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

History of Money and Banking in the United States The Colonial Era to World War II Book
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    AHISTORY OFMONEY ANDBANKINGIN THEUNITED STATES:THE COLONIAL ERA TOWORLD WAR II

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    The Ludwig von Mises Institute dedicates this volumeto all of its generous donors and wishes to thank these Patrons, in particular:George W. ConnellJames L. Bailey, James Bailey Foundation;Robert Blumen; Christopher P. Condon;John William Galbraith; Hugh E. Ledbetter;Frederick L. Maier; Mr. and M...

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    AHISTORY OFMONEY ANDBANKINGIN THEUNITED STATES:THE COLONIAL ERA TOWORLD WAR IIMURRAY N. ROTHBARD

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    Cover art: Wall Street, 1886. Permission for use of this print is granted to theLudwig von Mises Institute by Old World Prints, Ltd.Copyright © 2002 by the Ludwig von Mises InstituteAll rights reserved. Written permission must be secured from the publisherto use or reproduce any part of this boo...

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    CONTENTS 8,Introduction 8, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,7 8,Joseph T. 8, Salerno 48,PART 48,1 48,The 48,History of 48,Money and Banking 48,Before the Twentieth 48,Century 48, . 48, . 48, . 48, . 48, . 48, . 48, . 48, . 48, . 48, . 48, . 48,...

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    INTRODUCTIONIn this volume, Murray Rothbard has given us a comprehen-sive history of money and banking in the United States, fromcolonial times to World War II, the first to explicitly use theinterpretive framework of Austrian monetary theory. But evenaside from the explicitly Austrian theoretica...

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    episodes.1 It is in this sense that it can be said that economictheory is an a priori science. In sharp contrast, the new economic historians view historyas a laboratory in which economic theory is continually beingtested. The economic quantities observed at different dates inhistory are treated ...

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    This endeavor of North and others to deliberately extendthe positivist program to economic history immediately con-fronts two problems. First, as North emphasizes, this approachnarrowly limits the kinds of questions that can be investigatedin economic history. Those issues which do not readily le...

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    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, st...

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    always interpreted in terms of the motivations of those whohave contributed to their formation. For Rothbard, a particularprice datum is, no less than the Spanish-American War, a histor-ical event, and its causes must be traced back to the subjectiveaims governing human plans and choices. In flat...

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    definitive refutation of the positivist’s claim that it is impossibleto acquire real knowledge of subjective phenomena like humanmotives and that, therefore, economic history must deal exclu-sively with observable and measurable phenomena. To begin with, Mises grounds his discussion of historic...

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    between history and economics, but differing attitudes towardthem are precisely what distinguish the methods of the two dis-ciplines. Both economics and history deal with individualchoices of ends and the judgments of value underlying them.On the one hand, economic theory as a branch of praxeolog...

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    The difference between the methods of economics and his-tory may be illustrated with the following example. The econo-mist qua economist “explains” the Vietnam War-era inflationthat began in the mid-1960s and culminated in the inflationaryrecession of 1973–1975 by identifying those actions ...

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    provides in its field a consummate interpretation of pastevents recorded and a consummate anticipation of theeffects to be expected from future actions of a definite kind.Neither this interpretation nor this anticipation tells any-thing about the actual content and quality of the actual indi-vidu...

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    acceding to these demands and deciding what part of the costincrease to pass on to consumers. Thus, according to Mises,If what these disciplines [i.e., the aprioristic and the naturalsciences] teach is insufficient or if the historian chooses anerroneous theory out of several conflicting theories...

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    Understanding the values and goals of others is thus aninescapable prerequisite for successful action. Now, the method that provides the individual planningaction with information about the values and goals of otheractors is essentially the same method employed by the historianwho seeks knowledge...

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    is what a man knows about the way in which people valuedifferent conditions, about their wishes and desires andtheir plans to realize these wishes and desires. It is theknowledge of the social environment in which a man livesand acts or, with historians, of a foreign milieu about whichhe has lear...

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    based on our direct experience of their past modes of valuingand acting. Even our expectations of how strangers will react indefinite situations or what course political, social, and economicevents will take are based on thymology. For example, ourreservoir of thymological experience provides us ...

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    Thymology tells no more than that man is driven by variousinnate instincts, various passions, and various ideas. Theanticipating individual tries to set aside those factors thatmanifestly do not play any concrete role in the concrete caseunder consideration. Then he chooses among the remainingone...

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    enumeration of the factors that operate in bringing about theanticipated result but also the weighting of the relative influ-ence of each factor on the outcome. Of the two, the more diffi-cult problem is that of apportioning the proper weights amongthe various operative factors. Even if the actor...

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    motives and actions that bear a causal relation to the event inquestion and when assigning each action’s contribution to theoutcome a relative weight. In this task, “Understanding is in therealm of history the equivalent, as it were, of quantitative analy-sis and measurement.”32 The histori...

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    attempting to forecast any economic quantity. The economic his-torian, too, exercises understanding when making judgments ofrelevance about the factors responsible for the observed move-ments of the value of money during historical episodes of infla-tion or deflation. Rothbard’s contribution to...

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    higher goals are easily discerned and exposed by the historianin those cases “where the causal chain of economic interest toaction is simple and direct.”36 Thus, for example, when the steelindustry lobbies for higher tariffs or reduced quotas, no saneadult, and certainly no competent historia...

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    historian must be equipped with a worldview—an interrelatedset of ideas about the causal relationships governing how theworld works—in order to ascertain which facts are relevant inthe explanation of a particular historical event. According toRothbard, “Facts, of course, must be selected an...

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    These “presuppositions” derived from praxeology lead him toavoid any attribution of causal significance to the actions offoreign exchange speculators in accounting for the precipitousdecline of the domestic purchasing power of the mark. Insteadthey direct his attention to the motives of the G...

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    “political means” of taxation and the sale of monopoly privi-leges.42Rothbard argues that economic logic dictates that the kingand his courtiers, or the democratic government and its specialinterest groups, can never constitute more than a small minor-ity of the country’s population—that ...

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    mutual funds, or playing professional football, it is also the casethat only a fraction of the population tends to excel at wieldingcoercive power. Moreover, the law of comparative advantagegoverns the structure of relationships within as well as betweenorganizations, accounting for the hierarchi...

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    the ruling class, being small and largely specialized, ismotivated to think about its economic interests twenty-four hours a day. The steel manufacturers seeking a tariff,the bankers seeking taxes to repay their governmentbonds, the rulers seeking a strong state from which toobtain subsidies, the...

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    least since the Progressive Era in the U.S.—they have beendrawn increasingly from the academy.46Politicians, bureaucrats, and those whom they subsidizeand privilege within the economy thus routinely trumpet loftyideological motives for their actions in order to conceal fromthe exploited and plu...

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    increase State power in any way, their primary motivation iseconomic: to increase their plunder at the expense of thesubject and taxpayer. The ideology that they profess andthat is formulated and spread through society by the CourtIntellectuals is merely an elaborate rationalization for theirvena...

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    investigation of the actual motives of those individuals orgroups whose actions they are analyzing. Instead, their posi-tivist methodology inclines them to mechanically impute to realactors in concrete historical circumstances a narrowly conceivedutility maximization. James Buchanan, one of the f...

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    By thus discounting the effect of erroneous ideas about theappropriate means for achieving preferred goals on the choicesmade by historical actors, Stigler the positivist seeks to freehimself from the task of delving into the murky and unmeasur-able phenomenon of motives. Without doubt, if the hi...

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    assuming that men have motives on which they act.”52 Thisapproach also respects what Mises has called “historical indi-viduality” by assuming that “[t]he characteristics of individualmen, their ideas and judgments of value as well as the actionsguided by those ideas and judgments, cannot ...

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    required to record at all comprehensively the role of money inthe United States in the past century.”56 Thus, in effect, thebehavior of the unmotivated money supply takes center stagein this tome of 808 pages including appendices. Indeed, theopening sentence of the book reads, “This book is a...

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    events, intellectual controversies, social conflicts, and politicalmaneuverings that had an undeniable and fundamental impacton the institutional framework of the money supply. Due to theawkward fit of motives into the positivist framework, however,Friedman and Schwartz’s forays into human hist...

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    then commonly construed as its cause. The result is that theycharacterize the Federal Reserve System as the product of astraightforward, disinterested, bipartisan effort to provide apractical solution to a purely technical problem afflicting themonetary system.60 Nowhere in their discussion of th...

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    Friedman and Schwartz exemplify this method in their treat-ment of the panic of 1907.64 During this episode, banks swiftlyrestricted cash payments to their depositors within weeks afterthe financial crisis struck, and there ensued no large-scale fail-ure or even temporary closing of banks. Friedm...

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    is continually coming to light in the ongoing historical process.As pointed out above, this is the vicious circle that characterizesall attempts to apply the positive method to the interpretationof history.As if to preempt recognition of this vicious circle, Friedmanand Schwartz take as the motto...

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    who would reasonably have expected to benefit from and val-ued such a radical change in the monetary system. Here iswhere Rothbard’s scientific worldview comes into play. As anAustrian monetary theorist, he recognizes that the limits onbank credit inflation confronted by a fractional reserve ba...

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    abrupt and disastrous end in bank failures and industrialdepression. Rothbard employs the approach to economic history exem-plified in this treatment of the origins of the Fed consistentlyand dazzlingly throughout this volume to unravel the causesand consequences of events and institutions rangin...

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    comparatively free and decentralized banking that extendedfrom the 1830s up to the Civil War, and the pernicious impact ofthe war on the U.S. monetary system. Part 1 concludes with ananalysis and critique of the post–Civil War National BankingSystem. Rothbard describes how this regime—which w...

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    time in its original and unexpurgated version. Rothbard eluci-dates the reasons why the British and U.S. governments in the1920s so eagerly sought to reconstruct the international mone-tary system on the basis of this profoundly flawed and infla-tionary caricature of the classical gold standard. ...

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    Part 1AHISTORY OFMONEY ANDBANKINGIN THEUNITED STATESBEFORE THETWENTIETH CENTURY

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    AHISTORY OFMONEY ANDBANKINGIN THEUNITED STATESBEFORE THETWENTIETH CENTURYAs an outpost of Great Britain, colonial America of courseused British pounds, pence, and shillings as its money.Great Britain was officially on a silver standard, withthe shilling defined as equal to 86 pure Troy grains of ...

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    compulsory legal tender power to privilege one money aboveanother. In seventeenth- and eighteenth-century Britain, the govern-ment maintained a mint ratio between gold and silver that con-sistently overvalued gold and undervalued silver in relation toworld market prices, with the resultant disapp...

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    guinea, the Portuguese “joe,” the Spanish doubloon, and Brazil-ian coins, while silver coins included French crowns and livres. It is important to realize that gold and silver are internationalcommodities, and that therefore, when not prohibited by gov-ernment decree, foreign coins are perfec...

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    Since the Spanish silver dollar consisted of 387 grains, andthe English shilling consisted of 86 grains of silver, this meantthe natural, free-market ratio between the two coins would be4 shillings 6 pence per dollar.3Constant complaints, both by contemporaries and by somelater historians, arose ...

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    But the colonial governments had already found another,and far more inflationary, arrow for their bow: the invention ofgovernment fiat paper money.GOVERNMENT PAPER MONEYApart from medieval China, which invented both paperand printing centuries before the West, the world had neverseen government p...

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    revenue in a few years and that absolutely no further papernotes would be issued. Characteristically, however, both partsof the pledge went quickly by the board: The issue limit disap-peared in a few months, and all the bills continued unredeemedfor nearly 40 years. As early as February 1691, the...

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    expenditures and pay public debts, the government, not thepublic, benefited from the fiat issue. After Massachusetts had emitted another huge issue of£500,000 in 1711 to pay for another failed expedition againstQuebec, not only was the remainder of the silver driven fromcirculation, but, despite...

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    in trying to finance part of the French and Indian War againstthe French. Similar consequences—dramatic inflation, shortageof specie, massive depreciation despite compulsory par laws—ensued in each colony. Thus, along with Massachusetts’ depre-ciation of 11-to-1 of its notes against specie ...

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    Massachusetts on specie and Rhode Island still on depreciatedpaper, the result was that Newport, which had been a flourish-ing center for West Indian imports for western Massachusetts,lost its trade to Boston and languished in the doldrums.7, 8In fact, as one student of colonial Massachusetts has...

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    operation of paper money. Despite the inflation, booms andbusts, and shortages of specie caused by paper issues, the speciesystem worked well overall: Here was a silver standard . . . in the absence of institutionsof the central government intervening in the silver market,and in the absence of ei...

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    Charles I needed money in 1638, shortly before the outbreak ofthe civil war, he confiscated the huge sum of £200,000 of gold,calling it a “loan” from the owners. Although the merchantsfinally got their gold back, they were understandably shaken bythe experience, and forsook the mint, deposit...

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    13On the Massachusetts Land Bank, see the illuminating study byGeorge Athan Billias, “The Massachusetts Land Bankers of 1740,”University of Maine Bulletin 61 (April 1959). On merchant enthusiasm forinflationary banking in Massachusetts, see Herman J. Belz, “PaperMoney in Colonial Massachuse...

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    A History of Money and Banking in the United States59Before the Twentieth CenturyREVOLUTIONARY WAR FINANCETo finance the Revolutionary War, which broke out in 1775,the Continental Congress early hit on the device of issuing fiatpaper money. The leader in the drive for paper money wasGouverneur Mo...

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    60A History of Money and Banking in the United States:The Colonial Era to World War IIto the negligible 42-to-1. By the spring of 1781, the Continentalswere virtually worthless, exchanging on the market at 168 paperdollars to one dollar in specie. This collapse of the Continentalcurrency gave ri...

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    A History of Money and Banking in the United States61Before the Twentieth Centurythe least status.” E. James Ferguson, The Power of the Purse: A History ofAmerican Public Finance, 1776–1790 (Chapel Hill: University of NorthCarolina Press, 1961), p. 68.17In Virginia and Georgia, the state pape...

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    62A History of Money and Banking in the United States:The Colonial Era to World War IIpar in specie;18 and (b) to build up agitation for taxing powerin the Congress, which the Articles of Confederation refused toallow to the federal government. The decentralist policy of thestates’ raising taxe...

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    A History of Money and Banking in the United States63Before the Twentieth Centurymoney, the bank would graciously lend most of its newly cre-ated money to the federal government to purchase public debtand be reimbursed by the hapless taxpayer. The Bank of NorthAmerica was made the depository for ...

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    64A History of Money and Banking in the United States:The Colonial Era to World War IIhad been repaid. The first experiment with a central bank in theUnited States had ended.20At the end of the Revolutionary War, the contraction of theswollen mass of paper money, combined with the resumptionof im...

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    A History of Money and Banking in the United States65Before the Twentieth Century(Boston) followed two years later, with each institution enjoy-ing a monopoly of banking in its region.22 Their expansion ofbank notes and deposits helped to drive out specie, and in thefollowing year the expansion w...

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    66A History of Money and Banking in the United States:The Colonial Era to World War IIThe Coinage Act established a bimetallic dollar standard forthe United States. The dollar was defined as both a weight of371.25 grains of pure silver and/or a weight of 24.75 grains ofpure gold—a fixed ratio o...

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    A History of Money and Banking in the United States67Before the Twentieth Centurycoins began to disappear from the United States and silver coinsbegan to flood in. The fixed government ratio now significantlyovervalued silver and undervalued gold, so it paid people tobring in silver to exchange f...

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    68A History of Money and Banking in the United States:The Colonial Era to World War IIAmerican silver dollars were exported to the Caribbean. Thus,by the complex workings of Gresham’s Law, the United Stateswas left, especially after 1820, with no gold coins and onlySpanish fractional silver coi...

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    A History of Money and Banking in the United States69Before the Twentieth Centuryand demand deposits, pyramiding on top of $2 million inspecie. The Bank of the United States invested heavily in loansto the United States government. In addition to $2 millioninvested in the assumption of pre-existi...

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    70A History of Money and Banking in the United States:The Colonial Era to World War II1796. Thus, the Bank of the United States and its monetaryexpansion spurred the creation of 18 new banks in five years.36The establishment of the Bank of the United States precipi-tated a grave constitutional ar...

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    A History of Money and Banking in the United States71Before the Twentieth Centuryreserve ratio of 0.35 (or, a notes plus deposits pyramiding ontop of specie of 2.88-to-1). By 1811, 26 percent of the 117 banksreported a total of $2.57 million; but the two-and-a-half-foldincrease in specie was more...

