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

by Murray N. Rothbard

  76Seligman, Transformation of Wall Street, p. 105.

  77Burch, Elites, 3, p. 32. Chernow writes of Joseph Kennedy as a Morgan “hobgoblin,” who had been repeatedly snubbed by J.P. Morgan, Jr., in the late 1920s. In fact, Chernow sees the New Deal clash with Morgan in ethnic terms: “The money changers had indeed been chased from the Temple, by the Irish, the Italians, and the Jews—the groups excluded from WASP Wall Street in the 1920s.” Chernow, House of Morgan, p. 379.

  78McCraw, “Landis and the Statecraft of the SEC,” in Prophets of Regulation, p. 188. Ferdinand Pecora, however, resisted this new Landis dispensation, which he regarded as a sellout to Wall Street. After six months as an SEC commissioner, Pecora resigned to accept an appointment as a justice on the New York State Supreme Court.

  79As McCraw puts it, “When the leaders of the profession realized that a unique opportunity to gain respect lay at hand, their hostility to regulation abruptly ceased.” Ibid., p. 190.

  80Ibid.

  81Ibid., pp. 191–92.

  82Ibid., p. 192

  83In McCraw’s worshipful account, Landis’s brilliant achievement, achieving the status of a living “legend” before he was 40 (Landis was born in 1899) and apparently slated for the Supreme Court, was succeeded by tragic decline. Burnt out and unhappy in academia, Landis gradually but surely went into decline, marked by alcoholism. Finally, Landis was jailed for failure to file income tax returns for six years, and suspended from the practice of law for a year in July 1964. Shortly afterward, Landis died in his pool, either of heart attack or suicide. Landis’s house and effects were promptly seized by the IRS, and sold to settle his tax claims. Some may call this denouement a terrible tragedy; others, poetic justice. McCraw, Prophets of Regulation, pp. 203–09.

  84McCraw, Prophets of Regulation, pp. 352–53. See also ibid., pp. 193–96.

  851938 saw the extension of federal regulation and cartelization to the once free, decentralized and unregulated over-the-counter market. In 1933, the elite investment bankers in the Investment Bankers’ Association, eager to cartelize and regulate the over-the-counter market, seized the opportunity offered by the National Recovery Administration (NRA) to draft a very strict “Code of Fair Competition.” The association then established an Investment Bankers Code Committee that could pursue stringent enforcement of the code using the powers of the federal government. There was one weakness of the cartel, however: it did not include the smaller but numerous noninvestment-bank over-the-counter dealers.

  When the Supreme Court ruled the NRA unconstitutional in the Schechter decision in May 1935, Landis promptly stepped in to try to reconstitute the code under the aegis of the SEC. The code committee, now reconstituted in an Investment Bankers Conference Committee, engaged in lengthy negotiations with the SEC, to try to replicate the SEC structure for the organized stock exchanges. Finally, in early 1938, Senator Frank Maloney (D-Conn.), a friend of Chairman Douglas, pushed through the Maloney Act, which provided that the over-the-counter industry could establish its own private association that would be invested with the power, under SEC supervision, to fine, suspend, or expel those dealers found in violation of rules jointly worked out with the SEC. This new association, so reminiscent of the NRA, was specifically declared exempt from the antitrust laws.

  The over-the-counter industry happily responded to the Maloney Act by creating the National Association of Securities Dealers (NASD), a private association invested with government power. The NASD promptly fixed a uniform dealer commission rate of 5 percent—an open measure of cartelization—and, while no broker or dealer was required to join the NASD, nonmembers were prohibited by law from engaging in any securities underwriting. In effect, membership was compulsory, and the NASD “assumed the functions and structure of a regulatory agency.” At the SEC’s insistence, the NASD strengthened this regulatory function by hiring its own professional staff of several hundred examiners and investigators, and the SEC habitually ratified stern disciplinary measures, including suspension and expulsion, meted out over the years by the NASD. McCraw, Prophets of Regulation, pp. 197–200.

