A History of Money and Banking in the United States: The Colonial Era to World War II
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These requests gave President Roosevelt, upon securing congressional approval, the excuse to appoint in March 1903 a three-man Commission on International Exchange to bring about currency reform in Mexico, China, and the rest of the silver-using world. The aim was “to bring about a fixed relationship between the moneys of the gold-standard countries and the present silver-using countries,” in order to foster “export trade and investment opportunities” in the gold countries and economic development in the silver countries.
The three members of the CIE were old friends and like-minded colleagues. Chairman was Hugh H. Hanna, of the Indianapolis Monetary Commission; the others were his former chief aide at that commission, Charles A. Conant, and Professor Jeremiah W. Jenks. Conant, as usual, was the major theoretician and finagler. He realized that major opposition to Mexico’s and China’s going off silver would come from the important Mexican silver industry, and he devised a scheme to get European countries to purchase large amounts of Mexican silver to ease the pain of the shift.
In a trip to European nations in the summer of 1903, however, Conant and the CIE found the Europeans less than enthusiastic about making Mexican silver purchases as well as subsidizing U.S. exports and investments in China, a land whose market they too were coveting. In the United States, on the other hand, major newspapers and financial periodicals, prodded by Conant’s public relations work, warmly endorsed the new currency scheme.
In the meanwhile, however, the United States faced similar currency problems in its two new Caribbean protectorates, Cuba and Panama. Panama was easy. The United States occupied the Canal Zone, and would be importing vast amounts of equipment to build the canal, so it decided to impose the American gold dollar as the currency in the nominally independent Republic of Panama. While the gold dollar was the official currency of Panama, the United States imposed as the actual medium of exchange a new debased silver peso worth 50¢. Fortunately, the new peso was almost the same in value as the old Colombian silver coin it forcibly displaced, and so, like Puerto Rico, the takeover could go without a hitch.
Among the U.S. colonies or protectorates, Cuba proved the toughest nut to crack. Despite all of Conant’s ministrations, Cuba’s currency remained unreformed. Spanish gold and silver coins, French coins, and U.S. currency all circulated side by side, freely fluctuating in response to supply and demand. Furthermore, similar to the pre-reformed Philippines, a fixed bimetallic exchange rate between the cheaper U.S., and the more valuable Spanish and French coins, led the Cubans to return cheaper U.S. coins to the U.S. customs authorities in fees and revenues.
Why then did Conant fail in Cuba? In the first place, strong Cuban nationalism resented U.S. plans for seizing control of their currency. Conant’s repeated request in 1903 for a Cuban invitation for the CIE to visit the island met stern rejections from the Cuban government. Moreover, the charismatic U.S. military commander in Cuba, Leonard Wood, wanted to avoid giving the Cubans the impression that plans were afoot to reduce Cuba to colonial status.
The second objection was economic. The powerful sugar industry in Cuba depended on exports to the United States, and a shift from depreciated silver to higher-valued gold money would increase the cost of sugar exports, by an amount Leonard Wood estimated to be about 20 percent. While the same problem had existed for the sugar planters in Puerto Rico, American economic interests, in Puerto Rico and in other countries such as the Philippines, favored forcing formerly silver countries onto a gold-based standard so as to stimulate U.S. exports into those countries. In Cuba, on the other hand, there was increasing U.S. investment capital pouring into the Cuban sugar plantations, so that powerful and even dominant U.S. economic interests existed on the other side of the currency reform question. Indeed, by World War I, American investments in Cuban sugar reached the sum of $95 million.
