the United States (Cambridge, Mass.: Harvard University Press, 1978), pp. 13–18. The Gresham Law effect probably accounts for the startling decline of specie held by the reporting banks, from $9.3 million to $5.4 million, from 1814 to 1815. Van Fenstermaker, “Statistics,” p. 405.

  44Historical Statistics, pp. 115–24; Murray N. Rothbard, The Panic of 1819: Reactions and Policies (New York: Columbia University Press, 1962), p. 4.

  45On the suspensions of specie payments, and on their importance before the Civil War, see Vera C. Smith, The Rationale of Central Banking (London: P.S. King and Son, 1936), pp. 38–46. See also Dunne, Monetary Decisions, p. 26.

  46Smith, Rationale, p. 36. Smith properly defines “free banking” as

  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)

  47See Richard H. Timberlake, Jr., Money, Banking, and Central Banking (New York: Harper and Row, 1965), p. 94.

  48Hammond, Banks and Politics, pp. 179–80. Even before the suspension, in 1808, a Bostonian named Hireh Durkee who attempted to demand specie for $9,000 in notes of the state-owned Vermont State Bank, was met by an indictment for an attempt by this “evil-disposed person” to “realize a filthy gain” at the expense of the resources of the state of Vermont and the ability of “good citizens thereof to obtain money.” Ibid., p. 179. See also Gouge, Short History, p. 84.

  49Gouge, Short History, pp. 141–42. Secretary of the Treasury William H. Crawford, a Georgia politician, tried in vain to save the Bank of Darien from failure by depositing Treasury funds there during the panic. Rothbard, Panic of 1819, p. 62.

  50Ibid., pp. 64–68. Other compulsory par laws were passed by Ohio and Delaware.

  51The most extreme proposal was Tennessee politician Felix Grundy’s scheme, never adopted, to compel creditors to accept bank notes of the state bank or forfeit the debt; that would have conferred full legal tender status on the bank. Ibid., p. 91; and Joseph H. Parks, “Felix Grundy and the Depression of 1819 in Tennessee,” Publications of the East Tennessee Historical Society 10 (1938): 22.

  52Only New England, New York, New Jersey, Virginia, Mississippi, and Louisiana were comparatively untouched by the inconvertible paper contagion, either in the form of suspended specie banks continuing in operation or new state-owned banks emitting more paper. For an analysis of the events and controversies in each state, see Rothbard, The Panic of 1819, pp. 57–111.

  53Raguet to Ricardo, April 18, 1821, in David Ricardo, Minor Papers on the Currency Question, 1809–23, Jacob H. Hollander, ed. (Baltimore: Johns Hopkins Press, 1932), pp. 199–201; Rothbard, Panic of 1819, pp. 10–11. See also Hammond, Banks and Politics, p. 242.

  54New note issue series by banks reached a heavy peak in 1815 and 1816 in New York and Pennsylvania. D.C. Wismar, Pennsylvania Descriptive List of Obsolete State Bank Notes, 1782–1866 (Frederick, Md.: J.W. Stovell, 1933); and idem, New York Descriptive List of Obsolete Paper Money (Frederick, Md.: J.W. Stovell, 1931).

  55On the establishment of the Bank of the United States and on the deal with the state banks, see Ralph C.H. Catterall, The Second Bank of the United States (Chicago: University of Chicago Press, 1902), pp. 9–26, 479–90. See also Hammond, Banks and Politics, pp. 230–48; and Davis R. Dewey, The Second United States Bank (Washington, D.C.: National Monetary Commission, 1910), pp. 148–76.

  56On the Girard-Dallas connection, see Hammond, Banks and Politics, pp. 231–46, 252; Philip H. Burch, Jr., Elites in American History, vol. 1, The Federalist Years to the Civil War (New York: Holmes and Meier, 1981), pp. 88, 97, 116–17, 119–21; and Kenneth L. Brown, “Stephen Girard, Promoter of the Second Bank of the United States,” Journal of Economic History (November 1942): 125–32.

  57Annals of Congress, 14th Cong., 1st sess., April 1, 1816, pp. 267–70. See also ibid., pp. 1066, 1091, 1110 ff; cited in Murray N. Rothbard, The Case for a 100 Percent Gold Dollar (Washington, D.C.: Libertarian Review Press, 1974), p. 18 n. See also Gouge, Short History, pp. 79–83.

  58Hammond, Banks and Politics, p. 248. See also Condy Raguet, A Treatise on Currency and Banking, 2nd ed. (New York: Augustus M. Kelley, [1840] 1967), pp. 302–03; Catterall, Second Bank, pp. 37–39; and Walter Buckingham Smith, Economic Aspects of the Second Bank of the United States (Cambridge, Mass.: Harvard University Press, 1953), p. 104.

