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

by Murray N. Rothbard

  12Palyi, Twilight of Gold, p. 155; and Benjamin M. Anderson, Economics and the Public Welfare: Financial and Economic History of the United States, 1914–1946 (Princeton, N.J.: D. Van Nostrand, 1949), p. 74.

  13Moggridge, British Monetary Policy, pp. 28–29.

  14It is unfortunate that Dr. Melchior Palyi, in his valuable perceptive and solidly anti-inflationary work on the interwar period, is blind to the problems generated by the insistence on going back to gold at the prewar par. Palyi dismisses all such considerations as “Keynesian.” Palyi, Twilight of Gold, passim.

  15In an address to the annual general meeting of the Federation of British Industries in November 1921. See L.J. Hume, “The Gold Standard and Deflation: Issues and Attitudes in the 1920s” (1963), in The Gold Standard, Pollard, ed., p. 141.

  16Round Table 14 (1923), p. 28, quoted in ibid., p. 136.

  17The Times (London) April 29, 1925, cited in ibid., p. 144.

  18Bradbury to Farrer, July 24, 1924. Moggridge, British Monetary Policy, p. 47.

  19Undoubtedly the most charming testimony before the committee was by the free-market, hard-money economist from the London School of Economics, Edwin Cannan. In contrast to the other partisans of $4.86, Cannan fully recognized that the return to gold would require considerable deflation, and that the needed reduction in wage rates would cause extensive difficulty and unemployment in view of the new system of widespread unemployment insurance which made the unemployed far “more comfortable than they used to be.” The only thing to be done, counseled Cannan, was to return to gold immediately at $4.86, and get it over with. As Cannan wrote at the time, the necessary adjustments “must be regarded in the same light as those which a spendthrift or a drunkard is rightly exhorted by his friends to face like a man.” Ibid., pp. 45–46; Edwin Cannan, The Paper Pound: 1797–1821, 2nd ed. (London: P.S. King, 1925), p. 105, cited in Murray Milgate, “Cannan, Edwin,” in The New Palgrave: A Dictionary of Economics, Peter Newman, Murray Milgate, and John Eatwell, eds. (New York: Stockton Press, 1987), 1, p. 316.

  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.

  20Moggridge, British Monetary Policy, p. 72.

  21Actually, the old Gold Embargo Act remained in force until allowed to expire on December 31, 1925. Since gold exports were prohibited until then, the gold standard was really not fully restored until the end of the year. Palyi, Twilight of Gold, p. 71. The Churchill dinner party included Prime Minister Stanley Baldwin, Foreign Secretary Austen Chamberlain, Keynes, McKenna, Niemeyer, Bradbury, and Sir Percy Grigg, principal private secretary to the chancellor of the Exchequer. Sir Percy James Grigg, Prejudice and Judgment (London: Hutchinson, 1948), pp. 182–84. On Churchill’s early leaning to Keynes, see Moggridge, British Monetary Policy, p. 76.

  22Moggridge, British Monetary Policy, pp. 84ff.

  23In a memorandum to Churchill, Sir Otto Niemeyer delivered an eloquent critique of the Keynesian view that inflation would serve as a cure for the existing unemployment. Niemeyer declared:

  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.

  24See Murray N. Rothbard, “The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930,” in Money in Crisis, Barry Siegel, ed. (San Francisco: Pacific Institute for Public Policy, 1984), pp. 93–117.

  25Rothbard, “Federal Reserve,” p. 109; Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), pp. 23–41; Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Atlantic Monthly Press, 1990), pp. 142–45, 182; and Lawrence E. Clark, Central Banking Under the Federal Reserve System (New York: Macmillan, 1935), pp. 64–82.

  26France also appointed the House of Morgan as its fiscal agent, having long had close connections through the Paris branch, Morgan Harjes. Chernow, House of Morgan, pp. 104–05, 186, 195. Sir Henry Clay, Lord Norman (London: Macmillan, 1957), p. 87.

  27On the interconnections among the Morgans, the Allies, foreign loans, and the Federal Reserve, and on the role of the Morgans in bringing the United States into the war, see Charles C. Tansill, America Goes to War (Boston: Little, Brown, 1938), pp. 32–143. See also Chernow, House of Morgan, pp, 186–204. It is instructive that the British exempted the House of Morgan from its otherwise extensive mail censorship in and out of Britain, granting J.P. Morgan, Jr., and his key partners special code names. Ibid., pp. 189–90.