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    72A History of Money and Banking in the United States:The Colonial Era to World War IIinstructive to note that the major forces in favor of recharterwere merchants, chambers of commerce, and most of the statebanks. Merchants found that the bank had expended credit atcheap rates and had eased the ...

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    A History of Money and Banking in the United States73Before the Twentieth CenturyThe War of 1812–15 had momentous consequences for themonetary system. An enormous expansion in the number ofbanks and in bank notes and deposits was spurred by the dic-tates of war finance. New England banks were m...

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    74A History of Money and Banking in the United States:The Colonial Era to World War IIBut the aggregates scarcely tell the whole story since, as wehave seen, the expansion took place solely outside of New Eng-land, while New England banks continued on their relativelysound basis and did not infla...

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    A History of Money and Banking in the United States75Before the Twentieth Centuryblanche. It was precisely during 1815 when virtually all the pri-vate banks sprang up, the number of banks increasing in oneyear from 208 to 246. Reporting banks increased their pyramidratios from 3.17-to-1 in 1814 t...

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    76A History of Money and Banking in the United States:The Colonial Era to World War IIrespectively. Not only did the Treasury notes fuel the bank infla-tion, but their quasi–legal tender status brought Gresham’s Lawinto operation and specie flowed out of the banks and publiccirculation outsid...

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    A History of Money and Banking in the United States77Before the Twentieth Centuryof 1819, occurred everywhere outside of New England in 1837,and in all states south and west of New Jersey in 1839. A gen-eral suspension of specie payments occurred throughout thecountry once again in the panic of 1...

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    78A History of Money and Banking in the United States:The Colonial Era to World War IIFrom the 1814–1817 experience on, the notes of state banks cir-culated at varying rates of depreciation, depending on publicexpectations of how long they would be able to keep redeemingtheir obligations in spe...

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    A History of Money and Banking in the United States79Before the Twentieth Centuryhave been no room for wildcat banks or for varying degrees oflack of confidence in the genuineness of specie redemption atany given time. It can be imagined that the advent of the money broker wasnot precisely welcom...

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    80A History of Money and Banking in the United States:The Colonial Era to World War IIThe banks south of Virginia largely went off specie paymentduring the panic of 1819, and in Georgia at least general sus-pension continued almost continuously to the 1830s. One cus-tomer complained during 1819 t...

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    A History of Money and Banking in the United States81Before the Twentieth CenturyMaryland tried to bolster the defense of banks and the attackon brokers by passing a compulsory par law in 1819, prohibit-ing the exchange of specie for Maryland bank notes at less thanpar. The law was readily evaded...

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    82A History of Money and Banking in the United States:The Colonial Era to World War IIoccurred in the course of correspondence between one of the ear-liest economists in America, the young Philadelphia state Sena-tor Condy Raguet, and the eminent English economist DavidRicardo. Ricardo had eviden...

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    A History of Money and Banking in the United States83Before the Twentieth Centuryindividual banks. It was apparent that there were two ways outof the problem: one was the hard-money path, which was advo-cated by the Old Republicans and, for their own purposes, theFederalists. The federal and stat...

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    84A History of Money and Banking in the United States:The Colonial Era to World War IIdate. Instead of using the opportunity to compel the banks toredeem, however, the Second Bank of the United States, in ameeting with representatives from the leading urban banks,excluding Boston, agreed to issue...

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    A History of Money and Banking in the United States85Before the Twentieth Centuryremained unsubscribed, and he and Dallas managed to securefor the post of president of the new bank their good friendWilliam Jones, former Philadelphia merchant.56Much of the opposition to the founding of the Bank of...

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    86A History of Money and Banking in the United States:The Colonial Era to World War IIspecie had been nominal rather than real in the largest por-tion of the Union.58One problem is that the Bank of the United States lacked thecourage to insist on payment of its notes from the state banks.As a res...

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    A History of Money and Banking in the United States87Before the Twentieth Centuryparticularly the latter. It is no accident that three-fifths of all ofthe bank’s loans were made at these two branches.60 Also, thebank’s attempt to provide a uniform currency throughout thenation floundered on t...

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    88A History of Money and Banking in the United States:The Colonial Era to World War IIThe huge expansion of money and credit impelled a full-scale inflationary boom throughout the country. Import priceshad fallen in 1815, with the renewal of foreign trade after thewar, but domestic prices were an...

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    A History of Money and Banking in the United States89Before the Twentieth Centuryshaky branch notes at par, and seriously enforcing the require-ment that its debtor banks redeem in specie. In addition, it pur-chased millions of dollars of specie from abroad. These heroicactions, along with the ou...

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    90A History of Money and Banking in the United States:The Colonial Era to World War IIin 1820.65 Prices in general plummeted: The index of export sta-ples fell from 158 in November 1818 to 77 in June 1819, an annu-alized drop of 87.9 percent during those seven months. SouthCarolina export staples...

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    A History of Money and Banking in the United States91Before the Twentieth Centuryand of the Bank of the United States in particular. Andrew Jack-son himself, Senator Thomas Hart “Old Bullion” Benton ofMissouri, future President James K. Polk of Tennessee, andJacksonian economists Amos Kendall...

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    92A History of Money and Banking in the United States:The Colonial Era to World War IIwhat had become a one-party system after the War of 1812, inwhich the Democrat-Republicans had ended up adopting theFederalist program, including the re-establishing of the Bank ofthe United States. The new part...

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    A History of Money and Banking in the United States93Before the Twentieth Centuryhead of the Second Bank, decided to precipitate a showdownwith Jackson before his re-election effort, so Biddle filed forrenewal early, in 1831. The host of National Republicans andnon-Jacksonian Democrats proceeded ...

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    94A History of Money and Banking in the United States:The Colonial Era to World War IIscarcely ideal. From the depths of the post-1819 depression inJanuary 1820 to January 1823, under the regime of the conser-vative Langdon Cheves, the Bank of the United Statesincreased its notes and deposits at ...

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    A History of Money and Banking in the United States95Before the Twentieth Centuryshocked most economists, who had adopted the proto-mone-tarist position of Irving Fisher and other economists of the daythat a stable wholesale price level cannot, by definition, beinflationary. In reality, the unham...

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    96A History of Money and Banking in the United States:The Colonial Era to World War IIremarkable monetary inflation during the same period. For thetotal money supply rose from $150 million at the beginning of1833 to $267 million at the beginning of 1837, an astonishing riseof 84 percent, or 21 pe...

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    A History of Money and Banking in the United States97Before the Twentieth CenturyThe banks of the Middle states all supported the SecondBank except for those of New York.75What, then, was the cause of the enormous monetary expan-sion of the 1830s? It was a tremendous and unusual expansionof the s...

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    98A History of Money and Banking in the United States:The Colonial Era to World War IIThe enormous increase in specie was the result of two fac-tors: first and foremost, a large influx of silver coin from Mex-ico, and second, the sharp cut in the usual export of silver to theOrient. The latter wa...

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    A History of Money and Banking in the United States99Before the Twentieth CenturyIn 1836 the Jackson administration decided to stop the enor-mous speculation in Western public lands that had been fueledduring the past two years by the inflation of bank credit. Hence,Jackson decreed that public la...

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    100A History of Money and Banking in the United States:The Colonial Era to World War IIrestricted the American cotton export trade in London, exportsdeclined, cotton prices fell, capital flowed into England, andcontractionist pressure was put upon American trade and theAmerican banks. Banks throu...

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    A History of Money and Banking in the United States101Before the Twentieth Centurypublic works would be financed heavily from Britain and othercountries, and the cotton boom on which these hopes dependedcollapsed again in 1839. The states had to abandon their projectsen masse. Cotton prices decli...

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    102A History of Money and Banking in the United States:The Colonial Era to World War IIarrived, some of the southern and western states were clearly indanger of default, their plight made worse by the fact that thebulk of the debt was held by British and Dutch capitalists and thatspecie would hav...

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    A History of Money and Banking in the United States103Before the Twentieth CenturyBy 1847, four western and southern states (Mississippi,Arkansas, Michigan, and Florida) had repudiated all or part oftheir debts. Six other states (Maryland, Illinois, Indiana,Louisiana, Arkansas, and Pennsylvania) ...

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    104A History of Money and Banking in the United States:The Colonial Era to World War IIbrought about severe and continuing depression of productionand living standards. The Jacksonians had no intention of leaving a permanent sys-tem of pet banks, and so after the retirement of Jackson, his suc-ce...

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    A History of Money and Banking in the United States105Before the Twentieth Centurysury. The rest of the fight would have to be conducted during the1840s and later, at the state level where the banks were char-tered. But one thing the federal government could do was read-just the specie coinage. I...

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    106A History of Money and Banking in the United States:The Colonial Era to World War IIgold inflow a little push through a slight undervaluation andthat they anticipated a full coin circulation of both gold and sil-ver.85 In 1833, for example, the world market ratio was as highas 15.93-to-1. Inde...

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    A History of Money and Banking in the United States107Before the Twentieth Centuryall foreign silver and gold coins, and they flourished in circula-tion until the 1850s.88, 89A third plank in the Jacksonian coinage platform was toestablish branch U.S. mints so as to coin the gold found innewly di...

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    108A History of Money and Banking in the United States:The Colonial Era to World War IIdiscovery of extensive gold mines in California, Russia, andAustralia greatly increased gold production, reaching a peak inthe early 1850s. From the 1720s through the 1830s, annual worldgold production averaged...

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    A History of Money and Banking in the United States109Before the Twentieth Centuryto 15 percent. By the beginning of 1851, however, even theseworn foreign silver fractions had gone to a 1-percent premiumand were beginning to go. It was clear that America was undergoing a severe small-coincrisis. ...

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    110A History of Money and Banking in the United States:The Colonial Era to World War IIThe United States could have taken this opportunity of mon-etary crisis to go on either version of a parallel standard.95Apparently, however, few thought of doing so. Another viablethough inferior solution to t...

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    A History of Money and Banking in the United States111Before the Twentieth Centurycould not technically function easily as a lightweight subsidiarycoin. The only feasible solution, then, within a monometallicframework, was to make gold the basic standard and let highlyovervalued, essentially toke...

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    112A History of Money and Banking in the United States:The Colonial Era to World War IIDECENTRALIZED BANKING FROM THE1830STO THECIVIL WARAfter the central bank was eliminated in the 1830s, the battlefor hard money largely shifted to the state governmental arena.During the 1830s, the major thrust ...

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    A History of Money and Banking in the United States113Before the Twentieth Centuryredeem in specie payments, a bank is forced to declare insol-vency and close its doors. “Free” banking before the Civil War, on the other hand, wasvery different.100 As we have pointed out, the governmentallowed...

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    114A History of Money and Banking in the United States:The Colonial Era to World War IIIn addition to allowing periodic suspension of specie pay-ments, federal and state governments conferred upon the banksthe privilege of their notes being accepted in taxes. Moreover,the general prohibition of i...

  • Page 116

    A History of Money and Banking in the United States115Before the Twentieth CenturyAFREE-MARKET “CENTRAL BANK” It is a fact, almost never recalled, that there once existed anAmerican private bank that brought order and convenience to amyriad of privately issued bank notes. Further, this Suffol...

  • Page 117

    116A History of Money and Banking in the United States:The Colonial Era to World War IIthough, still had to pay the cost. In 1818, a group of prominentmerchants formed the Suffolk Bank to do the same thing. Thisenlarged competition brought the basic rate of country-notediscount down from 3 percen...

  • Page 118

    A History of Money and Banking in the United States117Before the Twentieth Centuryalone. Further, it now had the leverage to pressure countrybanks into depositing gold and silver with the Suffolk, to makenote redemption easier. By 1838, almost all banks in New Eng-land did so, and were redeeming ...

  • Page 119

    118A History of Money and Banking in the United States:The Colonial Era to World War IIshunned by the banks that did (or at least see its notes acceptedonly at discount, and not in a very wide area, at that). All legalmeans to stop Suffolk failed: The Massachusetts SupremeCourt upheld in 1827 Suf...

  • Page 120

    A History of Money and Banking in the United States119Before the Twentieth CenturyThe biggest, most powerful weapon Suffolk had to keep sta-bility was the power to grant membership into the system. Itaccepted only banks whose notes were sound. While Suffolkcould not prevent a bad bank from inflat...

  • Page 121

    120A History of Money and Banking in the United States:The Colonial Era to World War IITHE SUFFOLK DIFFERENCEThat the Suffolk system was able to provide note redemptionmuch more cheaply than the U.S. government was stated by aU.S. comptroller of the currency. John Jay Knox compared thetwo systems...

  • Page 122

    A History of Money and Banking in the United States121Before the Twentieth CenturyBank capital, note circulation, and deposits, consideredtogether as “banking power,” grew in New England on a percapita basis much faster than in any other region of the coun-try from 1803 to 1850. And there is ...

  • Page 123

    122A History of Money and Banking in the United States:The Colonial Era to World War IIOnly the Bank for Mutual Redemption was left, and thoughit soon had half the New England banks as members, it wasmuch more lax toward overissuance by country banks. Perhapsthe Suffolk would have returned amid d...

  • Page 124

    A History of Money and Banking in the United States123Before the Twentieth Centuryimplant the soft-money tradition permanently in the Americansystem. GREENBACKSThe Civil War led to an enormous ballooning of federalexpenditures, which skyrocketed from $66 million in 1861 to$1.30 billion four years...

  • Page 125

    124A History of Money and Banking in the United States:The Colonial Era to World War IIgreenbacks were also made convertible at par into U.S. bonds,which remained a generally unused option for the public, andwas repealed a year later. In creating greenbacks in February, Congress resolved thatthis...

  • Page 126

    A History of Money and Banking in the United States125Before the Twentieth CenturyWith the failure of this attempt to regulate the gold market,Chase promptly escalated his intervention. In mid-April, hesold the massive amount of $11 million in gold in order todrive down the gold premium of greenb...

  • Page 127

    126A History of Money and Banking in the United States:The Colonial Era to World War IIousted from office at the same time. The war against the specu-lators was over.104, 105As soon as greenbacks depreciated to less than 97¢ in gold,fractional silver coins became undervalued and so wereexported ...

  • Page 128

    A History of Money and Banking in the United States127Before the Twentieth Centurydid not help matters, because their lowest denominations were5¢ and 3¢, respectively. The penny shortage was finally allevi-ated when a debased and lighter-weight penny was issued inthe spring of 1864, consisting ...

  • Page 129

    128A History of Money and Banking in the United States:The Colonial Era to World War IIa “specific contracts act” at the end of April 1863. The specificcontracts act provided that contracts for the payment of specifickinds of money would be enforceable in the courts. After pas-sage of that la...

  • Page 130

    A History of Money and Banking in the United States129Before the Twentieth Centurymerchants in the rest of the state were quick to follow suit. ThePortland merchants issued a circular warning of a blacklist ofall customers who insisted on settling their debts in green-backs, and they would be qui...

  • Page 131

    130A History of Money and Banking in the United States:The Colonial Era to World War IIwhich provided them with legal tender that could function asa reserve base upon which they could expand. As Hammondputs it, “Instead of being curbed (as some people supposedlater), the powers of the banks wer...

  • Page 132

    A History of Money and Banking in the United States131Before the Twentieth Centuryat the end of the war, a rise of 110.9 percent, or 22.2 percent peryear.114The Republican administration argued that its issue ofgreenbacks was required by stern wartime “necessity.” Thespuriousness of this argu...

  • Page 133

    132A History of Money and Banking in the United States:The Colonial Era to World War IIdeficit came in 1865, totaling $963.8 million. All the rest wasfinanced by increased debt. Taxes also increased greatly, rev-enues rising from $52 million in 1862 to $333.7 million in 1865.Tax revenues as a per...

  • Page 134

    A History of Money and Banking in the United States133Before the Twentieth Centurythe Ohio State Journal, were close friends of U.S. SenatorSalmon P. Chase. Chase, a veteran leader of the antislaverymovement, fought for and lost the Republican presidentialnomination in 1860 to Abraham Lincoln. At...

  • Page 135

    134A History of Money and Banking in the United States:The Colonial Era to World War IItelegraph. He taught the American people to buy bonds,using lavish advertising in newspapers, broadsides, andposters. God, destiny, duty, courage, patriotism—all sum-moned “Farmers, Mechanics, and Capitalis...

  • Page 136

    A History of Money and Banking in the United States135Before the Twentieth CenturyActs destroyed the previously decentralized and fairly suc-cessful state banking system, and substituted a new, central-ized, and far more inflationary banking system under theaegis of Washington and a handful of Wa...

  • Page 137

    136A History of Money and Banking in the United States:The Colonial Era to World War IIembarrassing doctrine of state’s rights and to nationalizeAmerican politics.119As established in the bank acts of 1863 and 1864, the nationalbanking system provided for the chartering of national banksby the ...