  86Seligman, Transformation of Wall Street, pp. 127–38. Wendell Willkie’s sudden surprise Republican nomination for president in 1940 was a cleverly engineered Morgan coup in the Republican Party. During that period, Willkie sat on the board of the Morgan-dominated First National Bank of New York. Willkie’s close friends included the inevitable Thomas W. Lamont; Perry Hall, vice president of Morgan, Stanley and Company; George Howard, president of the United Corporation; and S. Sloan Colt, president of the Morgan-established and Morgan-dominated Bankers Trust Company. Moreover, the two young New York Republican leaders who actually engineered the nomination were Oren Root, Jr., of the top “Morgan” law firm of Davis (John W.), Polk, Wardwell, Gardiner and Reed; and Charlton MacVeagh. Not only was MacVeagh a former officer of J.P. Morgan and Company, but his father had been a longtime partner of the Davis Polk law firm, and his brother was still an officer there. Burch, Elites, 3, pp. 44–45, 66.

  It is intriguing that one of Willkie’s two main rivals for the nomination, New York’s Thomas E. Dewey, was all his life virtually in the hip pocket of Winthrop W. Aldrich, the Rockefellers, and the Chase National Bank. Thus, see Harr and Johnson, Rockefeller Century, pp. 208–09, 405–06.

  87Hyman, Marriner Eccles, passim. Hyman goes so far as to say that “Marriner Eccles is American economic history.” For a good summary of Eccles’s “remarkable intellectual accomplishment” from the hagiographical point of view, see L. Dwight Israelson, “Marriner S. Eccles, Chairman of the Federal Reserve Board,” American Economic Review 75 (May 1985): 357–62.

  88By the time of the depression, Marriner Eccles was president of: the First Security Corporation, the Eccles Investment Company, the First National Bank of Ogden (Utah), the First Savings Bank of Ogden, the Eccles Hotel Company, the Sego Milk Company, the Utah Construction Company, and the Amalgamated Sugar Company.

  89Hyman, Marriner Eccles, p. 107. Israelson is therefore wrong to imply that Eccles confined his statism to the macro sphere. Israelson, “Marriner S. Eccles,” pp. 358–59. Actually, this implication is belied by evidence on the same page of Israelson’s article.

  90Another major firm in this construction consortium was W.A. Bechtel Company. Eccles and Utah Construction had a close association with the Bechtels for many years, often subcontracting construction work to Bechtel in northern California. This association continues to the present day: Eccles’s successor as chairman of Utah Construction, Edmund Littlefield, became a senior director of Bechtel Corporation in the early 1980s.

  The construction of the Boulder Dam was also the occasion for Bechtel to save Stephen Bechtel’s old college chum John A. McCone’s Consolidated Steel from bankruptcy by awarding Consolidated a huge fabricated steel contract in constructing the dam. Bechtel and McCone soon began to collaborate closely with Standard Oil of California in worldwide construction contracts for refineries and oil complexes. McCone went on to become a high public official, including head of the Atomic Energy Commission and of the CIA. Laton McCartney, Friends in High Places: The Bechtel Story (New York: Simon and Schuster, 1988), pp. 34 and passim.

  91Israelson, “Marriner S. Eccles,” p. 358.

  92See Lauchlin Currie, The Supply and Control of Money in the United States, 2nd rev. ed. (Cambridge, Mass.: Harvard University Press, [1934] 1935). Currie’s doctoral thesis proved to be perhaps the most important monetarist work of the pre–World War II period. Currie’s thesis was simple:

  An ideal monetary system from the standpoint of control would be one in which expansions and contractions of the supply of money could be brought about easily and quickly to any required extent.... It appears to the writer that the most perfect control could be achieved by direct government issue of all money, both notes and deposits subject to check. (Ibid., p. 151)

  A history of monetary theory by a leading early monetarist partially acknowledged the importance of Currie’s influenc
e on economic theory. Lloyd W. Mints, A History of Banking Theory (Chicago: University of Chicago Press, 1945). Currie’s vital influence on Eccles and hence on banking legislation in the United States is shown in Hyman, Marriner Eccles, pp. 155 ff., and in Israelson, “Marriner S. Eccles,” p. 358. It is therefore all the more astonishing that there is not a single mention of Currie in Friedman and Schwartz, Monetary History.

  93Hyman, Marriner Eccles, pp. 157–58.