  28Rothbard, “Federal Reserve,” pp. 107–08, 111–12; Henry Parker Willis, The Theory and Practice of Central Banking (New York: Harper and Brothers, 1936), pp. 90–91; and Chandler, Benjamin Strong, p. 105. The massive U.S. deficits to pay for the war, were financed by Liberty Bond drives headed by a Wall Street lawyer who was a neighbor of McAdoo’s in Yonkers, New York. This man, Russell C. Leffingwell, would become a leading Morgan partner after the war. Chernow, House of Morgan, p. 203.

  29Rothbard, “The Federal Reserve,” p. 114; Chandler, Benjamin Strong, pp. 93–98. While some members of the Federal Reserve Board had heavy Morgan connections, its complexion was scarcely as Morgan-dominated as Benjamin Strong. Of the five Federal Reserve Board members, Paul M. Warburg was a leading partner of Kuhn, Loeb, an investment bank rival of Morgan, and during the war suspected of being pro-German; Governor William P.G. Harding was an Alabama banker whose father-in-law’s iron manufacturing company had prominent Morgan as well as rival Rockefeller men on its board; Frederic A. Delano, uncle of Franklin D. Roosevelt, was president of the Rockefeller-controlled Wabash Railway; Charles S. Hamlin, an assistant secretary to McAdoo, was a Boston attorney married into a family long connected with the Morgan-dominated New York Central Railroad and an assistant secretary to McAdoo. Finally, economist Adolph C. Miller, professor at Berkeley, had married into the wealthy, Morgan-connected Sprague family of Chicago. At that period, Secretary of Treasury McAdoo and his longtime associate, John Skelton Williams, comptroller of the currency, were automatically Federal Reserve Board members, but only ex officio. Thus, setting aside the two ex officio members, the Federal Reserve Board began its existence with one Kuhn, Loeb member, one Morgan man, one Rockefeller person, a prominent Alabama banker with both Morgan and Rockefeller connections, and an economist with family ties to Morgan interests. When we realize that the Rockefeller and Kuhn, Loeb interests were allied during this era, we can see that the Federal Reserve Board scarcely could be considered under firm Morgan control. Rothbard, “The Federal Reserve,” p. 108.

  30Clay, Lord Norman, p. 487; and Andrew Boyle, Montagu Norman (London: Cassell, 1967), p. 198.

  31Chernow, House of Morgan, pp. 246, 244.

  32Too much has been made of the fact that this discovery of the inflationary power of open market purchases by the Fed was the accidental result of a desire to increase Fed earnings. The result was not wholly unexpected. Thus, Strong, in April 1922, wrote to Undersecretary of the Treasury S. Parker Gilbert that one of his major reasons for these open market purchases was “to establish a level of interest rates... which would facilitate foreign borrowing in this country... and facilitate business improvement.” Strong
to Gilbert, April 18, 1922. Gilbert went on to become a leading partner of the House of Morgan. See Murray N. Rothbard, America’s Great Depression, 4th ed. (New York: Richardson and Snyder, [1963] 1983), p. 321, n. 2. See also ibid., pp. 123–24, 135; Chandler, Benjamin Strong, pp. 210–11; and Harold L. Reed, Federal Reserve Policy, 1921–1930 (New York: McGraw-Hill, 1930), pp. 14–41.

  33In terms of currency plus total adjusted deposits. If savings and loan shares are added, the money supply rose by 9 percent during 1924. Rothbard, America’s Great Depression, pp. 88, 102–05.

  34Strong to Pierre Jay, April 23 and April 28, 1924. Strong to Andrew Mellon, May 27, 1924. Moggridge, British Monetary Policy, pp. 51–53; Rothbard, America’s Great Depression, pp. 133–34; Chandler, Benjamin Strong, pp. 283–84, 293ff.

  35Rothbard, America’s Great Depression, p. 133; Chandler, Benjamin Strong, pp. 284, 308 ff., 312 ff.; and Moggridge, British Monetary Policy, pp. 60–62.

  36Robbins, Great Depression, p. 80; Rothbard, America’s Great Depression, p. 133; and Benjamin H. Beckhard, “Federal Reserve Policy and the Money Market, 1923–1931,” in The New York Money Market, Beckhart, et al. (New York: Columbia University Press, 1931), 4, p. 45.

  37Grenfell to J.P. Morgan, Jr., March 23, 1925; Chernow, House of Morgan, pp. 274–75.