  • Page 138

    A History of Money and Banking in the United States137Before the Twentieth Centuryprovision incorporated the “reserve requirement” concept thathad been a feature of the “free” banking system. Reserve citybanks, on the other hand, were allowed to keep one-half of theirrequired reserves in ...

  • Page 139

    138A History of Money and Banking in the United States:The Colonial Era to World War IIpyramid notes and deposits on top of specie, but its room forsuch inflationary expansion is limited, because any bank’sexpansion will cause increased spending by its clients on thegoods or services of other b...

  • Page 140

    A History of Money and Banking in the United States139Before the Twentieth Centurylarger banks, and in the short run because of the advantages ofhaving a line of credit with a larger “correspondent” bank aswell as earning interest on demand deposits at that bank.121Let us illustrate in anothe...

  • Page 141

    140A History of Money and Banking in the United States:The Colonial Era to World War IITotal reserves for the two sets of banks have not changed.But now because the country banks can use as their reservesdeposits in reserve city banks, the same total reserves can beused by the banks to expand far...

  • Page 142

    A History of Money and Banking in the United States141Before the Twentieth CenturyNote that since the reserve city banks are allowed to keephalf of their reserves in the central reserve city banks, the for-mer can still pyramid $2.4 million on top of their new$600,000, and yet deposit $300,000 in...

  • Page 143

    142A History of Money and Banking in the United States:The Colonial Era to World War IIBut this centralized inverse pyramiding of bank credit was notall. For, in a way modeled by the “free” banking system, everynational bank’s expansion of notes was tied intimately to its own-ership of U.S....

  • Page 144

    A History of Money and Banking in the United States143Before the Twentieth CenturyGenuine redeemability, furthermore, was made very difficultunder the national banking system. Laxity was ensured by thefact that national banks were required to redeem the notes anddeposits of every other national b...

  • Page 145

    144A History of Money and Banking in the United States:The Colonial Era to World War IIrequirements of less than 100 percent are more an inflationarythan a restrictive monetary device. The national banking system was intended to replace thestate banks, but many state banks continued aloof and ref...

  • Page 146

    A History of Money and Banking in the United States145Before the Twentieth CenturyThe Cooke-Chase connection with the new national bankingsystem was simple. As secretary of the Treasury, Chase wantedan assured market for the government bonds that were beingissued so heavily during the Civil War. ...

  • Page 147

    146A History of Money and Banking in the United States:The Colonial Era to World War IIsystem.” Such space meant not only publicity and articles, buteven more important, the fervent editorial support of most ofthe nation’s press. And so the press, implicitly bought for theoccasion, kept up a ...

  • Page 148

    A History of Money and Banking in the United States147Before the Twentieth Centurynotes and their dependence on the federal debt, Cooke urgedrepeal of the $300 million legal limit on national bank noteissue. In 1865, he published a pamphlet proclaiming that inless than 20 years national bank note...

  • Page 149

    148A History of Money and Banking in the United States:The Colonial Era to World War II1820,133 were led here and instructed by their intellectual men-tor—himself a Pennsylvania ironmaster—the elderly economistHenry C. Carey. Carey and his fellow iron manufacturers real-ized that during an in...

  • Page 150

    A History of Money and Banking in the United States149Before the Twentieth Centuryhigher gold prices, and railroads, which as heavy debtors totheir bondholders, realized that inflation benefits debtors bycheapening the dollar whereas it also tends to expropriate cred-itors by the same token. One ...

  • Page 151

    150A History of Money and Banking in the United States:The Colonial Era to World War IIGive us greenbacks we say, and build cities, plant corn, opencoal mines, control railways, launch ships, grow cotton,establish factories, open gold and silver mines, erect rollingmills. . . . Carry my resolutio...

  • Page 152

    A History of Money and Banking in the United States151Before the Twentieth Centuryof the post–Civil War period, but ultimately it is safe to say thatthe Democrats had a far greater proportion of congressmendevoted to hard money and to resumption than did theRepublicans. Thus, Secretary of the T...

  • Page 153

    152A History of Money and Banking in the United States:The Colonial Era to World War II$300 million limit on national bank notes, in a provision knownas “free banking.” The only hard-money compensation was an80-percent pro rata contraction of greenbacks to partially offsetany new national ban...

  • Page 154

    A History of Money and Banking in the United States153Before the Twentieth CenturyThe Grant administration was upset by Hepburn v. Griswold,as were the railroads, who had accumulated a heavy long-term debt, which would now be payable in more valuablegold. As luck would have it, however, there wer...

  • Page 155

    154A History of Money and Banking in the United States:The Colonial Era to World War IIAs a general overview of the national banking period, wecan agree with Klein that The financial panics of 1873, 1884, 1893, and 1907 were inlarge part an outgrowth of . . . reserve pyramiding andexcessive depos...

  • Page 156

    A History of Money and Banking in the United States155Before the Twentieth Centurythe fact that prices in general fell sharply during the entireperiod. Indeed they fell from the end of the Civil War until 1879.Friedman and Schwartz estimated that prices in general fellfrom 1869 to 1879 by 3.8 per...

  • Page 157

    156A History of Money and Banking in the United States:The Colonial Era to World War IIbecause he feared that inflation would destroy the value ofgovernment bonds. By the late 1860s, however, the House ofCooke was expanding everywhere, and in particular, had got-ten control of the new Northern Pa...

  • Page 158

    A History of Money and Banking in the United States157Before the Twentieth Centurythe will to contract in order to pave the way for resumption.Resumption was finally achieved after substantial sales of U.S.bonds for gold in Europe by Secretary of the Treasury Sher-man. Return to the gold standard...

  • Page 159

    158A History of Money and Banking in the United States:The Colonial Era to World War IIExcept for the acts of 1873 and 1874, labeled by the pro-silverforces as “The Crime of 1873,” silver would have flowed intothe United States, and the country would have been once againon a de facto monometa...

  • Page 160

    A History of Money and Banking in the United States159Before the Twentieth CenturySilver began as an urban movement, furthermore, not anagrarian crusade. Its original strongholds were the largetowns and cities of the Midwest and middle Atlantic states,not the country’s farming communities. The ...

  • Page 161

    160A History of Money and Banking in the United States:The Colonial Era to World War II10.45 percent per annum—surely enough to satisfy all but themost ardent inflationists.150For those who persist in associating a gold standard withdeflation, it should be pointed out that price deflation in th...

  • Page 162

    A History of Money and Banking in the United States161Before the Twentieth Century1878. The shift in Treasury balances from gold to silver struck adisquieting note in foreign financial circles.152Before examining the critical decade of the 1890s, it is well topoint out in some detail the excellen...

  • Page 163

    162A History of Money and Banking in the United States:The Colonial Era to World War IIWHOLESALE PRICE INDEX(1910–1914 = 100)YearIndex% Change1869 151—187990-40.4%188981-10.0%CONSUMER PRICE INDEX1869138—187997-28.8%188993-4.2%WAGES(1900–1914 = 100)Urban Labor...

  • Page 164

    A History of Money and Banking in the United States163Before the Twentieth CenturyINTEREST RATESSidney Homer writes in his monumental History of InterestRates, 2000 B.C. to the Present that “during the last two decadesof the nineteenth century (1880–1900), long-term bond yields inthe United S...

  • Page 165

    164A History of Money and Banking in the United States:The Colonial Era to World War IICOMMERCIAL PAPERCALL MONEY1870–1879 6.46% 5.73% 1880–1889 5.14% 3.98%ABURST INPRODUCTIVITYBy some measures the 188...

  • Page 166

    A History of Money and Banking in the United States165Before the Twentieth CenturyLABOR PRODUCTIVITYMANUFACTURING OUTPUT PER MAN-HOUR(1958 = 100) 1869 14.7 1879 16.2 1889 20.5 The 26.5-percent increase here ranks among the best in our his-tory. Labor productivity reflects increa...

  • Page 167

    166A History of Money and Banking in the United States:The Colonial Era to World War IIIt has repeatedly been alleged that the late nineteenth cen-tury, the “golden age of the gold standard” in the United States,was a period especially harmful to farmers. The facts, however,tell a different s...

  • Page 168

    A History of Money and Banking in the United States167Before the Twentieth CenturyThis phenomenal economic growth during the decadeimmediately after the return to gold convertibility cannot beattributed solely to the gold standard. Indeed all during thistime there was never a completely free-mark...

  • Page 169

    168A History of Money and Banking in the United States:The Colonial Era to World War IIUneasiness about the shift from gold to silver and the con-tinuing free-silver agitation caused foreigners to lose furtherconfidence in the U.S. gold standard, and to cause a drop in cap-ital imports and severe...

  • Page 170

    A History of Money and Banking in the United States169Before the Twentieth Centurybank suspension occurred, beginning with New York City. Thetotal money supply—gold coin, Treasury paper, national banknotes, and national and state bank deposits—fell by 6.3 percentin one year, from June 1892 to...

  • Page 171

    170A History of Money and Banking in the United States:The Colonial Era to World War IIThis conventional analysis overlooks several problems. First,if Bryan represented the “people” versus the “interests,” whydid Bryan lose and lose soundly, not once but three times? Whydid gold triumph l...

  • Page 172

    A History of Money and Banking in the United States171Before the Twentieth Centurydecades, with each particular party having a certain centralcharacter; in many cases, the name of the party can remain thesame but its essential character can drastically change—in theso-called “critical electio...

  • Page 173

    172A History of Money and Banking in the United States:The Colonial Era to World War IIOnly the findings of the new political historians havecleared up this puzzle. It turns out that the mass of the publicwas not necessarily interested in what the elites, or nationalpoliticians, were talking abou...

  • Page 174

    A History of Money and Banking in the United States173Before the Twentieth CenturyThe pietists defined sin very broadly. In particular, the mostimportant politically was “demon rum,” which clouded men’sminds and therefore robbed them of their theological free will.In the 1830s, the evangeli...

  • Page 175

    174A History of Money and Banking in the United States:The Colonial Era to World War IIThere came to this country during the century an increasingnumber of Catholic and Lutheran immigrants, especially fromIreland and Germany. The Catholics and High Lutherans, whohave been called “ritualists” ...

  • Page 176

    A History of Money and Banking in the United States175Before the Twentieth Centuryinterested in national economic questions. Thus, the Republi-can leaders would go to their rank and file and say: “Just as weneed Big Paternalistic Government on the local and state levelto stamp out sin and compe...

  • Page 177

    176A History of Money and Banking in the United States:The Colonial Era to World War IIbecoming an embarrassment and losing the Republicans largenumbers of German Lutheran votes. Also, they modified theirhostility to immigration. By the mid-1890s, the Republicans hadmoved rapidly toward the cente...

  • Page 178

    A History of Money and Banking in the United States177Before the Twentieth Centurywe will all back you. Refuse, and we will support Bryan or athird party. McKinley struck the deal, and from then on, theRepublicans, in nineteenth-century terms, were a centrist party.Their principles were now high ...

  • Page 179

    178A History of Money and Banking in the United States:The Colonial Era to World War IIoff the stage, and the shrewdly opportunistic Republicansadopted as their campaign slogan, “Schilling and Sauerkraut”and swept Milwaukee. 162The Greenbackers and later the pro-silver, inflationist, Bryan-it...

  • Page 180

    A History of Money and Banking in the United States179Before the Twentieth Centurypolitics steadily declined. A power vacuum was left in Ameri-can politics for the new corporate statist ideology of progres-sivism, which swept both parties (and created a short-lived Pro-gressive Party) in America ...

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    Part 2THE ORIGINSOF THEFEDERAL RESERVE

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    THE ORIGINS OF THEFEDERAL RESERVETHE PROGRESSIVE MOVEMENTThe Federal Reserve Act of December 23, 1913, was partand parcel of the wave of Progressive legislation, on local,state, and federal levels of government, that began about1900. Progressivism was a bipartisan movement which, in thecourse of ...

  • Page 185

    184A History of Money and Banking in the United States:The Colonial Era to World War IIestablish successful cartels on the free market. The first wave ofsuch cartels was in the first large-scale business, railroads, andin every case, the attempt to increase profits, by cutting saleswith a quota s...

  • Page 186

    The Origins of the Federal Reserve185in the name of curbing “big business monopoly” on the free mar-ket. In that way, the regulatory commissions could subsidize,restrict, and cartelize in the name of “opposing monopoly,” aswell as promoting the general welfare and national security. Oncea...

  • Page 187

    big business and big government with the Republican Partydrove through an income tax, heavy excise taxes on such sinfulproducts as tobacco and alcohol, high protective tariffs, andhuge land grants and other subsidies to transcontinental rail-roads. The overbuilding of railroads led directly to Mo...

  • Page 188

    with the status quo. The centralization was only limited, and,above all, there was no governmental central bank to coordinateinflation, and to act as a lender of last resort, bailing out banksin trouble. No sooner had bank credit generated booms whenthey got into trouble and bank-created booms tu...

  • Page 189

    By the turn of the century the political economy of the UnitedStates was dominated by two generally clashing financial aggre-gations: the previously dominant Morgan group, which hadbegun in investment banking and expanded into commercialbanking, railroads, and mergers of manufacturing firms; and ...

  • Page 190

    the Rockefeller forces, dominant in their home state of Ohio andnationally in the Republican Party, had decided to quietly ditchprohibition as a political embarrassment and as a grave deterrentto obtaining votes from the increasingly powerful bloc of Ger-man-American voters. In the summer of 1896...

  • Page 191

    190A History of Money and Banking in the United States:The Colonial Era to World War II“inelasticity” of money in the existing gold standard and tomove slowly toward the establishment of a central bank. To doso, they decided to use the techniques they had successfullyemployed in establishing ...

  • Page 192

    The Origins of the Federal Reserve191The conventioneers may have been businessmen, but theywere certainly not very grassrootsy. Presiding at the Indianapo-lis Monetary Convention of 1897 was C. Stuart Patterson, deanof the University of Pennsylvania Law School and a member ofthe finance committee...

  • Page 193

    192A History of Money and Banking in the United States:The Colonial Era to World War IIA.E. Willson, influential attorney from Louisville and afuture governor of Kentucky.But the two most interesting and powerful executive com-mittee members of the Indianapolis Monetary Convention wereHenry C. Pa...

  • Page 194

    The Origins of the Federal Reserve193George Foster Peabody. The entire Peabody family of BostonBrahmins had long been personally and financially closelyassociated with the Morgans. A member of the Peabody clanhad even served as best man at J.P. Morgan’s wedding in 1865.George Peabody had long a...

  • Page 195

    194A History of Money and Banking in the United States:The Colonial Era to World War IIserved as liaison between the Indianapolis members and theNew York financial community. To select the commission mem-bers, Peabody arranged for the executive committee to meet inthe Saratoga Springs summer home...

  • Page 196

    The Origins of the Federal Reserve195William B. Dean was a merchant from St. Paul, Minnesota,and a director of the St. Paul–based transcontinental GreatNorthern Railroad, owned by James J. Hill, ally with Morgan inthe titanic struggle over the Northern Pacific Railroad with Har-riman, Rockefell...

  • Page 197

    196A History of Money and Banking in the United States:The Colonial Era to World War IImaking the commission and its work highly visible to the public,to the business community throughout the country, and to mem-bers of Congress. Furthermore, through this device, the com-mission could be seen as ...

  • Page 198

    The Origins of the Federal Reserve1977,500 newspapers, large and small.” In the meanwhile,Guthridge and Conant orchestrated letters of support fromprominent men across the country, when the preliminary reportwas published on January 3, 1898. As soon as the report waspublished, Guthridge and Con...

  • Page 199

    198A History of Money and Banking in the United States:The Colonial Era to World War IITransportation, the Merchants’ Association, and the Chamber ofCommerce in New York City.Such corporate leaders attended as Cleveland iron manu-facturer Alfred A. Pope, president of the National MalleableCasti...

  • Page 200

    The Origins of the Federal Reserve199himself, later to be secretary of the Treasury under TheodoreRoosevelt, was a small-town banker in Iowa, and president ofthe Bank of Denison who continued as bank president through-out his term as convention governor. More important in Shaw’soutlook and care...

  • Page 201

    200A History of Money and Banking in the United States:The Colonial Era to World War IIBoth Taussig and Taylor were monetary theorists who, whilecommitted to a gold standard, urged reform that would makethe money supply more elastic. Taussig called for an expansionof national bank notes, which wo...

  • Page 202

    The Origins of the Federal Reserve201The convention delegates took the gospel of bankingreform to the length and breadth of the corporate and financialcommunities. In April 1898, for example, A. Barton Hepburn,president of the Chase National Bank of New York, at that timea flagship commercial ban...

