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

by Murray N. Rothbard

  If what these disciplines [i.e., the aprioristic and the natural sciences] teach is insufficient or if the historian chooses an erroneous theory out of several conflicting theories held by the specialists, his effort is misled and his performance is abortive.17

  But what exactly is the historical method of specific understanding, and how can it provide true knowledge of a wholly subjective and unobservable phenomenon like human motivation? First of all, as Mises emphasizes, the specific understanding of past events is

  not a mental process exclusively resorted to by historians. It is applied by everybody in daily intercourse with all his fellows. It is a technique employed in all interhuman relations. It is practiced by children in the nursery and kindergarten, by businessmen in trade, by politicians and statesmen in affairs of state. All are eager to get information about other people’s valuations and plans and to appraise them correctly.18

  The reason this technique is so ubiquitously employed by people in their daily affairs is because all action aims at rearranging future conditions so that they are more satisfactory from the actor’s point of view. However, the future situation that actually emerges always depends partly on the purposes and choices of others besides the actor. In order to achieve his ends, then, the actor must anticipate not only changes affecting the future state of affairs caused by natural phenomena, but also the changes that result from the conduct of others who, like him, are contemporaneously planning and acting.19 Understanding the values and goals of others is thus an inescapable prerequisite for successful action.

  Now, the method that provides the individual planning action with information about the values and goals of other actors is essentially the same method employed by the historian who seeks knowledge of the values and goals of actors in bygone epochs. Mises emphasizes the universal application of this method by referring to the actor and the historian as “the historian of the future” and “the historian of the past,” respectively.20 Regardless of the purpose for which it is used, therefore, understanding

  aims at establishing the facts that men attach a definite meaning to the state of their environment, that they value this state and, motivated by these judgments of value, resort to definite means in order to preserve or to attain a definite state of affairs different from that which would prevail if they abstained from any purposeful reaction. Understanding deals with judgments of value, with the choice of ends and of the means resorted to for the attainment of these ends, and with the valuation of the outcome of actions performed.21

  Furthermore, whether directed toward planning action or interpreting history, the exercise of specific understanding is not an arbitrary or haphazard enterprise peculiar to each individual historian or actor; it is the product of a discipline that Mises calls “thymology,” which encompasses “knowledge of human valuations and volitions.”22 Mises characterizes this discipline as follows:

  Thymology is on the one hand an offshoot of introspection and on the other a precipitate of historical experience. It is what everybody learns from intercourse with his fellows. It is what a man knows about the way in which people value different conditions, about their wishes and desires and their plans to realize these wishes and desires. It is the knowledge of the social environment in which a man lives and acts or, with historians, of a foreign milieu about which he has learned by studying special sources.23

  Thus, Mises tells us, thymology can be classified as “a branch of history” since “[i]t derives its knowledge from historical experience.”24 Consequently, the epistemic product of thymological experience is categorically different from the knowledge derived from experiments in the natural sciences. Experimental knowledge consists of “scientific facts” whose truth is independent of time. Thymological knowledge is confined to “historical facts,” which are unique and nonrepeatable events. Accordingly, Mises concludes,

  All that thymology can tell us is that in the past definite men or groups of men were valuing and acting in a definite way. Whether they will in the future value and act in the same way remains uncertain. All that can be asserted about their future conduct is speculative anticipation of the future based on specific understanding of the historical branches of the sciences of human action.... What thymology achieves is the elaboration of a catalogue of human traits. It can moreover establish the fact that certain traits appeared in the past as a rule in connection with certain other traits.25

  More concretely, all our anticipations about how family members, friends, acquaintances, and strangers will react in particular situations are based on our accumulated thymological experience. That a spouse will appreciate a specific type of jewelry for her birthday, that a friend will enthusiastically endorse our plan to see a Clint Eastwood movie, that a particular student will complain about his grade—all these expectations are based on our direct experience of their past modes of valuing and acting. Even our expectations of how strangers will react in definite situations or what course political, social, and economic events will take are based on thymology. For example, our reservoir of thymological experience provides us with the knowledge that men are jealous of their wives. Thus, it allows us to “understand” and forecast that if a man makes overt advances to a married woman in the presence of her husband, he will almost certainly be rebuffed and runs a considerable risk of being punched in the nose. Moreover, we may forecast with a high degree of certitude that both the Republican and the Democratic nominees will outpoll the Libertarian Party candidate in a forthcoming presidential election; that the price for commercial time during the televising of the Major League Soccer championship will not exceed the price for commercials during the broadcast of the Super Bowl next year; that the average price of a personal computer will be neither $1 million nor $10 in three months; and that the author of this paper will never be crowned king of England. All of these forecasts, and literally millions of others of a similar degree of certainty, are based on the specific understanding of the values and goals motivating millions of nameless actors.