Thus, when Charles Conant resumed his pressure for a Cuban gold-exchange standard in 1907, he was strongly opposed by the U.S. governor of Cuba, Charles Magoon, who raised the problem of a gold-based standard crippling the sugar planters. The CIE never managed to visit Cuba, and ironically, Charles Conant died in Cuba, in 1915, trying in vain to convince the Cubans of the virtues of the gold-exchange standard.46
The Mexican shift from silver to gold was more gratifying to Conant, but here the reform was effected by Foreign Minister Limantour and his indigenous technicians, with the CIE taking a back seat. However, the success of this shift, in the Mexican Currency Reform Act of 1905, was assured by a world rise in the price of silver, starting the following year, which made gold coins cheaper than silver, with Gresham’s Law bringing about a successful gold-coin currency in Mexico. But the U.S. silver coinage in the Philippines ran into trouble because of the rise in the world silver price. Here, the U.S. silver currency in the Philippines was bailed out by coordinated action by the Mexican government, which sold silver in the Philippines to lower the value of silver sufficiently so that the conants could be brought back into circulation.47
The big failure of Conant-CIE monetary imperialism was in China. In 1900, Britain, Japan, and the United States intervened in China to put down the Boxer Rebellion. The three countries thereupon forced defeated China to agree to pay them and all major European powers an indemnity of $333 million. The United States interpreted the treaty as an obligation to pay in gold, but China, on a depreciated silver standard, began to pay in silver in 1903, an action that enraged the three treaty powers. The U.S. minister to China reported that Britain might declare China’s payment in silver a violation of the treaty, which would presage military intervention.
Emboldened by United States success in the Philippines, Panama, and Mexico, Secretary of War Root sent Jeremiah W. Jenks on a mission to China in early 1904 to try to transform China from a silver to a gold-exchange standard. Jenks also wrote to President Roosevelt from China urging that the Chinese indemnity to the United States from the Boxer Rebellion be used to fund exchange professorships for 30 years. Jenks’s mission, however, was a total failure. The Chinese understood the CIE currency scheme all too well. They saw and denounced the seigniorage of the gold-exchange standard as an irresponsible and immoral debasement of Chinese currency, an act that would impoverish China while adding to the profits of U.S. banks where seigniorage reserve funds would be deposited. Moreover, the Chinese officials saw that shifting the indemnity from silver to gold would enrich the European governments at the expense of the Chinese economy. They also noted that the CIE scheme would establish a foreign controller of the Chinese currency to impose banking regulations and economic reforms on the Chinese economy. We need not wonder at the Chinese outrage. China’s reaction was its own nationalistic currency reform in 1905, to replace the Mexican silver coin with a new Chinese silver coin, the tael.48
Jenks’s ignominious failure in China put an end to any formal role for the Commission on International Exchange.49 An immediately following fiasco blocked the U.S. government’s use of economic and financial advisers to spread the gold-exchange standard abroad. In 1905, the State Department hired Jacob Hollander to move another of its Latin American client states, the Dominican Republic, onto the gold-exchange standard. When Hollander accomplished this task by the end of the year, the State Department asked the Dominican government to hire Hollander to work out a plan for financial reform, including a U.S. loan, and a customs service run by the United States to collect taxes for repayment of the loan. Hollander, son-in-law of prominent Baltimore merchant Abraham Hutzler, used his connection with Kuhn, Loeb and Company to place Dominican bonds with that investment bank. Hollander also engaged happily in double-dipping for the same work, collecting fees for the same job from the State Department and from the Dominican government. When this peccadillo was discovered in 1911, the scandal made it impossible for the U.S. government to use its own employees and its own funds to push for gold-exchange experts abroad. From then on, there was more of a public-private partnership between the U.S. government and the investment bankers, with the bankers supplyin
g their own funds, and the State Department supplying good will and more concrete resources.
Thus, in 1911 and 1912, the United States, over great opposition, imposed a gold-exchange standard on Nicaragua. The State Department formally stepped aside but approved Charles Conant’s hiring by the powerful investment banking firm of Brown Brothers to bring about a loan and the currency reform. The State Department lent not only its approval to the project, but also its official wires, for Conant and Brown Brothers to conduct the negotiations with the Nicaraguan government.