  • Page 203

    202A History of Money and Banking in the United States:The Colonial Era to World War IIrecessions by purchasing government bonds on the open mar-ket, and depositing large funds with pet commercial banks. In1900, Gage called vainly for the establishment of regional centralbanks.Finally, in his las...

  • Page 204

    The Origins of the Federal Reserve203standard, with no retention of silver money except as tokens.Less well known are the clauses that began the march toward amore “elastic” currency. As Lyman Gage had suggested in 1897,national banks, previously confined to large cities, were nowmade possibl...

  • Page 205

    204A History of Money and Banking in the United States:The Colonial Era to World War IIjournalists, two from Chicago, were to play a large role in thedevelopment of that movement. Massachusetts-born Charles A.Conant (1861–1915), a leading historian of banking, wrote A His-tory of Modern Banks o...

  • Page 206

    The Origins of the Federal Reserve205In the United States, however, there is no single businessinstitution, and no group of large institutions, in whichself-interest, responsibility, and power naturally unite andconspire for the protection of the monetary system againsttwists and strains.In short...

  • Page 207

    206A History of Money and Banking in the United States:The Colonial Era to World War IIpanied by centralization of the banking system. Thus, theFowler Bill proposed to create a three-member board of controlwithin the Treasury Department to supervise the creation of thenew bank notes and to establ...

  • Page 208

    The Origins of the Federal Reserve207banks in the New York money market. The two Morgan men atthe meeting were J.P. Morgan and George F. Baker, Morgan’sclosest friend and associate in the banking business.26 The twoRockefeller men were Frank Vanderlip and James Stillman,longtime chairman of the...

  • Page 209

    208A History of Money and Banking in the United States:The Colonial Era to World War IIsury, which had tried to confine government revenues andexpenditures to its own coffers. Instead, he expanded the prac-tice of depositing Treasury funds in favored big national banks.Indeed, even banking reform...

  • Page 210

    The Origins of the Federal Reserve209with a central bank, the gold-exchange standard establishes asystem, in the name of gold, which in reality manages to installcoordinated international inflationary paper money. The ideawas to replace a genuine gold standard, in which each country(or, domestica...

  • Page 211

    210A History of Money and Banking in the United States:The Colonial Era to World War IIcrippling capitalism, except that salvation loomed in the formof foreign markets and especially foreign investments. Newand expanded foreign markets would increase profits, at leasttemporarily, while investment...

  • Page 212

    The Origins of the Federal Reserve211business cycle, and in particular the necessity of economic impe-rialism to force open profitable outlets abroad for American andother Western surplus capital.The United States’s bold venture into an imperialist waragainst Spain in 1898 galvanized the energi...

  • Page 213

    212A History of Money and Banking in the United States:The Colonial Era to World War IIuninterrupted progress be conveyed to the tropical and unde-veloped countries.”33Conant also was bold enough to derive important domesticconclusions from his enthusiasm for imperialism. Domesticsociety, he cl...

  • Page 214

    The Origins of the Federal Reserve213army and navy are admirably adopted to inculcate orderlyhabits of thought and action.”But an even more important benefit from a policy of perma-nent imperialism is economic. To keep “capital . . . at work,”stern necessity requires that “an enlarged fie...

  • Page 215

    214A History of Money and Banking in the United States:The Colonial Era to World War II“The excess of capital has resulted in an unprofitable competi-tion. To employ Franklin’s witticism, the owners of capital are ofthe opinion they must hang together or else they will all hangseparately.” ...

  • Page 216

    The Origins of the Federal Reserve215Eager for positions and power commensurate with their gradu-ate training, these new social scientists, in the name of profes-sionalism and technical expertise, prepared to abandon the oldlaissez-faire creed and take their places as apologists and plan-ners in ...

  • Page 217

    216A History of Money and Banking in the United States:The Colonial Era to World War IIto economic advisers and planners. Previously, executives werehampered in seeking such expert counsel by the importance ofpolitical parties, their ideological commitments, and their massbase in the voting popul...

  • Page 218

    The Origins of the Federal Reserve217American Economic Association. The other two, non-AEA lead-ers, on the committee were Edward R. Strobel, former assistantsecretary of state and adviser to colonial governments, andCharles S. Hamlin, wealthy Boston lawyer and assistant secre-tary of the Treasu...

  • Page 219

    218A History of Money and Banking in the United States:The Colonial Era to World War IIgain the imprimatur of leading members of the power elite onthis bold move for power to economists as technocratic expertadvisers and administrators in the imperial nation-state.The American Economic Associatio...

  • Page 220

    The Origins of the Federal Reserve219brief, the developed Western countries by this time were on thegold standard, while most of the Third World nations were onthe silver standard. For the past several decades, the value ofsilver in relation to gold had been steadily falling, due to (1) anincreas...

  • Page 221

    220A History of Money and Banking in the United States:The Colonial Era to World War IIwilling to impose a form of bimetallism upon client states inorder to tie them into U.S. economic imperialism, and to pres-sure them into inflating their own money supplies on top of dol-lar reserves supposedly...

  • Page 222

    The Origins of the Federal Reserve221peso obligations at as cheap a rate as possible; they lobbied fora peso worth 50¢ American. In contrast, the Puerto Ricanbanker-creditors wanted the rate fixed at 75¢. Since theexchange rate was arbitrary anyway, Hollander and the otherAmerican officials dec...

  • Page 223

    222A History of Money and Banking in the United States:The Colonial Era to World War IIfresh from the Indianapolis Monetary Commission and beforegoing to New York as a leading investment banker, was, asmight be expected, an ardent gold-exchange-standard imperi-alist as well as the leading theoret...

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    The Origins of the Federal Reserve223of Manila. Recalcitrant U.S. bankers were warned by Conantthat they could no longer expect large government depositsfrom the War Department if they continued to oppose the plan.Furthermore, Conant won the support of the major enemies ofhis plan, the American s...

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    224A History of Money and Banking in the United States:The Colonial Era to World War IIof President Roosevelt’s new Commission on InternationalExchange (CIE). Jenks had already paved the way for Conant byvisiting English and Dutch colonies in the Far East in 1901 togain information about runnin...

  • Page 226

    The Origins of the Federal Reserve225By 1903, the currency reformers felt emboldened enough tomove against the Mexican silver dollar throughout the world. InMexico itself, U.S. industrialists who wanted to invest therepressured the Mexicans to shift from silver to gold, and theyfound an ally in M...

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    226A History of Money and Banking in the United States:The Colonial Era to World War IIand investment opportunities” in the gold countries and eco-nomic development in the silver countries.The three members of the CIE were old friends and like-minded colleagues. Chairman was Hugh H. Hanna, of t...

  • Page 228

    The Origins of the Federal Reserve227side, freely fluctuating in response to supply and demand. Fur-thermore, similar to the pre-reformed Philippines, a fixedbimetallic exchange rate between the cheaper U.S., and themore valuable Spanish and French coins, led the Cubans toreturn cheaper U.S. coin...

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    228A History of Money and Banking in the United States:The Colonial Era to World War IIto convince the Cubans of the virtues of the gold-exchangestandard.46The Mexican shift from silver to gold was more gratifying toConant, but here the reform was effected by Foreign MinisterLimantour and his ind...

  • Page 230

    The Origins of the Federal Reserve229China from a silver to a gold-exchange standard. Jenks alsowrote to President Roosevelt from China urging that the Chi-nese indemnity to the United States from the Boxer Rebellion beused to fund exchange professorships for 30 years. Jenks’s mis-sion, however...

  • Page 231

    230A History of Money and Banking in the United States:The Colonial Era to World War IIhire Hollander to work out a plan for financial reform, includ-ing a U.S. loan, and a customs service run by the United Statesto collect taxes for repayment of the loan. Hollander, son-in-lawof prominent Baltim...

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    The Origins of the Federal Reserve231Particularly interesting were Conant’s arguments in favor ofa gold-exchange standard, rather than a genuine gold-coinstandard. A straight gold-coin standard, Conant believed, didnot provide a sufficient amount of gold to provide for theworld’s monetary nee...

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    232A History of Money and Banking in the United States:The Colonial Era to World War IIto manage and control that standard. As Emily Rosenbergpoints out:Conant thus did not neglect . . . one of the major revolution-ary changes implicit in his system: a new, important role fora central bank as a c...

  • Page 234

    The Origins of the Federal Reserve233Thus, Conant was treasurer, from 1902 to 1906, of the Morgan-run Morton Trust Company of New York, and it was surely nocoincidence that Morton Trust was the bank that held thereserve funds for the governments of the Philippines, Panama,and the Dominican Republ...

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    234A History of Money and Banking in the United States:The Colonial Era to World War IImoney doctor served as president of the American EconomicAssociation.53JACOB SCHIFF IGNITESTHEDRIVE FOR ACENTRAL BANKThe defeat of the Fowler Bill for a broader asset currency andbranch banking in 1902, coupled...

  • Page 236

    The Origins of the Federal Reserve235function at Kuhn, Loeb was to agitate to bring the blessings ofEuropean central banking to the United States.55It took less than a month for the finance committee of theNew York chamber to issue its report, but the bank reformerswere furious, denouncing it as ...

  • Page 237

    236A History of Money and Banking in the United States:The Colonial Era to World War IIand Company, a large integrated wholesaling concern. Comingon board as secretary of the new currency committee was Van-derlip’s old friend Joseph French Johnson, now of New YorkUniversity, who had been callin...

  • Page 238

    The Origins of the Federal Reserve237After drafting and publishing this “Currency Report,” thereformers used the report as the lever for expanding the agita-tion for a central bank and broader note-issue powers to othercorporate and financial institutions. The next step was the pow-erful Amer...

  • Page 239

    238A History of Money and Banking in the United States:The Colonial Era to World War IIand political ally William Howard Taft as well as later underPresident Warren G. Harding, and a recipient of Herrick’s polit-ical support and financial largesse; and• Chairman of the ABA commission, A. Bart...

  • Page 240

    The Origins of the Federal Reserve239Worries about the existing system and hence about uncon-trolled asset currency were voiced by the top bank reformers.Thus, Vanderlip expressed concern that “there are so many statebanks that might count these [national bank] notes in theirreserves.” Schiff...

  • Page 241

    240A History of Money and Banking in the United States:The Colonial Era to World War IIBy the summer of 1907, Bankers Magazine was reporting adecline in influential banker support for broadening asset cur-rency and a strong move toward the “central bank project.”Bankers Magazine noted as a cr...

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    The Origins of the Federal Reserve241nation’s academics and experts. The task was made easier bythe growing alliance and symbiosis between academia and thepower elite. Two organizations that proved particularly usefulfor this mobilization were the American Academy of Politicaland Social Science...

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    242A History of Money and Banking in the United States:The Colonial Era to World War IIfacilitate adjustments. One big problem, however, still remainedfor Seligman. The horde of small competitors, for whom Selig-man had so much contempt, still prevailed in the field of cur-rency and banking. The ...

  • Page 244

    The Origins of the Federal Reserve243bank that would issue a monopoly of bank notes. It was partic-ularly important that the central bank be able to discount theassets of national banks, and thus supply an elastic currency.The last speaker was Paul Warburg, who lectured his audi-ence on the super...

  • Page 245

    244A History of Money and Banking in the United States:The Colonial Era to World War IIAldrich (R-R.I.), head of the Senate Finance Committee, and,as the father-in-law of John D. Rockefeller, Jr., Rockefeller’sman in the U.S. Senate. He introduced the Aldrich Bill, whichfocused on a relatively ...

  • Page 246

    The Origins of the Federal Reserve245carefully selected “experts.”64 Thus, the National MonetaryCommission (NMC) was the apotheosis of the clever commis-sion concept, launched in Indianapolis a decade earlier. Aldrich lost no time setting up the NMC, which waslaunched in June 1908. The offici...

  • Page 247

    246A History of Money and Banking in the United States:The Colonial Era to World War IIand central banks. As director of research, A. Piatt Andrewbegan to organize American banking experts and to commissionreports and studies. The National City Bank’s foreign exchangedepartment was commissioned...

  • Page 248

    The Origins of the Federal Reserve247The bank reformers therefore went out of their way to bringsuch men as Forgan into enthusiastic support for the newscheme. In his presidential address to the powerful AmericanBankers Association in mid-September 1909, George M.Reynolds not only came out flatly...

  • Page 249

    248A History of Money and Banking in the United States:The Colonial Era to World War IIPresident William Howard Taft, speaking in Boston, suggestedthat the country seriously consider establishing a central bank.Taft had been close to the reformers—especially his Rockefeller-oriented friends Ald...

  • Page 250

    The Origins of the Federal Reserve249The Wall Street Journal series inaugurated a shrewd and suc-cessful campaign by Conant to manipulate the nation’s pressand get it behind the idea of a central bank. Building on hisexperience in 1898, Conant, along with Aldrich’s secretary,Arthur B. Shelton...

  • Page 251

    250A History of Money and Banking in the United States:The Colonial Era to World War IIWarburg basically outlined the structure of his beloved GermanReichsbank, but he was careful to begin his talk by noting arecent poll in the Banking Law Journal that 60 percent of thenation’s bankers favored ...

  • Page 252

    The Origins of the Federal Reserve251At the same time, in the spring of 1910, the numerous researchvolumes published by the NMC poured onto the market. Theobject was to swamp public opinion with a parade of impressiveanalytic and historical scholarship, all allegedly “scientific” and“value-...

  • Page 253

    252A History of Money and Banking in the United States:The Colonial Era to World War IIaround papers by Kemmerer, Laughlin, Johnson, Bush, War-burg, and Conant, and the general atmosphere was that bankersand businessmen were to take their general guidance from theattendant scholars. As James B. F...

  • Page 254

    The Origins of the Federal Reserve253the attendees addressed each other only by first name, and therailroad car was kept dark and closed off from reporters orother travelers on the train. One reporter apparently caught onto the purpose of the meeting, but was in some way persuadedby Henry P. Davi...

  • Page 255

    254A History of Money and Banking in the United States:The Colonial Era to World War IIAfter working on some revisions of the Jekyll Island draftwith Forgan and George Reynolds, Aldrich presented the JekyllIsland draft as the Aldrich Plan to the full NMC in January 1911.But here an unusual event ...

  • Page 256

    The Origins of the Federal Reserve255The committee of seven shrewdly decided, following the leadof the old Indianapolis convention, to establish the National Cit-izens’ League for the Creation of a Sound Banking System inChicago rather than in New York, where the control reallyresided. The idea...

  • Page 257

    256A History of Money and Banking in the United States:The Colonial Era to World War IIhimself worked on a book on the Aldrich Plan, to be similar tohis own report of 1898 for the Indianapolis convention.Meanwhile, a parallel campaign was launched to bring thenation’s bankers into camp. The fir...

  • Page 258

    The Origins of the Federal Reserve257nation’s banking community was now solidly lined up behindthe drive for a central bank.However, 1912 and 1913 were years of some confusion andbacking and filling, as the Republican Party split between itsinsurgents and regulars, and the Democrats won increas...

  • Page 259

    258A History of Money and Banking in the United States:The Colonial Era to World War IITrust as all-powerful head of the Federal Reserve Bank of NewYork. The reformers had gotten the point by the end of con-gressional wrangling over the Glass bill, and by the time theFederal Reserve Act was passe...

  • Page 260

    patina of their allegedly scientific expertise to the elites’ drivefor a central bank. To achieve a regime of big government andgovernment control, power elites cannot achieve their goal ofprivilege through statism without the vital legitimizing sup-port of the supposedly disinterested experts ...

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  • Page 262

    Part 3FROM HOOVER TOROOSEVELT:THE FEDERAL RESERVEAND THEFINANCIAL ELITES

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    FROM HOOVER TOROOSEVELT: THE FEDERALRESERVE AND THEFINANCIAL ELITESThis chapter is grounded on the insight that American pol-itics, from the turn of the twentieth century until WorldWar II, can far better be comprehended by studying theinterrelationship of major financial groupings than by studyi...

  • Page 265

    for measures cartelizing industry that were sought and lobbiedfor by the National Civic Federation during the Progressive Era;and both groups joined to push through the Federal ReserveSystem.1THE EARLY FED, 1914–1928: THE MORGAN YEARSIn their joining together to draft, and then to lobby for, th...

  • Page 266

    The Morgans were not nearly as dominant in the then-lesserinstitution of the Federal Reserve Board in Washington. On theoriginal board, there were seven members, of whom two, thesecretary of the Treasury and the comptroller of the currency,were ex officio. The Morgan bloc on the original board wa...

