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A History of Money and Banking

IN THE United States:
The Colonial Era to World War II



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

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

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.

J. Terry Anderson, Anderson Chemical Company;

Mr. and Mrs. Ross K. Anderson; Toby O. Baxendale; Robert Bero;

Dr. V.S. Boddicker; Dr. John Bratland; John Cooke;

Carl Creager; Capt. and Mrs. Maino des Granges;

Clyde Evans, Evans Cabinet Corporation;

Elton B. Fox, The Fox Foundation; James W. Frevert; Larry R. Gies;

Frank W. Heemstra; Donald L. Ifland; Dr. and Mrs. John W. Johnson;

Richard J. Kossmann, M.D.; Alfonso Landa; John Leger;

Arthur L. Loeb; Ronald Mandle;

Ellice McDonald, Jr., CBE, and Rosa Hayward McDonald, CBE;

Norbert McLuckie; In honor of Mikaelah S. Medrano;

Joseph Edward Paul Melville;

Dr. and Mrs. Donald Miller; Reed W. Mower;

Terence Murphree, United Steel Structures; James O'Neill;

Victor Pankey; Catherine Dixon Roland; John Salvador;

Conrad Schneiker; Mark M. Scott;

Robert W. Smiley, Jr., Benefit Capital Companies;

Jack DeBar Smith; Val L. Tennent; David W. Tice;

Lawrence Van Someren, Sr.; Dr. Jim Walker;

Mr. and Mrs. Quinten E. Ward; Dr. Thomas L. Wenck;

Keith S. Wood; Steven Lee Yamshon; Jeannette Zummo



A History of Money and Banking

IN THE United States:
The Colonial Era to World War II



Murray N. Rothbard




von Mises
Instituie

AIJBLJRN, ALABAMA



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, ^vrite the Ludwig von Mises
Institute, 518 West Magnolia Avenue, Auburn, Alabama 36849-5301;
^vww.mises.org.

ISBN: 0-945466-33-1



Contents



Introduction 7

Joseph T. Salerno

Part 1
The History of Money and Banking

Before the Twentieth Century 45

Part 2
The Origins of the Federal Reserve 179

Parts
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
The New Deal and the

International Money System 431

Index 491



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 11, 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 and processes 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



1^ 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 meastire the
issues to be tested.^



ipor 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).

^Douglass C. North, Growth and Welfare in the American Past: A
New Economic History (Englewood Cliffs, N.].: Prentice-Hall, 1966),
pp. 1-2 (emphasis in original).



Introduction



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 GNP in 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



10 A History of Money and Banking in the United States:

The Colonial Era to World War II

human motives underlying the emergence of economic institu-
tions and processes.

The second and even more profound flaw in the new eco-
nomic history is the relationship it posits between theory and his-
tory. For North, history is the source of the "empirical evi-
dence" — that is, "ideally, statistical data" — against which the
economic theory is tested. This means that the claim to validity
of a particular theorem is always tentative and defeasible, rest-
ing as it does on its nonfalsification in previous empirical tests.
However, this also means that economic history must be contin-
ually revised, because the very theory which is employed to
identify the causal relations between historical events can
always be falsified by new evidence coming to light in the ongo-
ing historical process. In other words, what the new economic
historians characterize as "the intimate relationship between
measurement and theory" is in reality the vicious circle that
ensnares all attempts to invoke positivist precepts in the inter-
pretation of history.3 For if the theory used to interpret past
events can always be invalidated by future events, then it is
unclear whether theory is the explanans or the explanand in his-
torical research.

Rothbard's approach to monetary history does not focus on
measurement but on motives. Once the goals of the actors and
their ideas about the appropriate means for achieving these
goals have been established, economic theory, along with other
sciences, is brought to bear to trace out the effects of these
actions in producing the complex events and processes of history
which are only partially and imperfectly captured in statistical
data. This is not to say that Rothbard ignores the quantitative
aspects of historical monetary processes. Indeed, his book
abounds with money, price, and output data; but these data are



■^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),
p. 7.



