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

by Murray N. Rothbard

  96For an excellent portrayal of the congressional choice in 1853, see Martin, “1853,” pp. 825–44.

  97Only Spanish-American fractional silver coins were to remain legal tender, and they were to be received quickly at government offices and immediately reminted into American coins. Hepburn, History of Currency, pp. 66–67.

  98See Martin, “Metallism,” pp. 242–43.

  99Hugh Rockoff, The Free Banking Era: A Re-Examination (New York: Arno Press, 1975), pp. 3–4.

  100Rockoff goes so far as to call free banking the “antithesis of laissez-faire banking laws.” Hugh Rockoff, “Varieties of Banking and Regional Economic Development in the United States, 1840–1860,” Journal of Economic History 35 (March 1975): 162. Quoted in Hummel, “Jacksonians,” p. 157.

  101Hammond, Banks and Politics, p. 627. On free banking, see Hummel, “Jacksonians,” p. 154–60; Smith, Rationale, pp. 44–45; and Rockoff, “American Free Banking,” pp. 417–20. On the effect of usury laws, see William Graham Sumner, A History of American Currency (New York: Henry Holt, 1876), p. 125. On the Jacksonians versus their opponents on the state level after 1839, see William G. Shade, Banks or No Banks: The Money Issue in Western Politics, 1832–1865 (Detroit: Wayne State University Press, 1972); Herbert Ershkowitz and William Shade, “Consensus or Conflict? Political Behavior in the State Legislatures During the Jaksonian Era,” Journal of American History 58 (December 1971): 591–621; and James Roger Sharp, Jacksonians versus the Banks: Politics in the States After the Panic of 1837 (New York: Columbia University Press, 1970).

  102John Jay Knox, A History of Banking in the United States (New York: Augustus M. Kelley, [1900] 1969), pp. 368–69.

  103To be able to keep paying interest in specie, Congress provided that customs duties, at least, had to be paid in gold or silver. For a comprehensive account and analysis of the issue of greenbacks in the Civil War, see Wesley Clair Mitchell, A History of the Greenbacks (Chicago: University of Chicago Press, 1903). For a summary, see Paul Studenski and Herman E. Kross, Financial History of the United States (New York: McGraw-Hill, 1952), pp. 141–49.

  104Chase and the administration should have heeded the advice of Republican Senator Jacob Collamer of Vermont: “Gold does not fluctuate in price... because they gamble in it; but they gamble in it because it fluctuates.... But the fluctuation is not in the gold; the fluctuation is in the currency, and it is a fluctuation utterly beyond the control of individuals.” Mitchell, History of Greenbacks, pp. 229–30.

  105On the war against the gold speculators, see ibid., pp. 223–35. The greenbacks fell further to 35¢ in mid-July on news of military defeats for the North. Military victories, and consequently rising prospects of possible future gold redemption of the greenbacks, caused a rise in greenbacks in terms of gold, particularly after the beginning of 1865. At war’s end, the greenback dollar was worth 69¢ in gold. Ibid., pp. 232–38, 423–28.

  106Some of the greenbacks had been decorated with portraits of President Lincoln ($5) and Secretary Chase ($1). However, when Spencer Clark, chief clerk of the Treasury’s National Currency Division, put his own portrait on 5¢ fractional notes, the indignant Republican Representative Martin R. Thayer of Pennsylvania put through a law, still in force, making it illegal to put the picture of any living American on any coin or paper money. See Gary North, “Greenback Dollars and Federal Sovereignty, 1861–1865,” in Gold Is Money, Hans Sennholz, ed. (Westport, Conn.: Greenwood Press, 1975), pp. 124, 150.

  107See Mitchell, History of Greenbacks, pp. 156–63.

  108Banks of deposit existed in California, but of course they could not supply the public’s demand for cash. See Knox, History of Banking, pp. 843–45.

  109This experience illustrates a continuing problem in contract law: It is not sufficient for government to allow contracts to be made in gold or gold coin. It is necessary for government to enforce specific performance of the contracts so that debtors must pay in the weight or value of the gold (or anything else) required in the contract, and not in some paper-dollar equivalent decided by law or the courts.

  110Cited in Richard A. Lester, Monetary Experiments (London: David and Charles Reprints, [1939] 1970), p. 166. On the California and Oregon maintenance of the gold standard in this period, see ibid., pp. 161–71. On California, see Bernard Moses, “Legal Tender Notes in California,” in Quarterly Journal of Economics (October 1892): 1–25; and Mitchell, History of Greenbacks, pp. 142–44. On Oregon, see James H. Gilbert, Trade and Currency in Early Oregon (New York: Columbia University Press, 1907), pp. 101–22.