  • Page 267

    266A History of Money and Banking in the United States:The Colonial Era to World War IIbanker whose father-in-law’s iron manufacturing company hadprominent Morgan as well as rival Rockefeller men on its board;and Adolph C. Miller was an academic economist at Berkeleywho had married into the wea...

  • Page 268

    From Hoover to Roosevelt: 267The Federal Reserve and the Financial Elitesmoreover, Calvin Coolidge had two important mentors, bothneglected by historians. One was Massachusetts RepublicanParty Chairman W. Murray Crane, who served as a director ofthree powerful Morgan-dominated institutions: the N...

  • Page 269

    268A History of Money and Banking in the United States:The Colonial Era to World War IIMorgan’s personal attorney. After Root refused the StateDepartment post, Coolidge was forced to settle for a lesser Mor-gan light, Minnesota attorney Frank B. Kellogg. Undersecretaryto Kellogg was Joseph C. G...

  • Page 270

    From Hoover to Roosevelt: 269The Federal Reserve and the Financial ElitesHowever, 1928, saw inevitable changes in Morgan domina-tion of monetary policy. Benjamin Strong, sickly all year, died inOctober, and was replaced by George L. Harrison, his hand-picked successor. While Harrison was a devote...

  • Page 271

    270A History of Money and Banking in the United States:The Colonial Era to World War IIYork Central.10 Hoover’s secretary of the Navy was CharlesFrancis Adams, III, from the famous Boston Brahmin familylong associated with the Morgans. This particular Adamsdaughter had been fortunate enough to ...

  • Page 272

    From Hoover to Roosevelt: 271The Federal Reserve and the Financial Eliteswas at the prewar par, a rate that hopelessly overvalued thepound sterling, which Britain had inflated and depreciated dur-ing the fiat money era after 1914. Britain insisted on returning togold at an overvalued par, a polic...

  • Page 273

    272A History of Money and Banking in the United States:The Colonial Era to World War IIFederal Reserve Board, suffered from the same fallacious view.Partly responsible for the Hoover administration’s adoptingthis policy was the wily manipulator Montagu Norman, head ofthe Bank of England, and cl...

  • Page 274

    From Hoover to Roosevelt: 273The Federal Reserve and the Financial Elitesto engage in a massive public-works program. Although theUnited States got out of the recession on its own, without mas-sive intervention, Hoover vowed that next time it would be dif-ferent. In late 1928, after he was electe...

  • Page 275

    274A History of Money and Banking in the United States:The Colonial Era to World War IIand crises. But Hoover overrode Mellon, with the support ofTreasury Undersecretary Ogden Mills.If Hoover stood ready to impose an expansionist and inter-ventionist New Deal, Morgan man George L. Harrison, head ...

  • Page 276

    From Hoover to Roosevelt: 275The Federal Reserve and the Financial Elitessecurities had increased by $375 million during these twomonths, from the level of $136 million before the crash, but theexpansion had been offset by lower bank loans from the Fed, bygreater money in circulation, and by peop...

  • Page 277

    276A History of Money and Banking in the United States:The Colonial Era to World War II‘sweat it out’ and reach monetary ease by the wholesomeprocess of liquidation.”18 Once again, however, Harrison and theNew York Fed overruled Washington, and instituted a massiveeasy-money program. Discou...

  • Page 278

    From Hoover to Roosevelt: 277The Federal Reserve and the Financial Elitesthe bank, New York Fed Governor George Harrison made a“regular business trip” abroad in the fall to confer with the othercentral bankers, and the New York Fed extended loans to theBIS during 1931.20Late 1930 was perhaps ...

  • Page 279

    278A History of Money and Banking in the United States:The Colonial Era to World War IIrates and prices in depressions, and of pursuing inflationarycheap money, saying, “Our depression has been prolonged andnot alleviated by delay in making necessary readjustments.”22On the other hand, Busine...

  • Page 280

    From Hoover to Roosevelt: 279The Federal Reserve and the Financial Elitesspeculator, investor and financier, an associate of the Morgans,and even more closely an associate of Bernard Baruch andBaruch’s patrons, the powerful Guggenheim family, in virtualcontrol of the American copper industry. I...

  • Page 281

    280A History of Money and Banking in the United States:The Colonial Era to World War IIIt should not be surprising, then, that, under the regime ofWorld War I collectivism, Meyer began, first, in early 1917, ashead of the nonferrous metals unit of Bernard Baruch’s RawMaterials Committee under t...

  • Page 282

    From Hoover to Roosevelt: 281The Federal Reserve and the Financial Elitesthe federal deficit. All in all, during the war, the WFC madeloans of $71 million, in addition to its bond-price operations.It was clear that the essential mission of the WFC acted as acamouflage for a government subsidy ope...

  • Page 283

    282A History of Money and Banking in the United States:The Colonial Era to World War IIthe bountiful wartime level of American exports. Hence, theMorgans urged their friends in the Treasury Department to usethe WFC to provide credits to finance American exports, specif-ically to pay American expo...

  • Page 284

    From Hoover to Roosevelt: 283The Federal Reserve and the Financial ElitesHouston declared, in fact, that he was proposing ending theWFC, in order to complete the government’s withdrawal fromall its wartime activities of government intervention in theeconomy. Houston pointed out that exports had...

  • Page 285

    284A History of Money and Banking in the United States:The Colonial Era to World War IIThe defeat of the Democrats in November was a referendumon World War I, its aftermath, and the inflation and rationing ofwartime, rather than against Houston, but Meyer used the vic-tory to step up attacks on S...

  • Page 286

    From Hoover to Roosevelt: 285The Federal Reserve and the Financial Elitesfarm prices, and presaging the more directly governmentalfarm price support policies of the Hoover and Rooseveltadministrations. The WFC’s first loan was to Aaron Sapiro’sStaple Cotton Cooperative Association. Sapiro was...

  • Page 287

    286A History of Money and Banking in the United States:The Colonial Era to World War IIWith WFC duties now assumed by the new Federal Inter-mediate Credit system, Eugene Meyer allowed the WarFinance Corporation’s authority to make loans expire at theend of 1924. The WFC lingered on with no duti...

  • Page 288

    From Hoover to Roosevelt: 287The Federal Reserve and the Financial Elitesfor a reassuring statement—clearly mendacious—hailing the“fundamental soundness” of the German economy. Happen-ing to be in New York in the midst of this German crisis on theweekend of July 12, Meyer found out by acc...

  • Page 289

    288A History of Money and Banking in the United States:The Colonial Era to World War IIOctober, thereby reversing the gold drain by raising marketconfidence in the dollar.36By early September 1931, even before Britain’s abandonmentof the gold standard, President Hoover, Eugene Meyer, and thenat...

  • Page 290

    From Hoover to Roosevelt: 289The Federal Reserve and the Financial Elitesthe timid banks would be emboldened to lend massively to busi-ness and industry, the money supply would dramatically rise,and prosperity would return. This was the doctrine trumpeted byPresident Hoover, Meyer, Mills, and Und...

  • Page 291

    290A History of Money and Banking in the United States:The Colonial Era to World War IIstructure and took over many of the WFC’s actual personnel.The general counsel, and the three top examiners, of the WFChappily took up their old posts, while the first secretary of theRFC was George Cooksey,...

  • Page 292

    From Hoover to Roosevelt: 291The Federal Reserve and the Financial ElitesWall Street, summarizing the congressional debate over theRFC bill, noted that big business, “always complaining of pub-lic intervention in economic matters,” was now beating thedrums for intervention, the RFC being supp...

  • Page 293

    292A History of Money and Banking in the United States:The Colonial Era to World War IIto repaying debt. About a third of these loans went to repay-ing railroad debts to banks. Thus, one of the first RFC loanswas $5.75 million to the Missouri Pacific Railroad to repay itsdebt to J.P. Morgan and C...

  • Page 294

    From Hoover to Roosevelt: 293The Federal Reserve and the Financial Elitesthe RFC. But Meyer’s double-duty work was greatly appreci-ated by Felix Frankfurter, soon to be one of the major gurus ofthe Roosevelt New Deal. Frankfurter telegraphed Meyer’swife that “Gene . . . has been the only br...

  • Page 295

    294A History of Money and Banking in the United States:The Colonial Era to World War IIbinge of buying government securities, unprecedented at thetime. The Fed purchased $1.1 billion of government securitiesfrom the end of February to the end of July, raising its holdingsto $1.8 billion. Part of ...

  • Page 296

    From Hoover to Roosevelt: 295The Federal Reserve and the Financial Elitesthat, as fractional reserve banks, none of them could withstanddetermined and massive runs upon them by their depositors.Second, just at a time when bank loans were becoming risky, thecheap-money policy of the Fed had driven...

  • Page 297

    296A History of Money and Banking in the United States:The Colonial Era to World War IIcredit piled up in the banks. Mills established a committee inNew York City on May 19 headed by Owen D. Young, chairmanof the board of Morgan’s General Electric Corporation, and theYoung Committee tried to or...

  • Page 298

    From Hoover to Roosevelt: 297The Federal Reserve and the Financial Elitesthat until the culminating bank crisis in February 1933. But iftrue, so much the worse, for that means that bank liquidationwas postponed for a year until the final banking crisis of 1933.THE NEW DEAL: GOING OFF GOLDThe inte...

  • Page 299

    298A History of Money and Banking in the United States:The Colonial Era to World War IIconsumption spending. Thus, in January 1933, powerful busi-ness groups formed The Committee for the Nation (more for-mally, The Committee for the Nation to Rebuild Prices and Pur-chasing Power), dedicated to ge...

  • Page 300

    From Hoover to Roosevelt: 299The Federal Reserve and the Financial Elitesthe old nineteenth-century ratio of 16-to-1. Leading theoreticianand lobbyist for the silver bloc was New York banker ReneLeon, who got himself appointed as adviser to the House Waysand Means Committee in unsuccessfully pres...

  • Page 301

    300A History of Money and Banking in the United States:The Colonial Era to World War IIincluding promotion of labor unions, than the Morgans werewilling to accept. Thus, these anti-Morgan groups, now gath-ered in the Democratic Party, were happy to form a coalitionwith left-wing intellectuals, te...

  • Page 302

    From Hoover to Roosevelt: 301The Federal Reserve and the Financial ElitesTo return to monetary policy: Eugene Meyer, who, after all,had three years to go in a ten-year term as governor of the Fed-eral Reserve Board, refused President Hoover’s request toresign immediately upon the inauguration o...

  • Page 303

    302A History of Money and Banking in the United States:The Colonial Era to World War IIof none other than the eminent Winthrop W. Aldrich, chairmanof the board at Chase and a close kinsman of the Rockefellerfamily.49Roosevelt’s first secretary of the Treasury was William H.Woodin, who received ...

  • Page 304

    From Hoover to Roosevelt: 303The Federal Reserve and the Financial ElitesLehman (her mother was a sister of Herbert H. and ArthurLehman), and Henry’s nephew Jules Ehrich had married a sis-ter of Philip Lehman. Moreover, Henry Sr. had long been amajor stockholder of the Underwood Typewriter Comp...

  • Page 305

    304A History of Money and Banking in the United States:The Colonial Era to World War IIFisher had a personal as well as an ideological stake in rapidinflation. Sure of a permanent prosperity and stock boom in thelate 1920s, he had invested all of his wife’s and most of his sis-ter-in-law’s su...

  • Page 306

    From Hoover to Roosevelt: 305The Federal Reserve and the Financial Elitesand to rebuild the special relationship with Morgan allies inBritain and western Europe. The ultra-inflationists, led by TheCommittee for the Nation, were strongly opposed to fixedexchange rates with Britain and wanted to pr...

  • Page 307

    306A History of Money and Banking in the United States:The Colonial Era to World War IIRoosevelt angrily rejected the agreement. Roosevelt gave tworeasons to the chagrined Sprague and Harrison: the poundmust be no cheaper than $4.25, and Roosevelt could accept norestraint on his freedom to inflat...

  • Page 308

    From Hoover to Roosevelt: 307The Federal Reserve and the Financial Elitesefforts which we have well in hand.” But, adding insult to injury,Roosevelt followed up this rejection on July 3 with an arrogantand contemptuous message to the London conference, whichbecame known as his famous “bombshe...

  • Page 309

    308A History of Money and Banking in the United States:The Colonial Era to World War IIlongtime international rival, the British Royal Dutch Shell Oil,financed by the Rothschild interests. Thus, a top financier ofThe Committee for the Nation was James A. Moffett, a longtimedirector and high offic...

  • Page 310

    From Hoover to Roosevelt: 309The Federal Reserve and the Financial ElitesBankers enraged at Benjamin Strong and the New York Fed’slow-interest policy on behalf of Britain in the 1920s, were led byMelvin A. Traylor, head of the Rockefeller-controlled FirstNational Bank of Chicago. The Rockefelle...

  • Page 311

    310A History of Money and Banking in the United States:The Colonial Era to World War IIstruggle were board members Thomas M. Debevoise, fraternitybrother and top counsel to John D. Rockefeller, Jr.;55 VincentAstor, of the famed Astor family and friend and cousin ofFranklin Roosevelt; and Gordon A...

  • Page 312

    From Hoover to Roosevelt: 311The Federal Reserve and the Financial Elitesnot paying income taxes during the depression—the public notbeing willing to understand the legitimacy of deducting severestock losses from one’s income. The Morgans were also pillo-ried for having a “preferred list”...

  • Page 313

    312A History of Money and Banking in the United States:The Colonial Era to World War IISimilarly, Pecora was able to put Wiggin in the dock for prof-itably short-selling Chase stock on a loan from Chase.58 Hebadgered and ridiculed J. P. Morgan himself, and drove McCaininto resigning from the bank...

  • Page 314

    From Hoover to Roosevelt: 313The Federal Reserve and the Financial Elites“deliberately making a profit from the losses of other people”—which of course is what bulls and bears always do from eachother. Angrily replying to the protest of New York bankers,Hoover used some crystal ball of his ...

  • Page 315

    314A History of Money and Banking in the United States:The Colonial Era to World War IIthe Morgans stepped in to try to revive a crash in the bond mar-ket—a market where short-selling had been prohibited.The Senate subcommittee hearings were suspended in lateJune, but they took on a very differ...

  • Page 316

    From Hoover to Roosevelt: 315The Federal Reserve and the Financial ElitesIt was the hysterical atmosphere deliberately generated bythe Pecora hearings, particularly Pecora’s assaults on AlbertWiggin’s Chase National Bank and on the Morgans, that cre-ated the atmosphere that permitted the coal...

  • Page 317

    316A History of Money and Banking in the United States:The Colonial Era to World War IIsecurities—except, cleverly, that government securities wereexempt from this restriction; (b) prohibited commercial banksfrom issuing, underwriting, selling, or distributing any securi-ties (again, government...

  • Page 318

    From Hoover to Roosevelt: 317The Federal Reserve and the Financial ElitesThe Morgans fought back bitterly, William Potter of the Mor-gan-dominated Guaranty Trust calling Aldrich’s proposal“quite the most disastrous . . . ever heard from a member of thefinancial community.” The opposition wa...

  • Page 319

    318A History of Money and Banking in the United States:The Colonial Era to World War IIand Willis into uncongenial schemes of socializing and carteliz-ing Wall Street and helping the Rockefellers destroy the Mor-gans.Professor Benston points out that all the provisions of theBanking Act of 1933 h...

  • Page 320

    From Hoover to Roosevelt: 319The Federal Reserve and the Financial ElitesFed, since open market operations were in U.S. governmentsecurities, and the bond market is located in New York. TheBanking Act of 1933 began a transfer of power by creating astatutory Federal Open Market Committee (FOMC). T...

  • Page 321

    320A History of Money and Banking in the United States:The Colonial Era to World War IIThe demagogic eruption of the Pecora hearings also led toanother New Deal 100 Days measure that both revolutionizedand cartelized the securities industry and delivered anotherbody blow to the House of Morgan. T...

  • Page 322

    From Hoover to Roosevelt: 321The Federal Reserve and the Financial Elitesenforcement powers in July 1934. By that time, however, Con-gress had passed the Securities Exchange Act of June 1934,greatly expanding the powers of the Securities and ExchangeCommission from compulsory registration of new ...

  • Page 323

    322A History of Money and Banking in the United States:The Colonial Era to World War IIand enforcement, they could at one and the same time dominateand cartelize the securities and investment banking industries,while delivering another body blow to the House of Morgan.The two securities acts were...

  • Page 324

    From Hoover to Roosevelt: 323The Federal Reserve and the Financial ElitesWhile the New Deal Left originally wanted security regula-tion in the hands of the left-dominated Federal Trade Commis-sion (FTC), they were perfectly happy to “compromise” by set-ting up a specialized Securities and Exc...