  As noted, the source of thymological experience is our interactions with and observations of other people. It is

  acquired either directly from observing our fellow men and transacting business with them or indirectly from reading and from hearsay, as well as out of our special experience acquired in previous contacts with the individuals or groups concerned.26

  Such mundane experience is accessible to all who have reached the age of reason and forms the bedrock foundation for forecasting the future conduct of others whose actions will affect their plans. Furthermore, as Mises points out, the use of thymological knowledge in everyday affairs is straightforward:

  Thymology tells no more than that man is driven by various innate instincts, various passions, and various ideas. The anticipating individual tries to set aside those factors that manifestly do not play any concrete role in the concrete case under consideration. Then he chooses among the remaining ones.27

  To aid in this task of narrowing down the goals and desires that are likely to motivate the behavior of particular individuals, we resort to the “thymological concept” of “human character.”28 The concrete content of the “character” we attribute to a specific individual is based on our direct or indirect knowledge of his past behavior. In formulating our plans, “We assume that this character will not change if no special reasons interfere, and, going a step farther, we even try to foretell how definite changes in conditions will affect his reactions.”29 It is confidence in our spouse’s “character,” for example, that permits us to leave for work each morning secure in the knowledge that he or she will not suddenly disappear with the children and the family bank account. And our saving and investment plans involve an image of Alan Greenspan’s character that is based on our direct or indirect knowledge of his past actions and utterances. In formulating our intertemporal consumption plans, we are thus led to completely discount or assign a very low likelihood to the possibility that he will either deliberately orchestrate a 10-
percent deflation of the money supply or attempt to peg the short-run interest rate at zero percent in the foreseeable future.

  Despite reliance on the tool of thymological experience, however, all human understanding of future events remains uncertain, to some degree, for these events are generally a complex resultant of various causal factors operating concurrently. All forecasts of the future, therefore, must involve not only an enumeration of the factors that operate in bringing about the anticipated result but also the weighting of the relative influence of each factor on the outcome. Of the two, the more difficult problem is that of apportioning the proper weights among the various operative factors. Even if the actor accurately and completely identifies all the causal factors involved, the likelihood of the forecast event being realized depends on the actor having solved the weighting problem. The uncertainty inherent in forecasting, therefore, stems mainly from the intricacy of assigning the correct weights to different actions and the intensity of their effects.30

  While thymology powerfully, but implicitly, shapes everyone’s understanding of and planning for the future in every facet of life, the thymological method is used deliberately and rigorously by the historian who seeks a specific understanding of the motives underlying the value judgments and choices of the actors whom he judges to have been central to the specific event or epoch he is interested in explaining. Like future events and situations envisioned in the plans of actors, all historical events and the epochs they define are unique and complex outcomes codetermined by numerous human actions and reactions. This is the meaning of Mises’s statement,

  History is a sequence of changes. Every historical situation has its individuality, its own characteristics that distinguish it from any other situation. The stream of history never returns to a previously occupied point. History is not repetitious.31

  It is precisely because history does not repeat itself that thymological experience does not yield certain knowledge of the cause of historical events in the same way as experimentation in the natural sciences. Thus the historian, like the actor, must resort to specific understanding when enumerating the various motives and actions that bear a causal relation to the event in question and when assigning each action’s contribution to the outcome a relative weight. In this task, “Understanding is in the realm of history the equivalent, as it were, of quantitative analysis and measurement.”32 The historian uses specific understanding to try to gauge the causal “relevance” of each factor to the outcome. But such assessments of relevance do not take the form of objective measurements calculable by statistical techniques; they are expressed in the form of subjective “judgments of relevance” based on thymology.33 Successful entrepreneurs tend to be those who consistently formulate a superior understanding of the likelihood of future events based on thymology.

  The weighting problem that confronts actors and historians may be illustrated with the following example. The Fed increases the money supply by 5 percent in response to a 20-percent plunge in the Dow Jones Industrial Average—or, perhaps now, the Nasdaq—that ignites fears of a recession and a concomitant increase in the demand for liquidity on the part of households and firms. At the same time, OPEC announces a 10-percent increase in its members’ quotas and the U.S. Congress increases the minimum wage by 10 percent. In order to answer the question of what the overall impact of these events will be on the purchasing power of money six months hence, specific understanding of individuals’ preferences and expectations is required in order to weight and time the influence of each of these events on the relationship between the supply of and the demand for money. The ceteris-paribus laws of economic theory are strictly qualitative and only indicate the direction of the effect each of these events has on the purchasing power of money and that the change occurs during a sequential adjustment process so that some time must elapse before the full effect emerges. Thus the entrepreneur or economist must always supplement economic theory with an act of historical judgment or understanding when attempting to forecast any economic quantity. The economic historian, too, exercises understanding when making judgments of relevance about the factors responsible for the observed movements of the value of money during historical episodes of inflation or deflation.