  38Hughes was both attorney and chief foreign policy adviser to Rockefellers’ Standard Oil of New Jersey. On Hughes’s close ties to the Rockefeller complex and their being overlooked even by Hughes’s biographers, see the important but neglected article by Thomas Ferguson, “From Normalcy to New Deal: Industrial Structure, Party Competition, and American Public Policy in the Great Depression,” International Organization 38 (Winter 1984): 67.

  39“Morrow and Thomas Cochran, although moving spirits in the whole drive, remained in the background. The foreground was filled by the large, the devoted, the imperturbable figure of Frank Stearns.” Harold Nicolson, Dwight Morrow (New York: Harcourt, Brace, 1935), p. 232. Cochran, a leading Morgan partner, and board member of Bankers Trust Company, Chase Securities Corporation, and Texas Gulf Sulphur Company, was, by the way, a Midwesterner and not an Amherst graduate and therefore had no reasons of friendship to work strongly for Coolidge. Stearns, incidentally, had not met Coolidge before being introduced to him by Morrow. Philip H. Burch, Jr., Elites in American History, vol. 2, The Civil War to the New Deal (New York Holmes and Meier, 1981), pp. 274–75, 302–03.

  40In addition to being a director of the Merchants National Bank of St. Paul, Kellogg had been general counsel for the Morgan-dominated U.S. Steel Corporation for the Minnesota region, and most importantly, the top lawyer for the railroad magnate James J. Hill, long closely allied with Morgan interests.

  41Morgan partner Dwight Morrow became ambassador to Mexico that year, and Nicaraguan affairs came under the direction of Henry L. Stimson, Wall Street lawyer and longtime leading disciple of Elihu Root, and a partner in Root’s law firm. Burch, Elites, pp. 277, 305.

  42Chernow, House of Morgan, pp. 254–55.

  43The latter phrase is in a letter from Sir Otto Niemeyer to Winston Churchill, February 25, 1925. Moggridge, British Monetary Policy, p. 83.

  44Ibid., pp. 79–83.

  45Clay, Lord Norman, pp. 153–54; and Palyi, Twilight of Gold, pp. 121–23.

  46Contrast to Norman these insights of pro-gold-coin-standard economist Walter Spahr:

  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)

  47Williams Adams Brown, Jr., The International Gold Standard Reinterpreted, 1914–1934 (New York: National Bureau of Economic Research, 1940), 1, p. 355.

  48When the gold-exchange standard broke down in 1931, the economist H. Parker Willis noted that “the ease with which the gold-exchange standard can be instituted, especially with borrowed money, has led a good many nations during the past decade to ‘stabilize’... at too high a rate.” H. Parker Willis, “The Breakdown of the Gold Exchange Standard and its Financial Imperialism,” The Annalist (October 16, 1931): 626 ff.

  49Palyi, Twilight of Gold, pp. 73–74. See also p. 185.

  50Robert Skidelsky, John Maynard Keynes, vol. 1, 1883–1920 (New York: Viking Press, 1986), p. 275. See also ibid., pp 272–74; and Palyi, Twilight of Gold, pp. 155–57. While Keynes’s book was largely an apologia for the existing system in India, he also gently chided the British government for not going far enough in managed inflation by failing to establish a central bank. Skidelsky, Keynes, pp. 276–77.

  51Skidelsky, Keynes, pp. 374–83. Meanwhile, in the United States, the government, investment bankers, and economists such as Charles A. Conant, Jeremiah W. Jenks, and Jacob Hollander, collaborated in imposing or attempting to impose gold-exchange standards and central banks in Latin America and Asia, beginning with the U.S. acquisition of a colonial empire after the Spanish-American War. During the 1920s, Edwin W. Kemmerer, the “money doctor,” a student of Jenks and disciple of Conant, continued this task throughout the Third World. See Edward T. Silva and Sheila Slaughter, Serving Power: The Making of the Academic Social Science Expert (Westport, Conn.: Greenwood Press, 1984), pp. 103–38; Emily S. Rosenberg, “Foundations of United States International Financial Power: Gold Standard Diplomacy, 1900–1905,” Business History Review 59 (Summer 1985): 172–98; and Robert N. Seidel, “American Reformers Abroad: The Kemmerer Missions in South America, 1923–1931,” Journal of Economic History 32 (June 1972): 520–45.

  52Eric G. Davis, “R.G. Hawtrey, 1879–1975,” in Pioneers of Modern Economics in Britain, D.P. O’Brien and J.R. Presley, eds. (Totowa, N.J.: Barnes and Noble, 1981), p. 219. Hawtrey’s speech was published as “The Gold Standard,” Economic Journal 29 (1919): 428–42. Fisher’s proposal was in Irving Fisher, The Purchasing Power of Money (New York: Macmillan, 1911), pp. 332–46.