  • Page 325

    324A History of Money and Banking in the United States:The Colonial Era to World War IIcollectivist views. Thus, Kennedy not only enthusiasticallyendorsed the New Deal, he went beyond it to advocate a gen-eral federal incorporation law, as well as the abolition of privateinvestment banking. In ad...

  • Page 326

    From Hoover to Roosevelt: 325The Federal Reserve and the Financial ElitesIn all its efforts the [Securities and Exchange] Commissionhas sought and obtained the cooperation not only of theexchanges, but also of brokerage houses, investmentbankers, and corporation executives, who in turn recognizet...

  • Page 327

    326A History of Money and Banking in the United States:The Colonial Era to World War IIIn other words, the scholar, D.R. Scott, was noting the won-drous fact that whereas until the SEC, accountants were forcedto subordinate themselves to their private business clients onthe market, the SEC was en...

  • Page 328

    From Hoover to Roosevelt: 327The Federal Reserve and the Financial Elitesworked out the SEC rules in a series of negotiations with theexchanges. In early 1937, Landis outlined his strategy can-didly in a major address. Regulation, Landis noted, welded together existing self-regulation and direct ...

  • Page 329

    328A History of Money and Banking in the United States:The Colonial Era to World War IIMartin, Jr., who resented the elite floor traders led by Whitneyand the Morgans. It was these dissidents who ousted Whitneyand took over the stock exchange, and whose tough new dis-closure rules unexpectedly tu...

  • Page 330

    From Hoover to Roosevelt: 329The Federal Reserve and the Financial Eliteswith their most implacably radical piece of legislation: the Pub-lic Utility Holding Act of August 1935. Urged on by Roosevelthimself, the administration insisted on driving through thedrastic “death sentence” clause, ab...

  • Page 331

    330A History of Money and Banking in the United States:The Colonial Era to World War IIChicago-based utility empire, which collapsed with Insull flee-ing to Europe in mid-1932; the other two were Morgan-orientedcombines: J.P. Morgan’s directly controlled United Corporation,and General Electric...

  • Page 332

    From Hoover to Roosevelt: 331The Federal Reserve and the Financial ElitesMARRINER S. ECCLESAND THEBANKING ACT OF1935The saga of Marriner Stoddard Eccles has been told manytimes, not only by his adoring biographer,87 but also by numer-ous historians of the New Deal. How Marriner Eccles, youngmulti...

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    332A History of Money and Banking in the United States:The Colonial Era to World War IIunderconsumption as cause of depression, and governmentdeficit spending and stimulation of consumption as the way torecovery. Any intellectual acumen on Eccles’s part would, onthe contrary, have led him to re...

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    From Hoover to Roosevelt: 333The Federal Reserve and the Financial Elitesmacro: as head of the important Amalgamated Sugar Com-pany, Eccles led a vigorous effort to cartelize the sugar indus-try, and to unite all sugar producers, foreign and domestic, inan allotment plan to form rigorous maximum ...

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    334A History of Money and Banking in the United States:The Colonial Era to World War IIBy the time of his appearance at the Senate Finance Commit-tee hearings at the end of February 1933, in testimony thatwould win him great notoriety, Eccles had worked out a com-plete collectivist program: not o...

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    From Hoover to Roosevelt: 335The Federal Reserve and the Financial Elitesthe Morgan- and Wall Street–dominated New York FederalReserve Board to a non-Morgan politically appointed FederalReserve Board in Washington.Two channels have been charted for the way that Eccles’sviews became known to t...

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    336A History of Money and Banking in the United States:The Colonial Era to World War IInecessity for recovery to concentrate on open market opera-tions for rapid inflation of the money supply.92In early September 1934, Eccles was asked by administrationaides to accept an appointment as governor o...

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    From Hoover to Roosevelt: 337The Federal Reserve and the Financial Elitespublic interest, as represented at the [Federal Reserve] Board.”From now on, the “public interest” must prevail. In particular,the Federal Reserve Board must gain complete control over theOpen Market Committee, now com...

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    338A History of Money and Banking in the United States:The Colonial Era to World War IIthe Federal Reserve. He met with the Federal Advisory Council(FAC), a powerful voice of private bankers within the FederalReserve. The FAC consisted of one private banker from each ofthe 12 Federal Reserve dist...

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    From Hoover to Roosevelt: 339The Federal Reserve and the Financial Elitesdevised a cunning strategy: he would present Eccles’s radicalreform as Title II of the new banking act, sandwiched inbetween two reforms the bankers desperately wanted: Title I,liberalizing assessment on banks for deposit ...

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    340A History of Money and Banking in the United States:The Colonial Era to World War IIEssentially, Eccles won almost all of his points: the shift ofbanking control from Morgan’s New York Fed to the non-Mor-gan Washington politicians had been completed. In the Senate,Eccles only had to make one...

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    From Hoover to Roosevelt: 341The Federal Reserve and the Financial ElitesReserve banks to conduct open market operations on theirown in case of individual bank emergencies. In addition, the Federal Reserve Board was given vetopower over the election of the president and first vice presi-dent of e...

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    342A History of Money and Banking in the United States:The Colonial Era to World War IIpersonally interceded with the committee to kill the Glassamendment.97For his part, Aldrich, as a Wall Street banker himself, was notvery happy about the permanent shift of power from WallStreet to Washington, ...

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    From Hoover to Roosevelt: 343The Federal Reserve and the Financial Elitescentralized and irresponsible financial and banking machine ofwhich the modern world holds record.”The result, Willis pointed out, was that the years of“tremendous deficit” from 1931 on were marked by a processof “gr...

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    344A History of Money and Banking in the United States:The Colonial Era to World War IIStates entered into a tripartite agreement with Great Britain andFrance, the three countries agreeing—not exactly on fixedexchange rates—but on maneuvering to support each other’sexchanges at least within...

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    From Hoover to Roosevelt: 345The Federal Reserve and the Financial ElitesAs the United States prepared to enter World War II, it madeits economic war aims brutally simple: the ending of the eco-nomic and monetary nationalism of the 1930s, and their replace-ment by a new international economic or...

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    346A History of Money and Banking in the United States:The Colonial Era to World War IIKeynesian insistence on jointly promoting permanent inflation-ary policies to ensure “full employment.” The United States hadachieved the objective expressed by Secretary Morgenthau: “tomove the financial...

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    From Hoover to Roosevelt: 347The Federal Reserve and the Financial Eliteseconomic nationalism of the early New Deal happily cameback to help run the World War II and postwar version of thenew era: Lewis W. Douglas; Dean Acheson, who had left theNew Deal because of its radical monetary measures, w...

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    Part 4THE GOLD-EXCHANGE STANDARDIN THEINTERWAR YEARS

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    THE GOLD-EXCHANGE STANDARDIN THEINTERWAR YEARSGreat Britain emerged victorious from its travail in WorldWar I, but its economy, and particularly its currency, layin shambles. All the warring countries had financed theirmassive four-year war effort by monetizing their deficits, mostof them doublin...

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    during World War I. Only the United States, which entered thewar two and a half years after the other countries and henceinflated its currency less, managed to remain de jure on its pre-war gold standard. De facto, however, the U.S. barred export ofgold during the war, and so was effectively off ...

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    of pound sterling standard, since London was the great finan-cial center during this period. This disparagement of gold,however, is faulty and misleading. It is true that London wasthe major financial center in that period, but the world wasscarcely on a pound standard. Active competition from ot...

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    experiments, such as John Law’s Mississippi Bubble and theSouth Sea Bubble in the 1710s, and apart from the generation-long experience in Britain during the Napoleonic War, until thetwentieth century specie rather than paper had always beenthe standard money.In the classical gold standard, ever...

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    pyramid, must inexorably be followed by a loss in the bottomsupporting the swollen liabilities. In addition, clients who areholders of French bank notes or deposits, are apt to becomeincreasingly concerned, lose confidence in the viability of theFrench banks, and hence call on those banks to rede...

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    BRITAIN FACES THEPOSTWAR WORLDAt the end of World War I, only the United States dollarremained on the old gold-coin standard, at the one-twentieth-of-an-ounce par. The other powers suffered from national fiatcurrencies; suddenly, their currencies were no longer units ofweight of gold but independ...

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    $4.86. Apparently, few if any economists or statesmen at thetime argued for cutting British losses, starting with the realworld as it existed in the early 1920s, facing reality, and goingback to gold at the realistic, depreciated $3.20 or $3.50 perpound sterling. In view of the enormous difficult...

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    British maneuvered on the world monetary scene with brillianttactical shrewdness; but it was a policy that was doomed toend in disaster.Why did the British insist on returning to gold at the old,overvalued par? Partly it was a vain desire to recapture oldglories, to bring back the days when Londo...

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    Another reason for returning at $4.86 was a desire by thepowerful city of London—the financiers who held much of thepublic debt swollen during the war—to be repaid in poundsthat would be worth their old prewar value in terms of gold andpurchasing power. Since the British were now attempting t...

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    of the Bank of England. As early as its first interim report in thesummer of 1918, and confirmed by its final report the followingyear, the Cunliffe Committee called in no uncertain terms forreturn to the gold standard at the prewar par. No alternativeswere considered.10 This course was confirmed...

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    inflation, in 1919 and 1920, followed by a severe correctiverecession and deflation in 1921. The English deflation did notsuffice to correct the overvaluation of the pound, since theUnited States, now the strongest country on gold, had deflatedas well. The fact that sterling began to appreciate t...

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    fairly good shape in 1924. Setting 1913 as equal to 100, real grossdomestic product was 92 in 1924, consumer expenditure was100, construction was 114, and gross fixed investment was arobust 132. But while real imports were 100 in 1924, real exportswere in sickly shape, at only 72. Or, in monetary...

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    the huge Midland Bank. And yet, most of these inflationistsand antideflationists (with the exception of Keynes and of W.Peter Rylands, Federation of British Industries president in1921) were willing to go along with return at the prewar par.This put the critics of deflation and proponents of chea...

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    secure such a result an actively deflationary policy at thisparticular moment, leading to a further fall in prices.16There are several solutions to this puzzle, all centering aroundthe view that deflationary adjustments from a return to the pre-war par would be insignificant. In the first place, ...

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    Chancellor Sir Austen Chamberlain and by Sir John Bradbury,a former member of the old Cunliffe Committee. Also on thenew committee were Niemeyer and Professor Pigou of theCunliffe group. We have a full account of the testimony beforethe Chamberlain-Bradbury Committee, and of the argumentsused to ...

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    British price levels would be made up in the interim by a risein American prices.19Even influential Treasury official Ralph Hawtrey—a friendand fellow Cambridge apostle of Keynes, an equally ardentinflationist and critic of gold, and chief architect of the Europeangold-exchange standard of the ...

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    April 28, and putting the new gold standard into effect imme-diately.21It cannot be stressed too strongly that the British decision toreturn to gold at $4.86 was not made in ignorance of deflation-ary problems or export depression, but rather in the strong andconfident expectation of imminent Ame...

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    AMERICAN SUPPORT FOR THERETURN TOGOLDAT$4.86: THE MORGAN CONNECTIONWhy were the British so confident that American priceswould rise sufficiently to support their return to gold at theoverinflated $4.86? Because of the power of the new UnitedStates central bank, the Federal Reserve System, install...

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    “Harry” Pomeroy Davison. Strong was also a neighbor andclose friend of Davison and of two other top Morgan partnersin the then-wealthy New York suburb of Englewood, New Jer-sey, Dwight Morrow and Thomas W. Lamont. In 1904, Davisonoffered Strong the post of secretary of the new Morgan-createdB...

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    was Smith’s father a governor of the Bank of England, but hecame from the so-called “City Smiths,” the most prolific bank-ing family in English history, originating in seventeenth-centurybanking. Due to the good offices of Grenfell and Smith, J.P. Mor-gan and Company, before the war, had be...

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    In this way, the House of Morgan, which had been sufferingfinancially before the outbreak of war, profited greatly from andwas deeply committed to, the British and French cause. It is nowonder that the Morgans did their powerful best to maneuverthe United States into World War I on the side of th...

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    Scarcely had Benjamin Strong been appointed when hebegan to move strongly toward “international central bankcooperation,” a euphemism for coordinated, or cartelized, infla-tion, since the classical gold standard had no need for suchcooperation. In February 1916, Strong sailed to England andwo...

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    Strong made his agreement with the governor of the Bank ofEngland, Lord Cunliffe, but his most fateful meeting was withthe man who was then the bank’s deputy governor, MontaguNorman. This meeting proved to be the beginning of themomentous Strong-Norman close friendship and collaborationthat was...

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    only of her, and I’ve dedicated my life to her.”30 Two of Nor-man’s oldest and closest friends were the two main directorsof Morgan, Grenfell: Teddy Grenfell and particularly VivianHugh Smith. Smith had buoyed Norman’s confidence whenthe latter had been reluctant to become a director of t...

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    As for Benjamin Strong, hewas solidly in the Morgan mold. . . . Hobbled by a regulationthat he couldn’t lend directly to foreign governments, Strongneeded a private bank as his funding vehicle. He turned tothe House of Morgan, which benefited incalculably from hispatronage. In fact, the Morgan-...

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    During 1922 and 1923, Norman continued to pepper Strongwith pleas to inflate the dollar further, but Strong resisted theseblandishments for a time. Instead of rising further toward $4.86,the pound began to fall in the foreign exchange markets inresponse to Britain’s inflationary policies, the p...

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    Reserve System in the maintaining of lower interest rates inthis country and higher interest rates in England.” Strongdeclared that “the burden of this readjustment must fall morelargely upon us than upon them.” Why? Because it will be difficult politically and socially for the British gov-...

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    inflow of gold from Britain was temporarily checked. As LionelRobbins explained in mid-1924: Matters took a decisive turn. American prices began torise. . . . In the foreign exchange markets a return to gold atthe old parity was anticipated. The sterling-dollar exchangeappreciated from $4.34 to $...

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    an Ohio Republican, he was closest to the Rockefellers, and hissecretary of state, Charles Evans Hughes, was a leading Stan-dard Oil attorney and a trustee of the Rockefeller Foundation.38Harding’s sudden death in August 1923, however, elevated VicePresident Calvin Coolidge to the presidency.Co...

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    Furthermore, when Secretary of State Charles Evans Hughesreturned to private law practice in the spring of 1925, Coolidgeoffered his post to then-veteran Wall Street attorney and formerSecretary of State and of War Elihu Root, who might be calledthe veteran leader of the “Morgan bar.” Root wa...

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    institutions, and the working out of our problems, that Mr.Coolidge does.”On the other hand, the Democratic presidential candidatethat year was none other than John W. Davis, senior partner ofthe Wall Street law firm of Davis Polk and Wardwell, and thechief attorney for J.P. Morgan and Company....

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    The decision of the British Cabinet on March 20, 1925, to goback to gold was explicitly predicated on three conditions. Firstwas the attainment of a $300 million credit line from the UnitedStates. Second was that the bank rate would not increase uponannouncement of the decision, so that there wou...

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    at all in gold to British residents; gold bullion was only due topound-holders outside Great Britain. Britain was now only onan “international gold bullion standard.”44The purpose of redemption in gold bullion only, and only toforeigners, was to take control of the money supply away fromthe p...

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    Norway, and indeed all the countries returning to gold,heeded Norman’s advice. The way was paved for this develop-ment by the fact that, during World War I, the European coun-tries had systematically taken gold coins out of circulation andreplaced them with paper notes and deposits. During the ...

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    inflationary camouflage was to return, not to a gold standard atall, but to a “gold-exchange” standard. In a gold-exchange stan-dard, only one country, in this case Great Britain, is on a goldstandard in the sense that its currency is actually redeemable ingold, albeit only gold bullion for f...

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    Since all other countries were sucked into the inflationarygold-exchange trap, it seemed that the only nation Britain hadto worry about was the United States, the only country to con-tinue on a genuine gold standard. That was the reason itbecame so vitally important for Britain to get the United ...

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    exports by using cheap credit to lend money to European nationsso that they could purchase British goods. Not that every country was supposed to return to gold at theovervalued, prewar par. The rule of thumb imposed in the 1920swas that (a) currencies, such as that of Britain herself, that haddep...

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    many Third World countries, had been on a silver standard,onto a seemingly sounder gold, following the imperial nations.India’s reserves in pound sterling balances in London were sup-posed to be only a temporary transition to gold. But, as in somany cases of seeming transition, the Indian gold-...