  59Catterall, Second Bank, p. 36.

  60On the expansion and fraud at the Seco
nd Bank of the United States, see Catterall, Second Bank, pp. 28–50, 503. The main culprits were James A. Buchanan, president of the Baltimore mercantile firm of Smith and Buchanan, and the Baltimore Bank of the United States cashier James W. McCulloch, who was simply an impoverished clerk at the mercantile house. Smith, an ex-Federalist, was a senator from Maryland and a powerful member of the National Democratic-Republican establishment.

  61As a result of the contractionary influence on the Boston branch of the Bank of the United States, the notes of the Massachusetts banks actually declined in this period, from $1 million in June 1815 to $850,000 in June 1818. See Rothbard, Panic of 1819, p. 8.

  62Total notes and deposits of 39 percent of the nation’s reporting state banks was $26.3 million in 1816, while 38 percent of the banks had total notes and deposits of $27.7 million two years later. Converting this pro rata to 100 percent of the banks gives an estimated $67.3 million in 1816, and $72.9 million in 1818. Add to the latter figure $21.8 million for Bank of the United States notes and deposits, and this yields $94.7 million in 1818, or a 40.7-percent increase. Adapted from tables in Van Fenstermaker, “Statistics,” pp. 401, 405, 406.

  63Rothbard, Panic of 1819, pp. 6–10; Historical Statistics, pp. 120, 122, 563. See also George Rogers Taylor, The Transportation Revolution, 1815–1860 (New York: Rinehart, 1951), pp. 334–36.

  64These estimates are adapted from the tables in Van Fenstermaker, “Statistics,” pp. 401–06, and Development, pp. 66–68. The data for 38 percent of incorporated banks in 1818, and for 54 percent in 1819, are converted pro rata to 100-percent figures. Bank of the United States figures are in Catterall, Second Bank, p. 502. On the contraction by the Second Bank, see ibid., pp. 51–72.

  65On Treasury note contraction in this period, see Timberlake, Origins of Central Banking, pp. 21–26.

  66See Rothbard, Panic of 1819, pp. 11–16.

  67Gouge, Short History, p. 110.

  68Rothbard, Panic of 1819, p. 188.

  69Biddle continued the chain of control over both Banks of the United States by the Philadelphia financial elite, from Robert Morris and William Bingham, to Stephen Girard and William Jones. See Burch, Elites, p. 147. See also Thomas P. Govan, Nicholas Biddle: Nationalist and Public Banker, 1786–1844 (Chicago: University of Chicago Press, 1959), pp. 45, 74–75, 79.

  70Hammond, Banks and Politics, p. 420.

  71For an excellent biographical essay and critique of historical interpretations of Jacksonism and the Bank War, see Jeffrey Rogers Hummel, “The Jacksonians, Banking, and Economic Theory: A Reinterpretation,” Journal of Libertarian Studies 2 (Summer 1978): 151–65.

  72For the Bank of the United States data, see Catterall, Second Bank, p. 503; for total money supply, see Peter Temin, The Jacksonian Economy (New York: W.W. Norton, 1969), p. 71.

  73Temin, Jacksonian Economy, passim. See also Hugh Rockoff, “Money, Prices, and Banks in the Jacksonian Era,” in The Reinterpretation of American Economic History, R. Fogel and S. Engerman, eds. (New York: Harper and Row, 1971), pp. 448–58.

  74Temin, Jacksonian Economy, pp. 68–74.

  75Jean Alexander Wilburn, Biddle’s Bank: The Crucial Years (New York: Columbia University Press, 1979), pp. 118–19, quoted in Hummel, “Jacksonians,” p. 155.

  76Moreover, if the Jacksonians had been able to move more rapidly in returning the banking system to a 100-percent-specie basis, they could have used the increase in specie to ease the monetary contraction required by a return to a pure specie money.

  77Mexico was pinpointed as the source of the inflow of specie by Temin, Jacksonian Economy, p. 80, while the disclosure of the cause in Mexican copper inflation came in Rockoff, “Money, Prices, and Banks,” p. 454.

  78Public land sales by the federal government, which had been going steadily at approximately $4 million–$6 million per year, suddenly spurted upward in 1835 and 1836, to $16.2 million and $24.9 million respectively. The latter was the largest sale of public lands in American history, and the 1835 figure was the second largest. Temin, Jacksonian Economy, p. 124. The first demonstration of the negligible impact of the Specie Circular on the position of the banks was Richard H. Timberlake, Jr., “The Specie Circular and Distribution of the Surplus,” Journal of Political Economy 68 (April 1960): 109–17, reprinted in Timberlake, Origins, pp. 50–62. Timberlake defended his thesis in idem, “The Specie Circular and the Sale of Public Lands: A Comment,” Journal of Economic History 25 (September 1965): 414–16.

