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

by Murray N. Rothbard

  In his 1899 presidential address, Yale President Arthur Twining Hadley also saw economists developing as society’s philosopher-kings. The most important application of economic knowledge, declared Hadley, was leadership in public life, becoming advisers and leaders of national policy. Hadley opined,

  I believe that their [economists’] largest opportunity in the immediate future lies not in theories but in practice, not with students but with statesmen, not in the education of individual citizens, however widespread and salutary, but in the leadership of an organized body politic.38

  Hadley perceptively saw the executive branch of the government as particularly amenable to access of position and influence to economic advisers and planners. Previously, executives were hampered in seeking such expert counsel by the importance of political parties, their ideological commitments, and their mass base in the voting population. But now, fortunately, the growing municipal reform (soon to be called the Progressive) movement was taking power away from political parties and putting it into the hands of administrators and experts. The “increased centralization of administrative power [was giving]... the expert a fair chance.” And now, on the national scene, the new American leap into imperialism in the Spanish-American War was providing an opportunity for increased centralization, executive power, and therefore for administrative and expert planning. Even though Hadley declared himself personally opposed to imperialism, he urged economists to leap at this great opportunity for access to power.39

  The organized economic profession was not slow to grasp this new opportunity. Quickly, the executive and nominating committees of the American Economic Association (AEA) created a five-man special committee to organize and publish a volume on colonial finance. As Silva and Slaughter put it, this new, rapidly put-together volume permitted the AEA to show the power elite

  how the new social science could serve the interests of those who made imperialism a national policy by offering technical solutions to the immediate fiscal problems of colonies as well as providing ideological justifications for acquiring them.40

  Chairman of the special committee was Professor Jeremiah W. Jenks of Cornell, the major economic adviser to New York Governor Theodore Roosevelt. Another member was Professor E.R.A. Seligman, another key adviser to Roosevelt. A third colleague was Dr. Albert Shaw, influential editor of the Review of Reviews, progressive reformer and social scientist, and longtime crony of Roosevelt’s. All three were longtime leaders of the American Economic Association. The other two, non-AEA leaders, on the committee were Edward R. Strobel, former assistant secretary of state and adviser to colonial governments, and Charles S. Hamlin, wealthy Boston lawyer and assistant secretary of the Treasury who had long been in the Morgan ambit, and whose wife was a member of the Pruyn family, longtime investors in two Morgan-dominated concerns: the New York Central Railroad and the Mutual Life Insurance Company of New York.

  Essays in Colonial Finance, the volume quickly put together by these five leaders, tried to advise the United States how best to run its newly acquired empire. First, just as the British government insisted when the North American states were its colonies, the colonies should support their imperial government through taxation, whereas control should be tightly exercised by the United States imperial center. Second, the imperial center should build and maintain the economic infrastructure of the colony: canals, railroads, communications. Third, where—as was clearly anticipated—native labor is inefficient or incapable of management, the imperial government should import (white) labor from the imperial center. And, finally, as Silva and Slaughter put it,

  the committee’s fiscal recommendations strongly intimated that trained economists were necessary for a successful empire. It was they who must make a thorough study of local conditions to determine the correct fiscal system, gather data, create the appropriate administrative design and perhaps even implement it. In this way, the committee seconded Hadley’s views in seeing as an opportunity for economists by identifying a large number of professional positions best filled by themselves.41

  With the volume written, the AEA cast about for financial support for its publication and distribution. The point was not simply to obtain the financing, but to do so in such a way as to gain the imprimatur of leading members of the power elite on this bold move for power to economists as technocratic expert advisers and administrators in the imperial nation-state.

  The American Economic Association found five wealthy businessmen to put up $125, two-fifths of the full cost of publishing Essays in Colonial Finance. By compiling the volume and then accepting corporate sponsors, several of whom had an economic stake in the new American empire, the AEA was signaling that the nation’s organized economists were (1) wholeheartedly in favor of the new American empire; and (2) willing and eager to play a strong role in advising and administering the empire, a role which they promptly and happily filled, as we shall see in the following section.

  In view of the symbolic as well as practical role for the sponsors, a list of the five donors for the colonial finance volume is instructive. One was Isaac N. Seligman, head of the investment banking house of J. and W. Seligman and Company, a company with extensive overseas interests, especially in Latin America. Isaac’s brother, E.R.A. Seligman, was a member of the special committee on colonial finance and an author of one of the essays in the volume. Another was William E. Dodge, a partner of the copper mining firm of Phelps, Dodge, and Company and member of a powerful mining family allied to the Morgans. A third donor was Theodore Marburg, an economist who was vice president of the AEA at the time, and also an ardent advocate of imperialism as well as heir to a substantial American Tobacco Company fortune. Fourth was Thomas Shearman, a single-taxer and an attorney for powerful railroad magnate Jay Gould. And last but not least, Stuart Wood, a manufacturer who had a Ph.D. in economics and had been a vice president of the AEA.