Introduction 11

always interpreted in terms of the motivations of those who
have contributed to their formation. For Rothbard, a particular
price datum is, no less than the Spanish- American War, a histor-
ical event, and its causes must be traced back to the subjective
aims governing human plans and choices.

In flatly rejecting the positivist approach to economic history,
Rothbard adopts the method of historical research first formu-
lated by Ludwig von Mises. In developing this method, Mises
correctly delineated, for the first time, the relationship between
theory and history. It is Rothbard's great contribution in this vol-
ume — and his earlier America's Great Depression — to be the first
to consistently apply it to economic history.4 It is worth summa-
rizing this method here for several reasons. First, Mises's writ-
ings on the proper method of historical research have inexplica-
bly been almost completely ignored up to the present, even by
those who have adopted Mises's praxeological approach in eco-
nomics.5 Second, familiarity with Mises's method of historical
research illuminates the source and character of the remarkable
distinctiveness of Rothbard's historical writings. In particular, it
serves to correct the common but mistaken impression that
Rothbard's historical writings, especially on the origin and
development of the U.S. monetary system, are grounded in
nothing more substantial than an idiosyncratic "conspiracy the-
ory of history." Third, it gives us an opportunity to elucidate the
important elaboration of Mises's method that Rothbard con-
tributed and which he deploys to great effect in explicating the
topic of this volume. And finally, we find in Mises's method a



^Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn,
Ala.: Mises Institute, 2000).

^As Rothbard has written of Theory and History, the book in which
Mises gives this method its most detailed exposition, this work "has
made remarkably little impact, and has rarely been cited even by the
young economists of the recent Austrian revival. It remains by far the
most neglected masterwork of Mises." Murray N. Rothbard, Preface to
Ludwig von Mises's Theory and History: An Interpretation of Social and
Economic Evolution, 2nd ed. (Auburn, Ala.: Mises Institute, 1985), p. xi.



12 A History of Money and Banking in the United States:

The Colonial Era to World War II

definitive refutation of the positivist's claim that it is impossible
to acquire real knowledge of subjective phenomena like human
motives and that, therefore, economic history must deal exclu-
sively with observable and measurable phenomena.

To begin with, Mises grounds his discussion of historical
method on the insight that ideas are the primordial stuff of his-
tory. In his words:

History is the record of human action. Human action is the
conscious effort of man to substitute more satisfactory
conditions for less satisfactory ones. Ideas determine what
are to be considered more and less satisfactory conditions
and what means are to be resorted to to alter them. Thus
ideas are the main theme of the study of history^

This is not to say that all history should be intellectual history,
but that ideas are the ultimate cause of all social phenomena,
including and especially economic phenomena. As Mises puts it.

The genuine history of mankind is the history of ideas. It is
ideas that distinguish man from aU other beings. Ideas
engender social institutions, political changes, technologi-
cal methods of production, and all that is called economic
conditions.'^

Thus, for Mises, history

establishes the fact that men, inspired by definite ideas,
made definite judgments of value, chose definite ends, and
resorted to definite means in order to attain the ends chosen,
and it deals furthermore with the outcome of their actions,
the state of affairs the action brought about.^

Ideas — specifically those embodying the purposes and
values that direct action — are not only the point of contact



6lbid., pp. 224-25.

7lbid., p. 187.

^Ludwig von Mises, The Ultimate Foundation of Economic Science: An
Essay on Method, 2nd ed. (Kansas City, Mo.: Sheed Andrews and McMeel,
1978), p. 45.



Introduction 13



between history and economics, but differing attitudes toward
them are precisely what distinguish the methods of the two dis-
ciplines. Both economics and history deal with individual
choices of ends and the judgments of value underlying them.
On the one hand, economic theory as a branch of praxeology
takes these value judgments and choices as given data and
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