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    new reformed monetary order. While his book was still in proofs,Keynes was appointed a member of the Royal Commission onIndian Finance and Currency, to study and make recommenda-tions for the basic institutions of the Indian monetary system.Keynes dominated the commission proceedings, and while h...

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    gold, or world price levels. Hawtrey recommended interna-tional cooperation to stabilize price levels, and urged the use ofan index number of world prices, a proposal reminiscent of YaleProfessor Irving Fisher’s suggestion for a “tabular” gold-exchange standard made in 1911. In practice, su...

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    At a previous international financial conference at Brussels inSeptember 1920, the league had established a powerful finan-cial and economic committee, which from the very beginningwas dominated by Montagu Norman through his allies on thecommittee. Head of the committee was British Treasury offic...

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    each country deciding on the rate at which it would return togold.The European economic conference occurred at Genoa fromApril 10 to May 19, 1922. The conference divided itself into sev-eral commissions, including economic and transportation com-missions. The relevant commission for our concerns...

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    the leading fugleman and interpreter of the Genoa resolu-tions.55The currency resolutions of the Genoa Conference, whichformed the European monetary system of the 1920s, called for astable currency value in each country, and for the establishmentof central banks everywhere: “in countries where ...

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    subsequent contraction of overexpanded paper currencies. Res-olution 9 then became specific: the point was to economize “theuse of gold by maintaining reserves in the form of foreign bal-ances, such, for example, as the gold-exchange standard or aninternational clearing system.” Resolution 11...

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    monetary expansion, to stabilize the price level. Hawtrey asksthe crucial question:It may be asked, why is any international agreement on thesubject of the gold standard necessary at all? When we haveonce got a currency based on commodity like gold, whyshould we not rely on free market conditions...

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    experienced as such decades later by historians who fail tounderstand the social benefits of falling prices.58Second, in his exegesis Hawtrey lets the cat out of the bag.He virtually concedes that his ideal is to abandon gold alto-gether, and remain with only managed fiat money. Thus, in dis-cuss...

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    Many historians have written off the Genoa Conference as a“failure” and dismissed its influence on the international moneyof the twentieth century. It is true that the formal institutions ofcentral bank cooperation called for at Genoa were not estab-lished, largely because of the reluctance o...

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    intensifying the inflationary thrust of the gold-exchange stan-dard. Finally, with the establishment of the Bank for Interna-tional Settlements at Geneva in 1930, Norman at least succeededin having regular monthly meetings of central bankers.64Far from Genoa being merely a flash in the pan, the 1...

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    Throughout Europe, Great Britain, wielding its control of theFinance Committee of the League of Nations, engineered thestabilization of currencies on a gold-exchange, that is, a sterling-exchange standard: in Germany, Austria, Hungary, Estonia,Bulgaria, Greece, Belgium, Poland, and Latvia. New ce...

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    THE GOLD-EXCHANGE STANDARDINOPERATION: 1926–1929By the end of 1925, Montagu Norman and the British Estab-lishment were seemingly monarch of all they surveyed. Backedby Strong and the Morgans, the British had had everything theirway: they had saddled the world with a new form of pseudogold stand...

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    The unemployment was concentrated in the older, previ-ously dominant, and heavily unionized industries in the northof England. The pattern of the slump in British exports may beseen by some comparative data. If 1924 is set equal to 100,world exports had risen to 132 by 1929, while Western Euro-pe...

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    automobile exports rose by 95 percent, exports of chemical andmachinery manufactures rose by 24 percent, and of electricalgoods by 23 percent. During the 1929–31 recession, exports ofthese new industries did relatively better than the old: machin-ery and electrical exports falling to 28 percent...

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    about 10 percent in response to increased productivity andoutput, wage rates also declined, falling to 93 in 1928, and to90 in 1929. Swedish wages were even more flexible in thoseyears, enabling Sweden to surmount without export depres-sion and return to gold at the prewar par. Swedish wage rates...

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    labor that they would prefer that a million workers shouldremain in idleness and be maintained permanently out ofthe Employment Fund, than accept any sacrifice. The resultis to throw on to the capital and managerial side of industrya far larger reorganization than would be necessary: anduntil lab...

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    was resisted. Strict lines of demarcation between occupa-tions were maintained in engineering and elsewhere. Aplumber could repair a pipe conveying cold water; if it con-veyed hot water, he had to call in a hot water engineer. Entryinto certain occupations was rendered difficult. A man canbecome ...

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    banker conspiracy to profit at the expense of the British workingclass. But instead of identifying the problem as inflationism,cheap money, and the gold bullion–gold-exchange standard inthe face of an overvalued pound, Beaverbrook and British publicopinion pointed to “hard money” as the vil...

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    Establishment ever since. The legend has it that France was thespoiler, by returning to gold at an undervalued franc (peggingthe franc first in 1926, and then officially returning to gold twoyears later), consequently piling up sterling balances, and thenbreaking the gold-exchange system by insis...

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    When Poincaré presented his balanced budget and hismonetary and financial reform package to Parliament onAugust 2, 1926, and drove them through quickly, confidencein the franc dramatically rallied, pessimistic expectations inthe franc were changed to optimistic ones, and French capital,which had...

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    market, forcing the Bank of France to keep the franc at 3.92¢ byselling massive quantities of newly issued francs for foreignexchange. In that way, foreign exchange holdings of the Bank ofFrance skyrocketed rapidly, rising from a minuscule sum in thesummer of 1926 to no less than $1 billion in O...

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    gold outflow. But England was committed to an unsound, infla-tionist policy, in stark contrast to the old gold system. And so,Norman tried his best to use muscle to prevent France fromexercising its own property rights and redeeming sterling ingold, and absurdly urged that sterling was beneficia...

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    pegged the franc to gold at the end of 1926, the balance of tradereversed itself again to the original pattern. Thus, in 1928,French exports were only 96.1 percent of imports. On the sim-plistic-trade, or relative-purchasing-power criterion, then, wewould have to say that the post-1926 franc was ...

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    limit of what a central bank could reasonably afford to dounder the circumstances. No other major central bank tookanything like a similar risk (percentage-wise).83, 84Monty Norman could neutralize the French, at least tem-porarily. But what of the United States? The British, we remem-ber, were c...

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    although he agreed to help England by buying gold from NewYork instead of London, (that is, drawing down dollar bal-ances instead of sterling). Strong, in turn, agreed to supplyFrance with gold at a subsidized rate: as cheap as the cost ofbuying it from England, despite the far higher transportat...

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    largest rate of increase of bank reserves during the 1920s,mainly due to massive Fed purchases of U.S. government secu-rities and of bankers’ acceptances, totaling $445 million in thelatter half of 1927. Rediscount rates were also lowered, induc-ing an increase in bills discounted by the Fed. B...

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    of gold from Europe but also, by improving the position ofthe foreign exchanges, to enhance or stabilize Europe’spower to buy our exports.89If Strong was the point man for the monetary inflation of thelate 1920s, the Coolidge administration was not far behind.Pittsburgh multimillionaire Andrew ...

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    a sound financial and monetary basis.”91 Similarly, a prominentbanker admitted to H. Parker Willis in the autumn of 1926 thatbad consequences would follow America’s cheap-money pol-icy, but that “that cannot be helped. It is the price we must payfor helping Europe.” Of course, the price p...

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    Unfortunately, Benjamin Strong was not destined personallyto reap the whirlwind. A sickly man, Strong in effect was notrunning the Fed throughout 1928, finally dying on October 16of that year. He was succeeded by his handpicked choice,George L. Harrison, also a Morgan man but lacking the per-sona...

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    when a stock market boom became severe; yet in the historic andvirtually runaway stock market boom of 1928–29, the call ratenever went above 10 percent. The call rates were controlled atthese low levels by the New York Fed, in close collaborationwith, and at the advice of, the Money Committee o...

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    ready to buy any and all acceptances sold by certain favoredacceptance houses at an artificially cheap rate. Hence, whenbank reserves tightened as the Fed sold securities in 1928, thebanks simply shifted to the acceptance market, expanding theirreserves by selling acceptances to the Fed. Thus, th...

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    Leading the inflationary drive within the administrationwere President Coolidge and Treasury Secretary Mellon,eagerly playing their roles as the capeadores of the bull marketon Wall Street. Thus, when the stock market boom began to flag,as early as January 1927, Mellon urged it onward. Anotherrel...

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    The clamor from England against any tighter money in theU.S. was driven by England’s loss of gold and the pressure onsterling. France, having unwillingly piled up $450 million in ster-ling by the end of June 1928, was anxious to redeem sterling forgold, and indeed sold $150 million of sterling ...

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    In March 1929, Herbert Clark Hoover, who had been a pow-erful secretary of commerce during the Republican administra-tions of the 1920s, became president of the United States. Whilenot as intimately connected as Calvin Coolidge, Hoover longhad been close to the Morgan interests. Mellon continued ...

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    industry. Using methods of intimidation of business honedwhen he was secretary of commerce, Hoover attempted torestrain stock loans by New York banks, tried to induce thepresident of the New York Stock Exchange to curb speculation,and warned leading editors and publishers about the dangersof high...

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    A perceptive epitaph on the qualitative-credit politics of1928–29 was pronounced by A. Wilfred May:Once the credit system had become infected with cheapmoney, it was impossible to cut down particular outlets ofthis credit without cutting down all credit, because it isimpossible to keep differen...

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    in the previous cases, have encountered a recession-adjustmentperiod that would have been sharp, severe, but mercifully short.Recessions unhampered by government almost invariablywork themselves into recovery within a year or 18 months. But the United States, Britain, and the rest of the world ha...

  • Page 427

    the splendid Federal Reserve System, which had succeeded insaving shaky banks, had restored confidence, and had madecapital more abundant by reducing interest rates.In early 1930, the Fed launched a massive cheap-money pro-gram, lowering rediscount rates during the year from 4.5 per-cent to 2 per...

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    International Settlements (BIS), to meet regularly at Basle, toprovide clearing facilities for German reparations payments,and to provide regular facilities for meeting and cooperation.While Congress forbade the Fed from formally joining the BIS,the New York Fed and the Morgan interests worked cl...

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    Kredit-Anstalt liabilities up to $150 million, bank runs, oncelaunched, are irresistible, and so Austria went off the gold stan-dard, in effect, declaring national bankruptcy in June 1931. Atthat point, a fierce run began on the German banks, the Bank forInternational Settlements again trying to ...

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    had foisted upon the rest of the world. Indeed, instead of tight-ening money, the Bank of England made the pound shakier stillby inflating credit further. Thus, in the last two weeks of July,the Bank of England purchased nearly $115 million in govern-ment securities.England disgracefully threw in...

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    losses.109 The Netherlands Bank was strongly criticized by theDutch government for keeping its balances in sterling until itwas too late. In its own defense, the bank quoted repeated assur-ances from the Bank of England about the safety of foreign fundsin London. The bank made it clear that it wa...

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    foreigners that Britain would not take sufficient measures todefend the pound.In his memoirs, the economist Moritz J. Bonn neatly summedup the significance of England’s action in September 1931:September 20, 1931, was the end of an age. It was the lastday of the age of economic liberalism in wh...

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    American politics, since the turn of the twentieth century, hadbeen marked by an often bitter financial and political rivalrybetween the House of Morgan on the one hand, and an allianceof the Harrimans, the Rockefellers, and Kuhn, Loeb on theother. Accordingly, the early years of the Roosevelt Ne...

  • Page 434

    the cloak of the prestige of gold, was destined to last a greatdeal longer than the British venture, finally collapsing at theend of the 1960s.113The Gold-Exchange Standard in the Interwar Years433113For an overview of the monetary struggles and policies of the NewDeal, see Murray N. Rothbard, ...

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    PART 5THE NEW DEAL AND THEINTERNATIONAL MONETARY SYSTEM

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    THE NEW DEAL AND THEINTERNATIONAL MONETARY SYSTEMThe international monetary policies of the New Deal maybe divided into two decisive and determining actions,one at the beginning of the New Deal and the other at itsend. The first was the decision, in early 1933, to opt for domes-tic inflation and ...

  • Page 439

    seemingly one quite similar to the status quo ante, but actuallybased on very different principles and institutions. The prewar monetary order was genuinely “international”;that is, world money rested not on paper tickets issued by oneor more governments but on a genuine economic commodity—...

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    The advent of the World War disrupted and rended this eco-nomic idyll, and it was never to return. In the first place, all ofthe major countries financed the massive war effort through anequally massive inflation, which meant that every countryexcept the United States, even including Great Britai...

  • Page 441

    money markets to $3.50, a substantial 30-percent drop, a dropthat reflected the greater degree of inflation in Great Britain thanin the U.S. The British then decided to constitute a new form ofinternational monetary system, the “gold-exchange standard,”which it finally completed in 1925. In t...

  • Page 442

    and other currencies, and would therefore mean that at currentinflated price levels, Britain’s exports—its economic lifeline—would be severely crippled, and a general depression wouldensue. And indeed, Britain suffered a severe depression in herexport industries—particularly coal and text...

  • Page 443

    cajole or bludgeon country after country to (1) establish centralbanks that would collaborate closely with the Bank of England;(2) return to gold not in the classical gold-coin standard but inthe new gold-exchange standard which would permit contin-ued inflation by all the countries; and (3) retu...

  • Page 444

    The New Deal and the443International Monetary SystemEngland having been the first European country to reestab-lish a stable and secure money [sic] has used that advantageto establish a basis for putting Europe under a veritablefinancial domination. The Financial Committee [of theLeague of Nations...

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    444A History of Money and Banking in the United States:The Colonial Era to World War IIInducing the United States to support and bolster thepound and the gold-exchange system was vital to Britain’ssuccess, and this cooperation was ensured by the close tiesthat developed between Montagu Norman a...

  • Page 446

    The New Deal and the445International Monetary SystemFrance, and Strong gaily told the French representative that hewas going to give “a little coup de whiskey to the stock market.”It was a coup for which America and the world would paydearly.4The Chicago business and financial community, not ...

  • Page 447

    446A History of Money and Banking in the United States:The Colonial Era to World War IIA blatant example of Strong’s intervention to help Normanand his policy occurred in the spring of 1926, when one of Nor-man’s influential colleagues proposed a full gold-coin standardin India. At Norman’s...

  • Page 448

    The New Deal and the447International Monetary Systemworked for several years in the offices of Brown Brothers inthe United States. Moreover, J.P. Morgan and Company played a direct collab-orative role with the New York Fed, lending $100 million of itsown to Great Britain in 1925 to facilitate its...

  • Page 449

    448A History of Money and Banking in the United States:The Colonial Era to World War IIIt long has been a myth of American historiography thatbankers and big businessmen are invariably believers in“hard money” as against cheap credit or inflation. This wascertainly not the experience of the N...

  • Page 450

    The New Deal and the449International Monetary SystemUnited States Building and Loan League; the American Cot-ton Growers Exchange; the Chicago Association of Com-merce; the Merchants’ Association of New York; and the headsof the bankers associations of 43 states and the District ofColumbia.10Ir...

  • Page 451

    450A History of Money and Banking in the United States:The Colonial Era to World War IIManufacturers. Another critic was Dr. Rufus S. Tucker, econo-mist at General Motors. On the Federal Reserve Board the majorcritic was Dr. Adolph C. Miller, a close friend of HerbertHoover, who joined in the cri...

  • Page 452

    The New Deal and the451International Monetary SystemAustria, followed by Germany and other European countries,went off the gold standard during 1931.12But the key to the international monetary situation was GreatBritain, the nub and the base for the world’s gold-exchangestandard. British inflat...

  • Page 453

    452A History of Money and Banking in the United States:The Colonial Era to World War IIThe European monetary system was thereby broken up intoseparate and even warring currency blocs, replete with fluctu-ating exchange rates, exchange control, and trade restrictions.The major countries followed B...

  • Page 454

    The New Deal and the453International Monetary Systeminterest rates during the depression further weakened confi-dence in the dollar, and gold outflows combined with runs andfailures of the banks to put increasing pressure on the Americanbanking system. Finally, during the interregnum between theH...

  • Page 455

    454A History of Money and Banking in the United States:The Colonial Era to World War IIMoney Association had been supposedly dedicated to price sta-bilization, and what Fisher and the inflationists wanted was adrastic raising of prices, the association liquidated its assets intothe new and frankl...

  • Page 456

    The New Deal and the455International Monetary SystemAlso associated with the Committee for the Nation wasanother great influence on Franklin Roosevelt’s decision: agri-cultural economist George F. Warren of Cornell, who, alongwith his colleague Frank A. Pearson, was the inspiration for therefla...

