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The Drama of American Banking / Artikel, engl.

verfasst von - ELLI -, 10.01.2003, 15:24

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The Drama of American Banking
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by Joseph R. Stromberg

[Posted January 10, 2003]

[Review of A
History of Money and Banking in the United States by Murray N.
Rothbard (Mises Institute 2002)]

[img][/img] The
exciting book under review is a collection of Murray Rothbard's essays on
money and banking put together some five to six years after his unexpectedly
early death and including some material previously unpublished. 

In Rothbard's hands these subjects take on new interest and
importance. One reason is the author's straightforward narrative style.
Rothbard meant to be understood and he did not mean to be trapped in
irrelevant verbiage. Few economists—indeed, few academics—aim to write
this way. 

In addition, Rothbard makes it clear that money and banking
are deeply entangled with politics and that most of us, quite unaware of it,
are the serfs of well-placed interests, who acquired their present lordship
over our economic lives one step at a time, that is to say, historically.
Rothbard, as economist and historian, believed that the steps can be traced
and reconstructed in a way that amounts to explanation and understanding. 

In the introduction to this collection, economist Joseph T.
Salerno expounds upon Ludwig von Mises's ideas on the relationship
between theory and history, and observes that Rothbard was"the first to
consistently apply it [Mises's approach] to economic history" (p. 11).
The essential point is that an historian must derive from a multitude of
historical givens some sense of past actors' purposes, using common-sense or
"ideal-typical" generalizations stemming from social experience—a
method which Mises called"thymology." Where needed, the historian
also makes use of theory, including economics, without claiming to have found
directional"laws of history" as such. 

Rothbard also brought to his task his view of politics—that
is, his critical insights into the nature of the state. States constitute the
organization of the political means to wealth and they thrive by coercively
extracting wealth from the actual producers. Further, various groups within
society seek incomes above what they might have in the market by allying
themselves with state power.  

Rothbard took this"cynical" outlook on states
from the political writings of Franz Oppenheimer, Albert Jay Nock, and Frank
Chodorov (whom he knew personally), and developed it in such essays as
"War, Peace, and the State" (1963) and"Anatomy
of the State" (1965).

To succeed in their antisocial work, states and their allies
need to persuade the broad masses that everything is on the up and up. Thus it
pays such people to engage in ideological obfuscation. Let me give one example.
Professor Joseph Dorfman of Columbia University, the historian of American
economic thought who supervised Rothbard's dissertation on the Panic of 1819,
discovered something interesting about early 19th-century advocates
of soft money. Very often such a soft-money partisan signed his articles
"Old Farmer" or the like. Further research revealed that he was not
a farmer, but a major land speculator, merchant, or manufacturer. This put
paid to theories that Jacksonian"agrarians" favored inflation
because they were poor debtors. The debtors were typically a faction of
wealthy enterprisers out for a quick fix.

Colonists, Founders, Factions, and Printers 

Rather than go into great detail, I shall just sketch out
the main points of each chapter. First comes a very welcome Austrian account
of the American monetary politics of the 18th and 19th
centuries. Rothbard refutes the alleged"scarcity" of money and
credit in the colonial period, showing how gold and silver coins circulated
freely as money. If government set an arbitrary ratio between these monies,
Gresham's Law—nicely explained by Rothbard—set in. 

Rothbard brings the politics of paper money—first
introduced in Massachusetts in 1690—under his historical spotlight. He
explains the workings of pure paper inflation and fractional-reserve banking
so that the reader is prepared for the complications of Revolutionary War
finance, public debt, the Constitution movement, and more. He makes the very
important political point, that printing-press issues of fiat money were less
harmful in the long run than monetized government debt and an inherently
unstable banking system. 

Once the paper had bottomed out, that was it. It was a bad
policy, but its effects stopped with collapse or repudiation of the paper.
Alas, it was not so with other inflationary methods.