  79Temin, Jacksonian Economy, pp. 128–36.

  80See Reginald C. McGrane, Foreign Bondholders and American State Debts (New York: Macmillan, 1935), pp. 6–7, 24ff.

  81McGrane, Foreign Bondholders, pp. 39–40.

  82The Americans also pointed out that the banks, including the Bank of the United States, which were presuming to denounce repudiation of state debt, had already suspended specie payments and were largely responsible for the contraction. “Let the bondholders look to the United States Bank and to the other banks for their payment declared the people.” Ibid., p. 48.

  83In 1839–43, the money supply, as we have seen, fell by 34 percent, wholesale prices by 42 percent, and the number of banks by 23 percent. In 1929–33, the money supply fell by 27 percent, prices by 31 percent, and the number of banks by 42 percent. Temin, Jacksonian Economy, pp. 155 ff.

  84Probably the Jacksonians did so to preserve the illusion that the original silver dollar, the “dollar of our fathers” and the standard currency of the day, remained fixed in value. Laughlin, History of Bimetallism, p. 70.

  85For the illuminating discovery that the Jacksonians were interested in purging small bank notes by bringing in gold, see Paul M. O’Leary, “The Coinage Legislation of 1834,” Journal of Political Economy 45 (February 1937): 80–94. For the development of this insight by Martin, who shows that the Jacksonians anticipated a coinage of both gold and silver, and reveals the comprehensive Jacksonian coinage program, see David A. Martin, “Metallism, Small Notes, and Jackson’s War with the B.U.S.,” Explorations in Economic History 11 (Spring 1974): 227–47.

  86For the next 16 years, from 1835 through 1850, the market ratio averaged 18.5-to-1, a silver premium of only 1 percent over the 16-to-1 mint ratio. For the data, see Laughlin, History of Bimetallism, p. 291.

  87Martin, “Bimetallism,” pp. 436–37. Spanish fractional silver coins were from 5 percent to 15 percent underweight, so their circulation in the U.S. at par by name (or “tale”) meant that they were still considerably overvalued.

  88As Jackson’s Secretary of the Treasury Levi Woodbury explained the purpose of this broad legalization of foreign coins: “to provide a full supply and variety of coins, instead of bills below five and ten dollars,” for this would be “particularly conducive to the security of the poor and middling classes, who, as they own but little in, and profit but little by, banks, should be subjected to as small risk as practicable by their bills.” Quoted in Martin, “Metallism,” p. 242.

  89In 1837 another coinage act made a very slight adjustment in the mint ratios. In order to raise the alloy composition of gold coins to have them similar to silver, the definition of the gold dollar was raised slightly from 23.2 grains to 23.22 grains. With the weight of the silver dollar remaining the same, the silver-gold ratio was now very slightly lowered from 16.002-to-1 to 15.998-to-1. Further slight adjustments in valuations of foreign coins in the Coinage Act of 1843 resulted in the undervaluation of many foreign coins and their gradual disappearance. The major ones—Spanish fractional silver—continued, however, to circulate widely. Ibid., p. 436.

  90Ibid., p. 240.

  91On gold production, see Laughlin, History of Bimetallism, pp. 283–86; and David A. Martin, “1853: The End of Bimetallism in the United States,” Journal of Economic History 33 (December 1973): 830.

  92The silver-gold ratio began to slide sharply in October and November 1850. Laughlin, History of Bimetallism, pp. 194, 291.

  93Martin, “Metallism,” p. 240.

  94For an
account of how parallel standards worked in Europe from the medieval period through the eighteenth century, see Luigi Einaudi, “The Theory of Imaginary Money from Charlemagne to the French Revolution,” in Enterprise and Secular Change, F. Lane and J. Riemersma, eds. (Homewood, Ill.: Irwin, 1953), pp. 229–61. Robert Lopez contrasts the ways in which Florence and Genoa each returned to gold coinage in the mid-thirteenth century, after a gap of half a millennium:

  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.

  95Given parallel standards, the ultimate, admittedly remote solution would be to eliminate the term “dollar” altogether, and simply have both gold and silver coins circulate by regular units of weight: “grain,” “ounce,” or “gram.” If that were done, all problems of bimetallism, debasement, Gresham’s Law, etc., would at last disappear. While such a pure free-market solution seems remote today, the late nineteenth century saw a series of important international monetary conferences trying to move toward a universal gold or silver gram, with each national currency beginning as a simple multiple of each other, and eventually only units of weight being used. Before the conferences foundered on the gold-silver problem, such a result was not as remote or utopian as we might now believe. See the fascinating account of these conferences in Henry B. Russell, International Monetary Conferences (New York: Harper and Bros., 1898).