By the time he died in Cuba in 1915, Charles Conant had made himself the chief theoretician and practitioner of the gold-exchange and the economic imperialist movements. Aside from his successes in the Philippines, Panama, and Mexico, and his failures in Cuba and China, Conant led in pushing for gold-exchange reform and gold-dollar imperialism in Liberia, Bolivia, Guatemala, and Honduras. His magnum opus in favor of the gold-exchange standard, the two-volume The Principles of Money and Banking (1905), as well as his pathbreaking success in the Philippines, was followed by a myriad of books, articles, pamphlets, and editorials, always backed up by his personal propaganda efforts.
Particularly interesting were Conant’s arguments in favor of a gold-exchange standard, rather than a genuine gold-coin standard. A straight gold-coin standard, Conant believed, did not provide a sufficient amount of gold to provide for the world’s monetary needs. Hence, by tying the existing silver standards in the undeveloped countries to gold, the “shortage” of gold could be overcome, and also the economies of the undeveloped countries could be integrated into those of the dominant imperial power. All this could only be done if the gold-exchange standard were “designed and implemented by careful government policy,” but of course Conant himself and his friends and disciples always stood ready to advise and provide such implementation.50
In addition, adopting a government-managed gold-exchange standard was superior to either genuine gold or bimetallism because it left each state the flexibility of adapting its currency to local needs. As Conant asserted,
It leaves each state free to choose the means of exchange which conform best to its local conditions. Rich nations are free to choose gold, nations less rich silver, and those whose financial methods are most advanced are free to choose paper.
It is interesting that for Conant, paper was the most “advanced” form of money. It is clear that the devotion to the gold standard of Conant and his colleagues, was only to a debased and inflationary standard, controlled and manipulated by the U.S. government, with gold really serving as a façade of allegedly hard money.
And one of the critical forms of government manipulation and control in Conant’s proposed system was the existence and active functioning of a central bank. As a founder of the “science” of financial advising to governments, Conant, followed by his colleagues and disciples, not only pushed a gold-exchange standard wherever he could do so, but also advocated a central bank to manage and control that standard. As Emily Rosenberg points out:
Conant thus did not neglect... one of the major revolutionary changes implicit in his system: a new, important role for a central bank as a currency stabilizer. Conant strongly supported the American banking reform that culminated in the Federal Reserve System... and American financial advisers who followed Conant would spread central banking systems, along with gold-standard currency reforms, to the countries they advised.51
Along with a managed gold-exchange standard would come, as replacement for the old free-trade, nonmanaged, gold-coin standard, a world of imperial currency blocs, which “would necessarily come into being as lesser countries deposited their gold stabilization funds in the banking systems of more advanced countries.”52 New York and London banks, in particular, shaped up as the major reserve fund-holders in the developing new world monetary order.
It is no accident that the United States’ major financial and imperial rival, Great Britain, which was pioneering in imposing gold-exchange standards in its own colonial area at this time, built upon this experience to impose a gold-exchange standard, marked by all European currencies pyramiding on top of British inflation, during the 1920s. That disastrous inflationary experiment led straight to the worldwide banking crash and the general shift to fiat paper moneys in the early 1930s. After World War II, the United States took up the torch of a world gold-exchange standard at Bretton Woods, with the dollar replacing the pound sterling in a worldwide inflationary system that lasted approximately 25 years.
Nor should it be thought that Charles A. Conant was the purely disinterested scientist he claimed to be. His currency reforms directly benefited his investment banker employers. Thus, Conant was treasurer, from 1902 to 1906, of the Morgan-run Morton Trust Company of New York, and it was surely no coincidence that Morton Trust was the bank that held the reserve funds for the governments of the Philippines, Panama, and the Dominican Republic, after their respective currency reforms. In the Nicaragua negotiations, Conant was employed by the investment bank of Brown Brothers, and in pressuring other countries he was working for Speyer and Company and other investment bankers.
After Conant died in 1915, there were few to pick up the mantle of foreign financial advising. Hollander was in disgrace after the Dominican debacle. Jenks was aging, and lived in the shadow of his China failure, but the State Department did appoint Jenks to serve as a director of the Nicaraguan National Bank in 1917, and also hired him to study the Nicaraguan financial picture in 1925.