  111Historical Statistics, pp. 625, 648–49.

  112Bray Hammond, Sovereignty and an Empty Purse: Banks and Politics in the Civil War (Princeton, N.J.: Princeton University Press, 1970), pp. 246, 249–50. See also North, “Greenback Dollars,” pp. 143–48.

  113Historical Statistics, pp. 625, 648–49. In a careful analysis, North estimates the total money supply at approximately $2 billion and also points out that conterfeit notes in the Civil War have been estimated to amount to no less than one-third of the total currency in circulation. North, “Greenback Dollars,” p. 134. The counterfeiting estimates are in William P. Donlon, United States Large Size Paper Money, 1861 to 1923, 2nd ed. (Iola, Wis.: Krause, 1970), p. 15.

  114Ralph Andreano, ed., The Economic Impact of the American Civil War (Cambridge, Mass.: Schenckman, 1961), p. 178.

  115The Confederacy, on the other hand, financed virtually all of its expenditures through mammoth printing of fiat paper, the Southern version of the greenback. Confederate notes, which were first issued in June 1861 at a sum of $1.1 million, skyrocketed until the total supply of Confederate notes in January 1864 was no less than $826.8 million, an increase of 750.6 percent for three and a half years, or 214.5 percent per year. Bank notes and deposits in the Confederacy rose from $119.3 million to $268.1 million in this period, so that the total money supply rose from $120.4 million to $1.095 billion, an increase of 1,060 percent—or 302.9 percent per year. Prices in the eastern Confederacy rose from 100 in early 1861 to over 4,000 in 1864, and to 9,211 at the end of the war in April 1865. Thus, in four years, prices rose by 9,100 percent or an average of 2,275 percent per annum. See Eugene M. Lerner, “Inflation in the Confederacy, 1861–65,” in Studies in the Quantity Theory of Money, Milton Friedman, ed. (Chicago: University of Chicago Press, 1956), pp. 163–75; and Eugene M. Lerner, “Money, Prices, and Wages in the Confederacy, 1861–65,” in Andreano, Economic Impact, pp. 11–40.

  116Mitchell, History of the Greenbacks, pp. 61–74, 119 f., 128–31. See also Don C. Barrett, The Greenbacks and Resumption of Specie Payments, 1862–1879 (Cambridge, Mass.: Harvard University Press, 1931), pp. 25–57.

  117In Henrietta Larson, Jay Cooke, Private Banker (Cambridge, Mass: Harvard University Press, 1936), p. 103. See also Edward C. Kirkland, Industry Comes of Age: Business, Labor and Public Policy, 1860–1897 (New York: Holt, Rinehart and Winston, 1961), p. 20.

  118Kirkland, Industry, pp. 20–21.

  119In his important work on Northern intellectuals and the Civil War, George Frederickson discusses an influential article by one Samuel Fowler written at the end of the war:

  The Civil War which has changed the current of our ideas, and crowded into a few years the emotions of a lifetime,” Fowler wrote, “has in measure given to the preceding period of our history the character of a remote state of political existence.” Fowler described the way in which the war, a triumph of nationalism and a demonstration of “the universal tendency to combination,” had provided the coup de grace for the Jefferson philosophy of government with its emphasis on decentralization and the protection of local and individual liberties. (George Frederickson, The Inner Civil War: Northern Intellectuals and the Crisis of the Union [New York: Harper and Row, 1965], p. 184)

  See also Merrill D. Peterson, The Jeffersonian Image in the American Mind (New York: Oxford University Press, 1960), pp. 217–18.

  120For a particularly lucid exposition of the structure of th
e national banking system, see John J. Klein, Money and the Economy, 2nd ed. (New York: Harcourt, Brace and World, 1970), pp. 140–47.

  121Banks generally paid interest on demand deposits until the practice was outlawed in 1934.

  122Adapted from Klein, Money and the Economy, pp. 144–45.

  123See Hepburn, History of Currency, pp. 317–18.

  124Originally, national banks could only issue notes to the value 90 percent of their U.S. government bonds. This limitation was changed to 100 percent in 1900.

  125Except, of course, as we have seen with the greenbacks, for payment of customs duties, which had to be paid in gold, to build up a fund to pay interest on the government debt in gold.

  126See Smith, Rationale, p. 48.