That observation leads us on to the First and Second Banks
of the United States, an uneasy period of free-for-all fractional reserve
banking (1833-1862), centralized paper money inflation under Lincoln, Jay
Cooke, various post-war"panics," and Populist demands for
inflationary coinage of silver. Armed with Austrian theory, Rothbard is able
to sort out real depressions from imagined ones. Thus there was no great
recession in the 1870s; instead there were falling prices due to
increased productivity, but which economists trained to hate and fear
deflation take as evidence of recession. 

The key political insight that emerges from the first third
of book is just this: so long as a metal standard (gold or silver) existed,
banks and states ran up against a natural limit to their inflationary
maneuvers and were penalized by an outflow of"real money" from the
economy. This was a wonderful way of keeping such people's schemes in check.
Governments and bankers did not like being checked and worked consciously to
break the wholesome economic fetters that bound them.

Enter the 20th Century 

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Governments and bankers were not to be denied their inflated
place in the sun. Rothbard lays out in great detail precisely how top
bankers, friendly treasury officials, and pro-inflation intellectuals waged
protracted war from the late 1890s to 1913 to create the banking cartel we
now know as the Fed. He names the perpetrators and draws the lesson that,
"power elites cannot achieve their goal of privilege through statism
without the vital legitimizing support of the supposedly disinterested
experts and the professoriat. To achieve the Leviathan state, interests
seeking special privilege, and intellectuals offering scholarship and
ideology, must work hand in hand" (p. 259).
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Along the way, almost as an afterthought, Rothbard spells
out the very important links between the banking reformers and US imperialism.
One link has to with the banker-connected school of economists represented by
Charles A. Conant. The latter and his colleagues argued for an American
central bank and also founded the Leninist theory of"capitalist"
imperialism.

Supposedly, the market economy suffered from an inbuilt
defect resulting in surplus capital and a falling rate of profit. The cure was
foreign markets for goods and investment, markets to be acquired by
imperialist endeavor. All Hobson, and later Lenin, had to do was to adopt this
analysis, while condemning imperialism where these Americans had praised it.

This argument had had a run about seventy years earlier in
Britain, in the works of Edward Gibbon Wakefield, Robert Torrens, and John
Stuart Mill, as Rothbard points out in volume II of his Austrian
Perspective on the History of Economic Thought (pp. 285-288).

Once the US had seized the Philippine Islands (1898), these
economists—now ensconced in government service—tried to impose a new
"gold-exchange standard" on their colony, as well as on other
silver-standard countries like Mexico, Cuba, and China. The punch-line is that
the bankers also made some money (via seigniorage), wherever these deals were
successfully carried through. As Rothbard puts it,"the gold-exchange
standard establishes a system, in the name of gold, which in reality manages
to install coordinated international inflationary paper money" (p. 209).
He remarks in a footnote that someone should investigate this imperialist
initiative as a cause of the Mexican (and implicitly) the Chinese Revolutions. 

But why the Federal Reserve System at home? The central
logic was to create a banker's cartel to inflate the money supply by
pyramiding issues of paper-out-of-nothing on top of reserves, and then on
deposits, which in turn had earlier arisen from nothing, but also, to control
the whole process before it could generate a business cycle or boom-bust. The
iron hand of the state would prevent the market from redressing depositors'
grievances via the usual means: gold outflow, bank runs, collapse, and a
short-lived but instructive"bust." 

This was a tall order and required considerable massaging of
public opinion by Court Intellectuals (a term Rothbard coined on the model of
Harry Elmer Barnes's"Court Historians"). The perfection of the
bankers' inflationist utopia demanded, in the end, the destruction of any real
link to metallic money. Our cousins, the British, took the next steps—as the
next section of the book demonstrates. 

The War to End Liberalism 

In"the senseless catastrophe of 1914-1918" as
Joseph Schumpeter called World War I, all the civilized belligerent powers
suspended payment of notes in specie and massively inflated their money
supplies. After the war, British politicians brilliantly chose to re-jigger
the pound at a pre-war level of $4.86, or the gold equivalent, while still
needing to inflate at home to hoodwink the syndicalist trade unions. The
proto-Keynesian solution to which they came was the gold-exchange standard.