But the true successor of Conant was Edwin W. Kemmerer, the “money doctor.” After his Philippine experience, Kemmerer joined his old Professor Jenks at Cornell, and then moved to Princeton in 1912, publishing his book Modern Currency Reforms in 1916. As the leading foreign financial adviser of the 1920s, Kemmerer not only imposed central banks and a gold-exchange standard on Third World countries, but he also got them to levy higher taxes. Kemmerer, too, combined his public employment with service to leading international bankers. During the 1920s, Kemmerer worked as banking expert for the U.S. government’s Dawes Commission, headed special financial advisory missions to more than a dozen countries, and was kept on a handsome retainer by the distinguished investment banking firm of Dillon, Read from 1922 to 1929. In that era, Kemmerer and his mentor Jenks were the only foreign currency reform experts available for advising. In the late 1920s, Kemmerer helped establish a chair of international economics at Princeton, which he occupied, and from which he could train students like Arthur N. Young and William W. Cumberland. In the mid-1920s, the money doctor served as president of the American Economic Association.53
JACOB SCHIFF IGNITES THE DRIVE FOR A CENTRAL BANK
The defeat of the Fowler Bill for a broader asset currency and branch banking in 1902, coupled with the failure of Treasury Secretary Shaw’s attempts of 1903–1905 to use the Treasury as a central bank, led the big bankers and their economist allies to adopt a new solution: the frank imposition of a central bank in the United States.
The campaign for a central bank was kicked off by a fateful speech in January 1906 by the powerful Jacob H. Schiff, head of the Wall Street investment bank of Kuhn, Loeb and Company, before the New York Chamber of Commerce. Schiff complained that in the autumn of 1905, when “the country needed money,” the Treasury, instead of working to expand the money supply, reduced government deposits in the national banks, thereby precipitating a financial crisis, a “disgrace” in which the New York clearinghouse banks had been forced to contract their loans drastically, sending interest rates sky-high. An “elastic currency” for the nation was therefore imperative, and Schiff urged the New York chamber’s committee on finance to draw up a comprehensive plan for a modern banking system to provide for an elastic currency.54 A colleague who had already been agitating for a central bank behind the scenes was Schiff’s partner, Paul Moritz Warburg, who had suggested the plan to Schiff as early as 1903. Warburg had emigrated from the German investment firm of M.M. Warburg and Company in 1897, and before long his major
function at Kuhn, Loeb was to agitate to bring the blessings of European central banking to the United States.55
It took less than a month for the finance committee of the New York chamber to issue its report, but the bank reformers were furious, denouncing it as remarkably ignorant. When Frank A. Vanderlip, of Rockefeller’s flagship bank, the National City Bank of New York, reported on this development, his boss, James Stillman, suggested that a new five-man special commission be set up by the New York chamber to come back with a plan for currency reform.
In response, Vanderlip proposed that the five-man commission consist of himself; Schiff; J.P. Morgan; George Baker of the First National Bank of New York, Morgan’s closest and longest associate; and former Secretary of the Treasury Lyman Gage, now president of the Rockefeller-controlled U.S. Trust Company. Thus, the commission would consist of two Rockefeller men (Vanderlip and Gage), two Morgan men (Morgan and Baker), and one representative from Kuhn, Loeb. Only Vanderlip was available to serve, however, so the commission had to be redrawn. In addition to Vanderlip, beginning in March 1906, there sat, instead of Schiff, his close friend Isidore Straus, a director of R.H. Macy and Company. Instead of Morgan and Baker there now served two Morgan men: Dumont Clarke, president of the American Exchange National Bank and a personal adviser to J.P. Morgan, and Charles A. Conant, treasurer of Morton and Company. The fifth man was a veteran of the Indianapolis Monetary Convention, John Claflin, of H.B. Claflin and Company, a large integrated wholesaling concern. Coming on board as secretary of the new currency committee was Vanderlip’s old friend Joseph French Johnson, now of New York University, who had been calling for a central bank since 1900.