  127Ibid., p. 132.

  128Historical Statistics, pp. 628–29.

  129Quoted in Robert P. Sharkey, Money, Class, and Party: An Economic Study of Civil War and Reconstruction (Baltimore, Md.: The Johns Hopkins Press, 1959), p. 245.

  130See Hammond, Sovereignty, pp. 289–90.

  131Actually, Cooke erred, and national bank notes never reached that total. Instead, it was demand deposits that expanded, and reached the billion-dollar mark by 1879.

  132See Sharkey, Money, Class, and Party, p. 247.

  133The leader of the protectionists in Congress in 1820 was Representative Henry Baldwin, a leading iron manufacturer from Pittsburgh. Rothbard, Panic of 1819, pp. 164 ff.

  134On the Carey circle and its influence, see Irwin Unger, The Greenback Era: A Social and Political History of American Finance, 1865–1879 (Princeton, N.J.: Princeton University Press, 1964), pp. 53–59; and Joseph Dorfman, The Economic Mind in American Civilization, vol. 3, 1864–1918 (New York: Viking Press, 1949), pp. 7–8. Dorfman notes that Congressman Kelley dedicated his collected Speeches, Addresses, and Letters on Industrial and Financial Questions of 1872 to “The Great Master of Economic Science, The Profound Thinker, and the Careful Observer of Social Phenomena, My Venerable Friend and Teacher, Henry C. Carey.” Ibid., p. 8. On the link between high tariffs and greenbacks for the Pennsylvania ironmasters, see Sharkey, Money, Class, and Party, chap. 4.

  135Thus, Keynes wrote: “‘To dig holes in the ground,’ paid for out of savings will increase, not only employment, but the real national dividend of useful goods and services.” John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace, 1936), p. 220. On pyramid-building, see ibid., pp. 131, 220.

  136Unger, Greenback Era, p. 46.

  137Ibid., p. 222.

  138The federal government had contracted to redeem the interest on the wartime public debt in gold, but nothing was contracted about the repayment of the principal.

  139Similar motivations had impelled many hard-money anti-Federalists during the 1780s to advocate the issue of state paper money for the sole purpose of redeeming swollen wartime public debts.

  140On the McCulloch Loan Bill, see Sharkey, Money, Class, and Party, p. 75; on the Inflation Bill, see Unger, Greenback Era, p. 410.

  141This political and compromise interpretation of the Resumption Act successfully revises the previous hard-money view of this measure. See Unger, Greenback Era, pp. 249–63.

  142See Charles Fairman, “Mr. Justice Bradley’s Appointment to the Supreme Court and the Legal Tender Cases,” Harvard Law Review (May 1941): 1131; cited in Unger, Greenback Era, p. 174.

  143The first new justice, William Strong of Pennsylvania, had been a top attorney for the Philadelphia and Reading Railroad, and a director of the Lebanon Valley Railroad. The second jurist, Joseph P. Bradley, was a director of the Camden and Amboy Railroad and of the Morris and Essex Railroad, in New Jersey. On the railroad ties of Strong and Bradley, see Philip H. Burch, Jr., Elites in American History, vol. 2, The Civil War to the New Deal (New York: Holmes and Meier, 1981), pp. 44–45. On the reaction of the Grant administration, see Unger, Greenback Era, pp. 172–78. For a legal analysis of the decisions, see Hepburn, History of Currency, pp. 254–64; and Government’s Money Monopoly, Henry Mark Holzer, ed. (New York: Books in Focus, 1981), pp. 99–168.

  144Klein, Money and the Economy, pp. 145–46.

  145For the bemusement of Friedman and Schwartz, see Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (New York: National Bureau of Economic Research, 1963), pp. 33–44. On totals of bank money, see Historical Statistics, pp. 624–25.

  146S.B. Saul, The Myth of the Great Depression, 1873–1896 (London: Macmillan, 1969).

  147Unger, Greenback Era, pp. 47 and 221.

  148For the best discussion of the crime against silver, see Allen Weinstein, Prelude to Populism: Origins of the Silver Issue, 1867–1878 (New Haven, Conn.: Yale University Press, 1970), pp. 8–32. See also Paul M. O’Leary, “The Scene of the Crime of 1873 Revisited: A Note,” Journal of Political Economy 68 (1960): 388–92.

  149Weinstein, Prelude to Populism, p. 356.

  150Friedman and Schwartz, Monetary History, pp. 91–93; and Historical Statistics, p. 625.

  151Friedman and Schwartz, Monetary History, pp. 98–99.