  94Ibid., pp. 167–71.

  95Lauchlin Currie, continuing as economist at the Fed, rose to the post of administrative assistant to President Roosevelt during World War II. There he was recruited as a valuable member of the Silvermaster group of Soviet espionage agents. The group was organized by Board of Economic Warfare official Nathan Gregory Silvermaster, and it included Treasury economist and later director of the International Monetary Fund, Harry Dexter White. After the defection of Soviet agent Elizabeth Bentley after World War II and his naming by Bentley, Lauchlin Currie found it expedient to emigrate to Colombia, spending the rest of his days as economic adviser to the Colombian government. Elizabeth Bentley, Out of Bondage (New York: Ballantine Books, 1988), particularly the “Afterword” by Hayden Peake; and Christopher Andrew and Oleg Gordievsky, KGB: The Inside Story of Its Foreign Operations from Lenin to Gorbachev (New York: Harper Collins, 1990), pp. 281–84, 369–70.

  96Friedman and Schwartz, Monetary History, pp. 445–49.

  97Chernow, House of Morgan, p. 384; Ferguson, “Coming of the New Deal,” pp. 29–30.

  98Henry Parker Willis, The Theory and Practice of Central Banking: With Special Reference to American Experience 1913–1935 (New York: Harper and Brothers, 1936), p. 107.

  99Ibid., p. 108. Marriner Eccles, too, ended up left behind by the New Deal revolution he had helped to lead. Specifically, Eccles could not understand why Truman’s Fair Deal insisted on continuing deficits and monetary inflation even after the depression and World War II were over. Removed by Truman as chairman of the Federal Reserve Board in 1948, Eccles, as a continuing member of the board, was the principal figure in forcing an end, in 1951, to the disastrously inflationary Fed policy of supporting the price of Treasury securities, and hence providing a channel for perpetual monetization of the federal deficit. After leaving the Fed, Eccles went back into the conservative Republican camp. Such is the leftward drift of American politics that he could do so without repudiating any of his New Deal macro positions.

  100Rothbard, “New Deal and International Monetary System,” pp. 105–11. Germany could not devalue the mark, because the German public erroneously blamed foreign exchange devaluation, instead of monetary expansion, for the disastrous runaway inflation of 1923, and devaluation would have been political suicide for any government, even Hitler’s. For a valuable explanation of the workings of the German barter agreements of the 1930s, see Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 796–99. Unfortunately, this section was removed in later editions. [Mises’s original text was reinstated in the scholar’s edition (Auburn, Ala.: Ludwig von Mises Institute, 1998), pp. 796–799.—Ed.]

  101One incident almost marred the success of the Tripartite Agreement. In the fall of 1938, the British began pushing the pound below $4.80. Treasury officials promptly warned Morgenthau that if “sterling drops substantially below $4.80, our foreign and domestic business will be adversely affected.” Morgenthau then successfully insisted that a new trade agreement then being worked out with Britain include a provision that the agreement would end should the British allow the pound to fall below $4.80. Lloyd C. Gardner, Economic Aspects of New Deal Diplomacy (Madison: University of Wisconsin Press, 1964), p. 107.

  102At the Atlantic Conference with Churchill in August 1941, FDR revealingly told his son, Elliott:

  It’s something that’s not generally known, but British bankers and German bankers have had world trade pretty well sewn up in their pockets for a long time.... Well, that’s not so good for world trade, is it?... If in the past German and British economic interests have operated to exclude us from world trade, kept our merchant shipping closed down, closed us out of this or that market, and now Germany and Britain are at war, what should we do? (Robert Freeman Smith, “American Foreign Relations, 1920–1942,” in Toward a New Past, Barton J. Bernstein, ed. [New York: Pantheon, 1968], p. 252)

  See also Gabriel Kolko, The Politics of War: The World and United States Foreign Policy, 1943–45 (New York: Random House, 1968), pp. 248–49; and Rothbard, “New Deal and International Monetary System,” pp. 111–15.

  103Richard N. Gardner, Sterling-Dollar Diplomacy (Oxford: Clarendon Press, 1956), p. 76.