  Rothbard’s contribution to Mises’s method of historical research involves the creation of a guide that mitigates some of the uncertainty associated with formulating judgments of relevance about human motives. According to Rothbard, “It is part of the inescapable condition of the historian that he must make estimates and judgments about human motivation even though he cannot ground his judgments in absolute and apodictic certainty.”34 But the task of assigning motives and weighting their relevance is rendered more difficult by the fact that, in many cases, historical actors, especially those seeking economic gain through the political process, are inclined to deliberately obscure the reasons for their conduct. Generally in these situations, Rothbard points out, “the actor himself tries his best to hide his economic motive and to trumpet his more abstract and ideological concerns.”35

  Rothbard contends, however, that such attempts to obfuscate or conceal the pecuniary motive for an action by appeals to higher goals are easily discerned and exposed by the historian in those cases “where the causal chain of economic interest to action is simple and direct.”36 Thus, for example, when the steel industry lobbies for higher tariffs or reduced quotas, no sane adult, and certainly no competent historian, believes that it is doing so out of its stated concern for the “public interest” or “national security.” Despite its avowed motives, everyone clearly perceives that the primary motivation of the industry is economic, that is, to restrict foreign competition in order to increase profits. But a problem arises in those cases “when actions involve longer and more complex causal chains.”37 Rothbard points to the Marshall Plan as an example of the latter. In this instance, the widely proclaimed motives of the architects of the plan were to prevent starvation in Western European nations and to strengthen their resistance to the allures of Communism. Not a word was spoken about the goal that was also at the root of the Marshall Plan: promoting and subsidizing U.S. export industries. It was only through painstaking research that historians were later able to uncover and assess the relevance of the economic motive at work.38

  Given the propensity of those seeking and dispensing privileges and subsidies in the political arena to lie about their true motives, Rothbard formulates what he describes as “a theoretical guide which will indicate in advance whether or not a historical action will be predominantly for economic, or for ideological, motives.”39 Now, it is true that Rothbard derives this guide from his overall worldview. The historian’s worldview, however, should not be interpreted as a purely ideological construction or an unconscious reflection of his normative biases. In fact, every historian must be equipped with a worldview—an interrelated set of ideas about the causal relationships governing how the world works—in order to ascertain which facts are relevant in the explanation of a particular historical event. According to Rothbard, “Facts, of course, must be selected and ordered in accordance with judgments of importance, and such judgments are necessarily tied into the historian’s basic world outlook.”40

  Specifically, in Mises’s approach to history, the worldview comprises the necessary preconceptions regarding causation with which the historian approaches the data and which are derived from his knowledge of both the aprioristic and natural sciences. According to Mises:

  History is not an intellectual reproduction, but a condensed representation of the past in conceptual terms. The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only relevant facts. He does not approach the documents without presuppositions, but equipped with the whole apparatus of his age’s scientific knowledge, that is, with all the teachings of contemporary logic, mathematics, praxe
ology, and natural science.41

  So, for example, the fact that heavy speculation against the German mark accompanied its sharp plunge on foreign-exchange markets is not significant for an Austrian-oriented economic historian seeking to explain the stratospheric rise in commodity prices that characterized the German hyperinflation of the early 1920s. This is because he approaches this event armed with the supply-and-demand theory of money and the purchasing-power–parity theory of the exchange rate. These “presuppositions” derived from praxeology lead him to avoid any attribution of causal significance to the actions of foreign exchange speculators in accounting for the precipitous decline of the domestic purchasing power of the mark. Instead they direct his attention to the motives of the German Reichs-bank in expanding the money supply. In the same manner, a modern historian investigating the cause and dissemination of bubonic plague in fourteenth-century Europe would presuppose that the blossoming of religious heresy during that period would have no significance for his investigation. Instead he would allow himself to be guided by the conclusions of modern medical science regarding the epidemiology of the disease.

  The importance of Rothbard’s theoretical guide is that it adds something completely new to the historian’s arsenal of scientific preconceptions that aids him in making judgments of relevance when investigating the motives of those who promote or oppose specific political actions. The novelty and brilliance of this guide lies in the fact that it is neither a purely aprioristic law like an economic theorem nor an experimentally established “fact” of the natural sciences. Rather it is a sociological generalization grounded on a creative blend of thymological experience and economic theory. At the core of this generalization is the insight that the State throughout history has been essentially an organization of a segment of the population that forsakes peaceful economic activity to constitute itself as a ruling class. This class makes its living parasitically by establishing a permanent hegemonic or “political” relationship between itself and the productive members of the population. This political relationship permits the rulers to subsist on the tribute or taxes routinely and “legally” expropriated from the income and wealth of the producing class. The latter class is composed of the “subjects” or, in the case of democratic states, the “taxpayers,” who earn their living through the peaceful “economic means” of production and voluntary exchange. In contrast, constituents of the ruling class may be thought of as “tax-consumers” who earn their living through the coercive “political means” of taxation and the sale of monopoly privileges.42