  152See Rendigs Fels, American Business Cycle, 1865–1897 (Chapel Hill: University of North Carolina Press, 1959), pp. 130–31.

  153See Friedman and Schwartz, Monetary History, pp. 106, n. 25.

  154On silver agitation, the gold reserves, and the panic of 1893, see Friedman and Schwartz, Monetary History, pp. 104–33, 705.

  155Ibid., Monetary History, pp. 113–19.

  156The locus classicus of the new political history in late nineteenth-century politics is Paul Kleppner, The Cross of Culture: A Social Analysis of Midwestern Politics, 1859–1900 (New York: Free Press, 1970). See also other writings of the prolific Kleppner, especially his magnum opus, The Third Electoral System, 1853–1892: Parties, Voters, and Political Cultures (Chapel Hill: University of North Carolina Press, 1979). On the late nineteenth century, see also Richard J. Jensen, The Winning of the Midwest: Social and Political Conflict, 1888–1896 (Chicago: University of Chicago Press, 1971). On the Civil War period and earlier, see the works of Ronald Formisano, Joel Sibley, and William Shade. For Eastern confirmation on the Kleppner and Jensen findings on the Middle West, see Samuel T. McSeveney, The Politics of Depression: Political Behavior in the Northeast, 1893–1896 (Oxford: Oxford University Press, 1972).

  157”Yankees” originated in rural New England and then emigrated westward in the early nineteenth century, settling in upstate (particularly western) New York, northern Ohio, northern Indiana, and northern Illinois.

  158These pietists have been called “evangelical pietists” to contrast them with the new Southern pietists, called “salvational pietists,” who did not include the compulsion to save everyone else in their doctrine.

  159These pietists are distinguished from contemporary “fundamentalists” because the former were “postmillennialists” who believe that the world must be shaped up and Christianized for a millennium before Jesus will return. In contrast, contemporary fundamentalists are “pre-millennials” who believe that the Second Coming of Jesus will usher in the millennium. Obviously, if everyone must be shaped up before Jesus can return, there is a much greater incentive to wield State power to stamp out sin.

  160Lutherans, then as now, were split into many different synods, some highly liturgical, others highly pietist, and still others in between. Paul Kleppner has shown a 1-to-1 correlation between the degree of liturgicalness and the percentage of Democratic Party votes among the different synods.

  161Grover Cleveland himself, of course, was neither a Roman Catholic nor a Lutheran. But he was a Calvinist Presbyterian who detested the takeover of the Presbyterian Church by the pietists.

  162So intense was the German-American devotion to gold and hard money that even German communist-anarchist Johann Most, leader of a movement that sought the abolition of money itself, actually came out for the gold standard during the 1896 campaign! See Jensen, Winning of the Midwest, pp. 29
3–95.

  163Kleppner, Third Electoral System, pp. 291–96.

  *[Congress eliminated federal restrictions on interstate banking and branching in September 1994, with the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act.—Ed.]

  Part 2

  [Originally published as “The Origins of the Federal Reserve,” Quarterly Journal of Austrian Economics 2, no. 3 (Fall): 3–51.—Ed.]

  1On the national banking system background and on the increasing unhappiness of the big banks, see Murray N. Rothbard, “The Federal Reserve as a Cartelization Device: The Early Years, 1913–1920,” in Money in Crisis, Barry Siegel, ed. (San Francisco: Pacific Institute, 1984), pp. 89–94; Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report on the U.S. Gold Commission (Washington, D.C.: Cato Institute, 1982); and Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History (Glencoe, Ill.: Free Press, 1983), pp. 139–46.

  2Indeed, much of the political history of the United States from the late nineteenth century until World War II may be interpreted by the closeness of each administration to one of these sometimes cooperating, more often conflicting, financial groupings: Cleveland (Morgan), McKinley (Rockefeller), Theodore Roosevelt (Morgan), Taft (Rockefeller), Wilson (Morgan), Harding (Rockefeller), Coolidge (Morgan), Hoover (Morgan), and Franklin Roosevelt (Harriman–Kuhn, Loeb–Rockefeller).

  3For the memorandum, see James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913 (Ithaca, N.Y.: Cornell University Press, 1986), pp. 104–05.

  4Yale Review 5 (1897): 343–45, quoted in ibid., p. 105.

  5See Philip H. Burch, Jr., Elites in American History, vol. 2, The Civil War to the New Deal (New York: Holmes and Meier, 1981), p. 189, n. 55.