  CONANT, MONETARY IMPERIALISM, AND THE GOLD-EXCHANGE STANDARD

  The leap into political imperialism by the United States in the late 1890s was accompanied by economic imperialism, and one key to economic imperialism was monetary imperialism. In brief, the developed Western countries by this time were on the gold standard, while most of the Third World nations were on the silver standard. For the past several decades, the value of silver in relation to gold had been steadily falling, due to (1) an increasing world supply of silver relative to gold, and (2) the subsequent shift of many Western nations from silver or bimetallism to gold, thereby lowering the world’s demand for silver as a monetary metal.

  The fall of silver value meant monetary depreciation and inflation in the Third World, and it would have been a reasonable policy to shift from a silver-coin to a gold-coin standard. But the new imperialists among U.S. bankers, economists, and politicians were far less interested in the welfare of Third World countries than in foisting a monetary imperialism upon them. For not only would the economies of the imperial center and the client states then be tied together, but they would be tied in such a way that these economies could pyramid their own monetary and bank credit inflation on top of inflation in the United States. Hence, what the new imperialists set out to do was to pressure or coerce Third World countries to adopt, not a genuine gold-coin standard, but a newly conceived “gold-exchange” or dollar standard.

  Instead of silver currency fluctuating freely in terms of gold, the silver-gold rate would then be fixed by arbitrary government price-fixing. The silver countries would be silver in name only; a country’s monetary reserve would be held, not in silver, but in dollars allegedly redeemable in gold; and these reserves would be held, not in the country itself, but as dollars piled up in New York City. In that way, if U.S. banks inflated their credit, there would be no danger of losing gold abroad, as would happen under a genuine gold standard. For under a true gold standard, no one and no country would be interested in piling up claims to dollars overseas. Instead, they would demand payment of dollar claims in gold. So that even though these American ban
kers and economists were all too aware, after many decades of experience, of the fallacies and evils of bimetallism, they were willing to impose a form of bimetallism upon client states in order to tie them into U.S. economic imperialism, and to pressure them into inflating their own money supplies on top of dollar reserves supposedly, but not de facto redeemable in gold.

  The United States first confronted the problem of silver currencies in a Third World country when it seized control of Puerto Rico from Spain in 1898 and occupied it as a permanent colony. Fortunately for the imperialists, Puerto Rico was already ripe for currency manipulation. Only three years earlier, in 1895, Spain had destroyed the full-bodied Mexican silver currency that its colony had previously enjoyed and replaced it with a heavily debased silver “dollar,” worth only 41¢ in U.S. currency. The Spanish government had pocketed the large seigniorage profits from that debasement. The United States was therefore easily able to substitute its own debased silver dollar, worth only 45.6¢ in gold. Thus, the United States silver currency replaced an even more debased one and also the Puerto Ricans had no tradition of loyalty to a currency only recently imposed by the Spaniards. There was therefore little or no opposition in Puerto Rico to the U.S. monetary takeover.42

  The major controversial question was what exchange rate the American authorities would fix between the two debased coins: the old Puerto Rican silver peso and the U.S. silver dollar. This was the rate at which the U.S. authorities would compel the Puerto Ricans to exchange their existing coinage for the new American coins. The treasurer in charge of the currency reform for the U.S. government was the prominent Johns Hopkins economist Jacob H. Hollander, who had been special commissioner to revise Puerto Rican tax laws, and who was one of the new breed of academic economists repudiating laissez-faire for comprehensive statism. The heavy debtors in Puerto Rico— mainly the large sugar planters—naturally wanted to pay their peso obligations at as cheap a rate as possible; they lobbied for a peso worth 50¢ American. In contrast, the Puerto Rican banker-creditors wanted the rate fixed at 75¢. Since the exchange rate was arbitrary anyway, Hollander and the other American officials decided in the time-honored way of governments: more or less splitting the difference, and fixing a peso equal to 60¢.43

  The Philippines, the other Spanish colony grabbed by the United States, posed a far more difficult problem. As in most of the Far East, the Philippines was happily using a perfectly sound silver currency, the Mexican silver dollar. But the United States was anxious for a rapid reform, because its large armed forces establishment suppressing Filipino nationalism required heavy expenses in U.S. dollars, which it of course declared to be legal tender for payments. Since the Mexican silver coin was also legal tender and was cheaper than the U.S. gold dollar, the U.S. military occupation found its revenues being paid in unwanted and cheaper Mexican coins.

  Delicacy was required, and in 1901, for the task of currency takeover, the Bureau of Insular Affairs (BIA) of the War Department—the agency running the U.S. occupation of the Philippines—hired Charles A. Conant. Secretary of War Elihu Root was a redoubtable Wall Street lawyer in the Morgan ambit who sometimes served as J.P. Morgan’s personal attorney. Root took a personal hand in sending Conant to the Philippines. Conant, fresh from the Indianapolis Monetary Commission and before going to New York as a leading investment banker, was, as might be expected, an ardent gold-exchange-standard imperialist as well as the leading theoretician of economic imperialism.