  53Rothbard, America’s Great Depression, p. 161. See also Paul Einzig, Montagu Norman (London: Kegan Paul, 1932), pp. 67, 78; Clay, Lord Norman, p. 138; and Anne Orde, British Policy and European Reconstruction After the First World War (Cambridge: Cambridge University Press, 1990), pp. 105–18.

  54Davis, “R.G. Hawtrey,” pp. 219–20, 232; Carole Fink, The Genoa Conference: European Diplomacy, 1921–1922 (Chapel Hill: University of North Carolina Press, 1984), pp. 158, 232; and Dan P. Silverman, Reconstructing Europe After the Great War (Cambridge, Mass.: Harvard University Press, 1982), pp. 282ff.

  55See Ralph G. Hawtrey, “The Genoa Resolutions on Currency,” Economic Journal 32 (1922): 290–304, included in Ralph G. Hawtrey, Monetary Reconstruction (London: Longmans, Green, 1923), pp. 131–47. The text of the Genoa resolutions themselves can be found in the Federal Reserve Bulletin (June 1922): 678–79, reprinted in Joseph Stagg Lawrence, Stabilization of Prices (New York: Macmillan, 1928), pp. 162–65.

  56Lawrence, Stabilization of Prices, p. 164.

  57Hawtrey, Monetary Reconstruction, pp. 134–35.

  58Thus, see the illuminating work by S.B. Saul, The Myth of the Great Depression, 1873–1896 (London: Macmillan, 1969).

  59Hawtrey, Monetary Reconstruction, p. 136.

  60Ibid., p. 147.

  61For contemporaneous critiques of Hawtrey’s stabilizationism as a mask for inflationism, see Lawrence, Stabilization of Prices, pp. 326, 432–33; and Patrick Deutscher, R.G. Hawtrey and the Development of Macroeconomics (Ann Arbor: University of Michigan Press, 1990), pp. 211–15.

  62Michael J. Hogan, Informal Entente: The Private Structure of Cooperation in Anglo-American Economic
Diplomacy, 1918–1928 (Columbia: University of Missouri Press, 1977). On Strong’s misgivings on the gold-exchange system, see Stephen V.O. Clarke, Central Bank Cooperation, 1924–31 (New York: Federal Reserve Bank of New York, 1967), pp. 36–40.

  63Clarke, Central Bank Cooperation, pp. 40–41.

  64Ibid., p. 36.

  65Davis, “R.G. Hawtrey,” p. 232, n. 74.

  66Palyi, Twilight of Gold, pp. 116–17, 107.

  67Finland acted on the advice of the great classical liberal Swedish economic historian, Professor Eli Heckscher of the University of Stockholm. See Richard A. Lester, “The Gold Parity Depression in Norway and Denmark, 1924–1928,” Journal of Political Economy (August 1937): 433–67; and Palyi, Twilight of Gold, pp. 73, 107.

  68Judith L. Kooker, “French Financial Diplomacy: The Interwar Years,” in Rowland, Balance of Power, pp. 86–90.

  69Entry of February 6, 1928. Chandler, Benjamin Strong, pp. 379–80. Rothbard, America’s Great Depression, p. 139. See also the entry in October 1926, in which Moreau comments on a report of Pierre Quesnay, general manager of the Bank of France, on the “doctrinaire, and without doubt somewhat Utopian or even Machiavellian” schemes of Montagu Norman and his financier associates such as Sir Otto Niemeyer, Sir Arthur Salter, and Sir Henry Strakosch, aided and abetted by Benjamin Strong, to establish and dominate the “economic and financial organization of the world by Norman and his fellow-central bankers.” Palyi, Twilight of Gold, pp. 134–45.

  70Peter Clarke, “The Treasury’s Analytical Model of the British Economy Between the Wars,” in The State and Economic Knowledge: The American and British Experiences, Mary Furner and Barry Supple, eds. (Cambridge: Cambridge University Press, 1990), p. 177. See also Palyi, Twilight of Gold, p. 109.

  71Anderson, Economics and Public Welfare, p. 166; Moggridge, British Monetary Policy, p. 117.

  72Moggridge, British Monetary Policy, pp. 117–25.

  73Draft memorandum to Chancellor of Exchequer Churchill, April 1929. Clarke, “Treasury’s Analytical Model,” p. 186. See also ibid., pp. 179–80, 184–87.