Under this pseudo-gold standard, only central banks would
ever need to handle or exchange real gold. Inflation would give a temporary
boost to British exports to such places as Greece and Rumania and soothe the
trade unions via monetary illusion. Rothbard refers to this as British
monetary imperialism—i.e., the export of inflation overseas, which has now
become a staple of US foreign economic policy.

The problem with this, addressed here and in the last
chapter, was that, try as they might, British inflation would lead eventually
to a gold drain—to the United States. The success of British policy hinged
on friendly relations to the US central bank, which could inflate the US
dollar and thereby thwart the normal outcome of British monetary expansion. It
is here that Rothbard introduces US and British bankers close to the J. P.
Morgan firm as well as"the cloven hoof of Sir Montagu Norman,"
Governor of the Bank of England and a personal friend of Benjamin Strong,
Governor of the Federal Reserve Bank of New York, the wheelhorse of the US
system. 

It would be idle to tell the whole story here, when Rothbard
does it better. Suffice it to say that the Republican adminstrations of the
twenties, or their monetary functionaries, were more than willing to help out
the cousins. Of course US-British inflation was a major causal force in
bringing on the collapse of 1929.

Morgans and Rockefellers 

In another chapter, Rothbard writes that the period
1900-1941"can far better be comprehended by studying the
interrelationships of major financial groupings than by studying the
superficial and often sham struggles between Democrats and Republicans"
(p. 262). This puts us in touch with the nuts and bolts of monetary policy in
relation to specific bankers, political coalitions, foreign affairs, etc. The
short story version is that the New Deal coalition, which was close to the
Rockefeller interests, rudely shoved aside the Morgan interests and their
British allies.

Of such small rivalries are great historical disasters made—and
if you don't believe me, read Rothbard, because he has all the details, in
spades.

A final chapter on New Deal foreign monetary policy rounds
out the book. The discussion here matches in political-historical importance
Rothbard's asides on fin de siècle proto-Leninist
banking theorists. With the 1929 collapse, the great nation-states fled from
even the vestigial gold standard. Free-fall into fiat paper currencies ensued
and international political-economic rivalries heated up. Hitler's financial
wizard Hjalmar Schacht began to negotiate state-to-state bulk barter deals for
commodities with such countries as Rumania in order to by-pass the
Anglo-American financial system, which they believed was rigging world markets.
(It was.)

Rothbard quotes US Secretary of State Cordell Hull, to good
effect, on how these"economic" rivalries contributed to the coming
of World War II.

History Not Taught in School 

The result of Rothbard's efforts is a unified
reinterpretation of US economic history from day one. His reading of events
centers on power vs. liberty, state vs. markets, and the attempts of special
interest groups to profit from privileges awarded by government, specifically
through a practically and morally iffy centralized fractional-reserve banking
system, stabilized only by an increasing scale of operation, which now
encompasses the entire world.

Rothbard makes sense of these complex events—power
struggles, recessions, foreign relations—wielding the principles of monetary
theory and Austrian business cycle theory, which he explains very well, on the
run. Again: if you don't believe me, read Rothbard. He names the historical
"forces" at work—i.e., specific individuals acting in
concert toward ends that can plausibly be teased out of the historical tale.
His deft handling of individual actors and their genealogical and functional
connections calls to mind the work of Sir Lewis Namier. Unlike that historian,
the importance of family connections and economic interest did not lead
Rothbard to conclude that ideas don't matter: they matter very much indeed.

This is why the Jeffersonian and Jacksonian movements arose
to fight against the Walpolean policies of Alexander Hamilton and the two
Banks of the United States. Later critics of the bankers—populist, socialist,
fascist—have been muddled and bereft of decent theory. And now it is early
in the new century but late in the day, and we're waist deep in the Big
Financial Muddy and the Big Fool still says"push on." Sound ideas,
such as those found in Rothbard's History of Money and Banking in the
United States are demanded, if we are to get out of there. 

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Joseph R. Stromberg holds the
JoAnn B. Rothbard chair in history at the Ludwig von Mises
Institute in Auburn, Alabama. Send him MAIL and
see his Mises.org Daily
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