  • Page 457

    456A History of Money and Banking in the United States:The Colonial Era to World War IIIf Irving Fisher’s interest was personal as well as ideological,economic interests also underlay the concern of the Committeefor the Nation. The farm groups wanted farm prices driven up,including farm export ...

  • Page 458

    The New Deal and the457International Monetary Systemtold Roosevelt that his action “was vitally necessary and themost important of all the helpful things you have done.”20 Mor-gan himself hailed Roosevelt’s decision to leave the gold stan-dard: I welcome the reported action of the President...

  • Page 459

    458A History of Money and Banking in the United States:The Colonial Era to World War IIthe banking community who had been major opponents of theStrong-Morgan policies during the 1920s: Dr. Benjamin M.Anderson of the Rockefeller-oriented Chase National Bank, andDr. H. Parker Willis, editor of the ...

  • Page 460

    The New Deal and the459International Monetary Systemfinal hope for a restored international monetary system on theWorld Economic Conference scheduled for London in June1933.25Preparations for the conference had been under way for ayear, under the guidance of the League of Nations, in a desper-ate...

  • Page 461

    460A History of Money and Banking in the United States:The Colonial Era to World War II[T]here was serious discussions of a proposal, sponsored bythe United States and vigorously opposed by the gold coun-tries, that the whole world should embark upon a “cheapermoney” policy, not only through ...

  • Page 462

    The New Deal and the461International Monetary Systemstabilization of the three currencies, setting the dollar-sterlingrate at about $4.00 per pound, and pledging the United Statesnot to engage in massive inflation of the currency for the dura-tion of the agreement. The American representatives ur...

  • Page 463

    462A History of Money and Banking in the United States:The Colonial Era to World War IIworld level of commodity prices, and (2) stating that “the cen-tral banks of the principal countries should undertake tocooperate with a view to securing these conditions andshould announce their intention of...

  • Page 464

    The New Deal and the463International Monetary SystemThe difference of views between the nations on inflation andprices, however, precluded any agreement in this area at theconference. On the gold question, Great Britain submitted a pol-icy declaration and the U.S. a draft resolution which looked ...

  • Page 465

    464A History of Money and Banking in the United States:The Colonial Era to World War IIis more, the general gloom at the conference gave internationalspeculators the idea that in the near future many of these coun-tries would themselves be forced to go off gold. In consequence,money began to flow...

  • Page 466

    The New Deal and the465International Monetary SystemNot hearing immediately from the president, Moley franti-cally wired Roosevelt the next morning that “success even con-tinuance of the conference depends upon United States agree-ment.”33 Roosevelt cabled his rejection on July 1, declaring t...

  • Page 467

    466A History of Money and Banking in the United States:The Colonial Era to World War IIcould fade into limbo.34 The World Economic Conferencelimped along aimlessly for a few more weeks, but the Roo-sevelt bombshell message effectively killed the conference, andthe hope for a restored internationa...

  • Page 468

    The New Deal and the467International Monetary Systemany day.” James A. Farley has recorded in his memoirs thatRoosevelt was prompted to send his angry message by comingto suspect a plot to influence Moley in favor of stabilization byThomas W. Lamont, partner of J.P. Morgan and Company,working t...

  • Page 469

    468A History of Money and Banking in the United States:The Colonial Era to World War IIThe only significant act of international collaboration after1934 came in the fall of 1936, at about the time France wasforced to leave the gold standard. Partly to assist the French,the United States, Great Br...

  • Page 470

    The New Deal and the469International Monetary SystemHere we may only touch on a fascinating historical problemwhich has been discussed by revisionist historians of the 1930s:To what extent was the American drive for war against Ger-many the result of anger and conflict over the fact that, in the1...

  • Page 471

    470A History of Money and Banking in the United States:The Colonial Era to World War IIdirect “barter” arrangements that angered the United Statesand other Western countries in totally bypassing gold andother international banking or financial arrangements. In the anti-German propaganda of th...

  • Page 472

    The New Deal and the471International Monetary Systemproduce, the Balkan countries, in the bilateral world of the1930s, did not have sufficient pounds or dollars to buy manu-factured goods from the West. Thus, Britain and the West weredeprived of raw materials and markets for their manufacturesby ...

  • Page 473

    472A History of Money and Banking in the United States:The Colonial Era to World War IIGermany an “aggressor” because of its successful bilateraltrade competition, and Japan was similarly castigated formuch the same reasons. By late 1938, J. Pierrepont Moffat,head of the Western European Divi...

  • Page 474

    The New Deal and the473International Monetary SystemOne of the United States government’s biggest economicworries was the growing competition of Germany and its bilat-eral trade in Latin America. As early as 1935, Cordell Hull hadconcluded that Germany was “straining every tendon toundermine ...

  • Page 475

    474A History of Money and Banking in the United States:The Colonial Era to World War IIfavor of America. The American reply “really meant,” notedPierrepont Moffat, “a fundamental acceptance by Germany ofour trade philosophy, and a thoroughgoing partnership withus along the road of equality ...

  • Page 476

    The New Deal and the475International Monetary SystemConsidering that Secretary Hull was a leading maker of Amer-ican foreign policy throughout the 1930s and through WorldWar II, it is certainly a possibility that his remarks should betaken, not as a quaint testimony to Hull’s idée fixe on reci...

  • Page 477

    476A History of Money and Banking in the United States:The Colonial Era to World War IITHE SECOND NEW DEAL: THE DOLLAR TRIUMPHANTWhether and to what extent German economic nationalismwas a cause for the American drive toward war, one point is cer-tain: that, even before official American entry in...

  • Page 478

    The New Deal and the477International Monetary Systemwas now to move in and take over, with the pound no less sub-ordinate than all the other major currencies. It was truly a tri-umphant “dollar imperialism” to parallel the imperial Ameri-can thrust in the political sphere. As Secretary of the...

  • Page 479

    478A History of Money and Banking in the United States:The Colonial Era to World War IIman who quickly became the key official for postwar interna-tional economic planning, William L. Clayton, a former leaderof the anti–New Deal Liberty League, and chairman and majorpartner of Anderson, Clayton...

  • Page 480

    The New Deal and the479International Monetary Systemnationalism on behalf of inflation and full employment. He hadgone so far as to hail Roosevelt’s torpedoing of the London Eco-nomic Conference because the path was then cleared for eco-nomic nationalism. Keynes’s visit to Washington on behal...

  • Page 481

    480A History of Money and Banking in the United States:The Colonial Era to World War IIsign the agreement’s Article VII—which merely involved avague commitment to the elimination of discriminatory treat-ment in international trade—only after intense pressure by theUnited States. The agreeme...

  • Page 482

    The New Deal and the481International Monetary Systemiron out temporary balance-of-payments difficulties. But inreturn for this provision of greater liquidity and short-term aidto deficit countries, exchange rates of currencies were to befixed, in relation to the dollar and hence to gold, with the...

  • Page 483

    482A History of Money and Banking in the United States:The Colonial Era to World War IILord Beaverbrook, the Times of London, and the Economist. TheKeynes Plan was attacked by conservatives in the United States,as was even the White Plan for interfering with market forces,and for automatic extens...

  • Page 484

    The New Deal and the483International Monetary Systemand that larger changes could be made to correct “fundamentaldisequilibria”; in short, that a chronically deficit country coulddevalue its currency rather than check its own inflation. Fur-thermore, the U.S. yielded again in allowing credito...

  • Page 485

    484A History of Money and Banking in the United States:The Colonial Era to World War IIand proposed making loans to Britain in exchange for the abo-lition of exchange controls and quantitative restrictions onimports. Another bankers’ group came up with a “key cur-rency” proposal as a substi...

  • Page 486

    The New Deal and the485International Monetary SystemThe administration countered the critics of Bretton Woodswith a massive propaganda campaign, which was able to drivethe agreement through Congress by mid-July 1945. It empha-sized that the U.S. government would have effective control, atleast of...

  • Page 487

    486A History of Money and Banking in the United States:The Colonial Era to World War IINew Deal had established the triumphant dollar as the base ofa new international monetary order.66 The dollar had displacedthe pound, and within a general political framework in whichthe American empire had rep...

  • Page 488

    The New Deal and the487International Monetary Systemwas the strongest and “hardest” of world currencies, a world“dollar shortage” prevailed, and the dollar could base itselfupon the vast stock of gold in the United States, much of whichhad fled from war and devastation abroad. But in the ...

  • Page 489

    488A History of Money and Banking in the United States:The Colonial Era to World War IIthe postwar key country, the United States, led to increasingstrains and fissures in the triumphant dollar-order of thepost–World War II world. It has become increasingly evidentthat an ever more inflated and...

  • Page 490

    The New Deal and the489International Monetary Systemrefused to lose face by raising the price of gold or by otherwisedevaluing the dollar down to its genuine value in the worldmarket, then the harder currencies, such as West Germany,Switzerland, and the Netherlands, found themselves reluc-tantly ...

  • Page 491

    inflate any currencies indefinitely, and allow inflating curren-cies to pay for any and all deficits ad infinitum. While such ascheme, embodied in the Triffin Plan, the Bernstein Plan, andothers, is now the American dream, it has met determinedopposition by the hard-money countries, and it remain...

  • Page 492

    American Bankers Association (ABA),205–06, 237, 244, 247, 256–58, 283, 482American Car and Foundry, 302, 311 American Economic Association (AEA),199, 215–18, 234, 246 American Federation of Labor, 275, 448 American Locomotive Company, 302 American Smelting and Refining, 370 American Te...

  • Page 493

    commercial paper, 163–64, 238, 250compulsory par law of 1819, 81country banks, 116–18, 121–22,137–41, 197, 206, 242, 247decentralized banking, 77, 112–14,136n, 135, 137, 204–05, 238–39,242–43, 247, 253demand deposits, 69–71, 71n, 137,144, 147n, 186–87, 418paying interest on, 1...

  • Page 494

    Index493International Bank for Reconstruc-tion and Development, 482nKuhn, Loeb, 188, 192, 195, 230, 235,235n, 292, 299, 310, 432among financial elites, 263, 266central bank proponent, 188, 234 Massachusetts Land Bank, 51–53, 55,57–58, 58nMellon National Bank, 267, 378 National City Bank ...

  • Page 495

    Business Men’s Monetary ReformLeague, 254 Butler, Nicholas Murray, 241 Cannan, Edwin, 366n Capeadores, 415, 420 Capital formation, 165–69Carey, Henry C., 148–49, 149n Cartelization of agriculture, 285, 334–34of banking industry, 36, 186, 318,322, 368, 372of industry, 264, 277, 281, 2...

  • Page 496

    Index495master of public relations and masspropaganda, 134, 145–47 monopoly underwriter of govern-ment bonds, 134national banking system, forcebehind, 134–35, 145, 156Cooksey, George, 290 Coolidge, Calvin, 266–69, 311, 379–80,420–22 Coolidge, T. Jefferson, 266, 335, 379 Cord, E.L., ...

  • Page 497

    redemption, 489 run on, 488 world shortage of, 487See also InflationDonham, Wallace, 457 Dowd, Kevin, 42n, 351nDouglas, Lewis W., 304, 307, 335, 347,458, 464 Douglas, William O., 321n, 327–28 Duffield, J.R., 243 DuPont, 313, 370Durant, William Crapo, 420n Durkee, Hireh, 79n Eames, Henry...

  • Page 498

    Index497failure of, 416, 445fallacious qualitativist view, 419 favors granted to large banks, 247 monetary expansion by, 274 open market operations, completecontrol of, 340 origins of, 34, 39–40, 42, 190, 208purpose of, 37, 368 spurious veil of regionalism, 247 stock market, deliberate s...

  • Page 499

    economic competition by, 473 Hull policy and, 472–75 mark protected by exchange con-trols, 428 trade competition, 469–75 Gerstle, Gary, 308, 433 Giannini, A.P., 334 Gifford, Walter S., 296 Gilbert, James H., 129 Gilbert, S. Parker, 287, 375n Girard, Stephen, 84–85, 92 Glass, Carte...

  • Page 500

    Index499Gold Standard Actof 1900, 202–05, 381 of 1925, 367, 382 Goldenweiser, Emanuel, 338 Goldsmith, R.W., 164 Goldsmiths, 57Gompers, Samuel, 448 Goodenough, F.C., 364 Gouge, William M., 90 Gould, Jay, 218 Government benefits from fiat issue, 53 big government, 175, 179, 185–86,259...

  • Page 501

    Greenback Party, 177–78Greenspan, Alan, 20 Grenfell, Teddy, 369, 374, 378St. Just, Lord, 369 Gresham’s Law, 47, 50, 52–53, 64–68,67n, 76, 81, 104, 107, 110n, 111, 127,222, 228Grew, Joseph C., 268, 380 Grigg, Sir Percy James, 367n Griswold, John A., 148 Grundy, Felix, 81n Gulf Oil, 2...

  • Page 502

    Index501Ickes, Harold, 330 Imperialism, 212, 219–22, 251 consent of governed, 211 dollar, 43, 437, 477economic benefits of, 213 financial, 386, 443increased centralization of adminis-trative power, 216 sponsors of, 218 surplus capital and, 208 Indianapolis Board of Trade, 190 Indianapol...

  • Page 503

    Laissez-faire, 92, 113n, 174–79, 183,273–82, 283n, 304, 321, 331, 438–39,447, 453 Lamont, Robert P., 296 Lamont, Thomas W., 251, 264, 269, 269n,282n, 309–10, 311n, 313, 321n, 330n,369, 416, 422n, 467 Landis, James McCauley, 322–27, 325n,327n, 329n Laughlin, James Laurence, 195, 200...

  • Page 504

    Index503Mills, Ogden L., 269, 274, 287, 289,295–96, 422n Ministry of Reconstruction, 359 Mises, Ludwig von, 11–19, 21, 34, 110,344, 355, 471method of historical research, 11, 23,25method of specific understanding,13–16, 32–33, 39 Mitchell, Charles E., 296n Mitchell, John J., 191 Moff...

  • Page 505

    Morgenthau, Henry, Jr., 302, 335,338–39, 344n, 346, 468, 477, 485Morrell, Daniel, 148Morrill, Chester, 338Morris, Gouverneur, 59 Morris, Robert, 61–63, 62n, 63n, 68, 92n Most, Johann, 178n Mueles, Monsieur, 51n Müller-Armack, Alfred, 487n Nash, Gerald D., 288n Nashville Banner, 191 Na...

  • Page 506

    Index505Paul, Ron, 47 Payne, Henry C., 192–93 Peabody, George Foster, 192–93 Peake, Hayden, 340 Pearson, Frank A., 455 Pecora, Ferdinand, 312, 314–15, 323,325n, 330 Pecora–U.S. Senate Banking andCurrency Committee, 310–312,311n, 314–15, 316n, 320Peek, George, 471 Pendleton, Geo...

  • Page 507

    Remington Rand Company, 298, 448, 454 Republican Partyparty of great moral idea, 174upheaval of, 175–76state, changing role in, 172–74ongoing transformation, 170–71See also PietismResumption Act of January 1875, 151 Review of Reviews, 216Reynolds, Arthur, 237 Reynolds, George M., 237, 245...

  • Page 508

    Index507Seager, Henry R., 246 Sears, Roebuck and Company, 255, 298,454, 456 Securities Act of 1933, 315, 320, 322Securities and Exchange Commission(SEC), 320–21, 321n, 323–30, 325n,328n–29nSecurities Exchange Act of June 1934,320–27 Sego Milk Company, 332 Seligman, Isaac N., 215n, 218...

  • Page 509

    Strong, Benjamin, 257, 264–66, 269–72,309, 368–69, 371, 377, 378, 390,399–400, 412, 415–17, 421, 443 and England, 376, 413, 414, 416,Anglophile policies of, 444 coup de whiskey, 445 discount rates, lowering of, 445 Fed postwar inflationary policy and,375 India, gold-coin standard an...

  • Page 510

    Index509Van Buren, Martin, 92, 104 Van Fenstermaker, J., 71n, 88n–89n Vandenberg, Arthur, 457 Vanderlip, Frank A., 204, 207, 235–36,238–43, 246, 251, 253, 298, 454 Vassar-Smith Committee on FinancialFacilities in 1918, 360 Versailles, 450 Vietnam War-era, 14–15Virginia School, 31 V...

  • Page 511

    opposition to Fed, 276n–77n, 277,337, 342–43, 426“real bills” doctrine, 276n, 316Willkie, Wendell L., 330, 330n–31n Willoughby, William F., 221n Willson, A.E., 192 Wilshire, H. Gaylord, 210n Wilson, Woodrow, 229n, 247n, 257, 265,281–82, 310, 471 Wilson administration, 193, 282, 31...

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