  Realizing that the Filipino people loved their silver coins, Conant devised a way to impose a gold U.S. dollar currency upon the country. Under his cunning plan, the Filipinos would continue to have a silver currency; but replacing the full-bodied Mexican silver coin would be an American silver coin tied to gold at a debased value far less than the market exchange value of silver in terms of gold. In this imposed, debased bimetallism, since the silver coin was deliberately overvalued in relation to gold by the U.S. government, Gresham’s Law inexorably went into effect. The overvalued silver would keep circulating in the Philippines, and undervalued gold would be kept sharply out of circulation.

  The seigniorage profit that the Treasury would reap from the debasement would be happily deposited at a New York bank, which would then function as a “reserve” for the U.S. silver currency in the Philippines. Thus, the New York funds would be used for payment outside the Philippines instead of as coin or specie. Moreover, the U.S. government could issue paper dollars based on its new reserve fund.

  It should be noted that Conant originated the gold-exchange scheme as a way of exploiting and controlling Third World economies based on silver. At the same time, Great Britain was introducing similar schemes in its colonial areas in Egypt, in Straits Settlements in Asia, and particularly in India.

  Congress, however, pressured by the silver lobby, balked at the BIA’s plan. And so the BIA again turned to the seasoned public relations and lobbying skills of Charles A. Conant. Conant swung into action. Meeting with editors of the top financial journals, he secured their promises to write editorials pushing for the Conant plan, many of which he obligingly wrote himself. He was already backed by the American banks of Manila. Recalcitrant U.S. bankers were warned by Conant that they could no longer expect large government deposits from the War Department if they continued to oppose the plan. Furthermore, Conant won the support of the major enemies of his plan, the American silver companies and pro-silver bankers, promising them that if the Philippine currency reform went through, the federal government would buy silver for the new U.S. coinage in the Philippines from these same companies. Finally, the tireless lobbying, and the mixture of bribery and threats by Conant, paid off: Congress passed the Philippine Currency Bill in March 1903.

  In the Philippines, however, the United States could not simply duplicate the Puerto Rican example and coerce the conversion of the old for the new silver coinage. The Mexican silver coin was a dominant coin not only in the Far East but throughout the world, and the coerced conversion would have been endless. The U.S. tried; it removed the legal tender privilege from the Mexican coins, and decreed the new U.S. coins be used for taxes, government salaries, and other government payments. But this time the Filipinos happily used the old Mexican coins as money, while the U.S. silver coins disappeared from circulation into payment of taxes and transactions to the United States.

  The War Department was beside itself: How could it drive Mexican silver coinage out of the Philippines? In desperation, it turned to the indefatigable Conant, but Conant couldn’t join the colonial government in the Philippines because he had just been appointed to a more far-flung presidential commission on international exchange for pressuring Mexico and China to go on a similar gold-exchange standard. Hollander, fresh from his Puerto Rican triumph, was ill. Who else? Conant, Hollander, and several leading bankers told the War Department they could recommend no one for the job, so new then was the profession of technical expertise in monetary imperialism. But there was one more hope, the other pro-cartelist and financial imperialist, Cornell’s Jeremiah W. Jenks, a fellow member with Conant of President Roosevelt’s new Commission on International Exchange (CIE). Jenks had already paved the way for Conant by visiting English and Dutch colonies in the Far East in 1901 to gain information about running the Philippines. Jenks finally came up with a name, his former graduate student at Cornell, Edwin W. Kemmerer.

  Young Kemmerer went to the Philippines from 1903 to 1906 to implement the Conant plan. Based on the theories of Jenks and Conant, and on his own experience in the Philippines, Kemmerer went on to teach at Cornell and then at Princeton, and gained fame throughout the 1920s as the “money doctor,” busily imposing the gold-exchange standard on country after country abroad.

  Relying on Conant’s behind-the-scenes advice, Kemmerer and his associates finally came out with a successful scheme to drive out the Mexican silver coins. It was a plan that relied heavily on government coercion. The United States imposed a legal prohibition on the importation of the Mexican coins, fo
llowed by severe taxes on any private Philippine transactions daring to use the Mexican currency. Luckily for the planners, their scheme was aided by a large-scale demand at the time for Mexican silver in northern China, which absorbed silver from the Philippines or that would have been smuggled into the islands. The U.S. success was aided by the fact that the new U.S. silver coins, perceptively called “conants” by the Filipinos, were made up to look very much like the cherished old Mexican coins. By 1905, force, luck, and trickery had prevailed, and the conants (worth 50¢ in U.S. money) were the dominant currency in the Philippines. Soon the U.S. authorities were confident enough to add token copper coins and paper conants as well.44

  By 1903, the currency reformers felt emboldened enough to move against the Mexican silver dollar throughout the world. In Mexico itself, U.S. industrialists who wanted to invest there pressured the Mexicans to shift from silver to gold, and they found an ally in Mexico’s powerful finance minister, Jose Limantour. But tackling the Mexican silver peso at home would not be an easy task, for the coin was known and used throughout the world, particularly in China, where it formed the bulk of the circulating coinage. Finally, after three-way talks between United States, Mexican, and Chinese officials, the Mexicans and Chinese were induced to send identical notes to the U.S. secretary of state, urging the United States to appoint financial advisers to bring about currency reform and stabilized exchange rates with the gold countries.45