  104Kolko, Politics of War, p. 294. See also Rothbard, “New Deal and International Monetary System,” pp. 112, 120.

  105See the illuminating research of Domhoff, Power Elite, pp. 115ff.; and Laurence H. Shoup and William Minter, Imperial Brain Trust: The Council on Foreign Relations and United States Foreign Policy (New York: Monthly Review Press, 1977).

  106Stettinius chose as his assistant secretary for economic affairs William L. Clayton, chairman and major partner of the cotton export firm, Anderson, Clayton and Company. Clayton had formerly been a leader of the fiercely anti-New Deal Liberty League. Clayton’s major focus in the postwar era was the promotion of American exports, especially cotton; as undersecretary of state he was chiefly responsible for drafting and pushing through the Marshall Plan, which promptly awarded Anderson, Clayton and Company a major cotton export contract. His work in foreign policy accomplished, Clayton could return to private life. Rothbard, “New Deal and International Monetary System,” p. 113.

  107It is no wonder that, in the late 1950s, John Kenneth Galbraith and Richard Rovere dubbed McCloy “Chairman of the Establishment.” Kai Bird, The Chairman: John J. McCloy, the Making of the American Establishment (New York: Simon and Schuster, 1992).

  Part 4

  1Germany, which multiplied its money supply eightfold during the war, would soon spiral into runaway inflation, propelled by accelerated monetization of government deficits and of private credit; France and Austria also went into hyperinflation after the war to a lesser extent than Germany. See Melchior Palyi, The Twilight of Gold 1914–1936 (Chicago: Henry Regnery, 1972), p. 33. See also D.E. Moggridge, British Monetary Policy, 1924–1931: The Norman Conquest of $4.86 (Cambridge: Cambridge University Press, 1972).

  [Previously published in an edited version as “The Gold-Exchange Standard in the Interwar Years,” in Money and the Nation State: The Financial Revolution, Government and the World Monetary System, Kevin Dowd and Richard H. Timberlake, Jr., eds. (New Brunswick, N.J.: Transactions Publishers, 1998), pp. 105–63.—Ed.]

  2Precisely, British currency had traditionally been defined so that one ounce of gold was equal to 77s. 102d. Comparing the prewar ratios of the dollar and the pound to gold, the pound sterling was therefore set at $4.86656. The gold ounce was also set equal to $20.67.

  3See Palyi, Twilight of Gold, pp. 1–21, 118–19. See also David P. Calleo, “The Historiography of the Interwar Period: Reconsiderations,” in Balance of Power or Hegemony: The Interwar Monetary System, Benjamin M. Rowland, ed. (New York: Lehrman Institute and New York University Press, 1976), pp. 227–60. Calleo shows that the pre-1914 gold standard was a genuine, multicentered gold standard, not a British sterling standard.

  4Professor Timberlake misconstrues the historical research of Luigi Einaudi on “imaginary money” in the Middle Ages. Far from showing, as Timberlake believes, that moneys of account can be “imaginary” in relation to media of exchange, they simply reveal various countries’ experiences with various relationships between gold and silver, both commodity moneys. See Luigi Einaudi, “The Theory of Imaginary Money from Charlemagne to the French Revolution,” in Enterprise and Secular Change, F.C. Lane and J.C. Riemersma, eds. (Homewood, Ill.: Richard D. Irwin, 1953), pp. 229–61; Richard Timberlake, Gold, Greenbacks, and the Constitution (Berryville, Va.: George Edward Durell Founda
tion, 1991); and Murray N. Rothbard, “Aurophobia, or Free Banking on What Standard?” Review of Austrian Economics 6, no. 1 (1992): 97–108.

  5Prices during the boom did not necessarily increase in historical terms. If a secular price fall was occurring due to increased production, as happened in much of the nineteenth century, the inflationary boom took the form of prices being higher than they would have been in the absence of the expansion of money and credit.

  6While the United States was the only major power before 1914 to lack a central bank, the quasi-centralized national banking system performed a similar function in the years between the Civil War and 1914. Instead of the government conferring a monopoly note-issuing privilege upon the central bank, the federal government conferred that privilege upon a handful of large, federally chartered “national banks,” located in New York and a few other Eastern financial centers.

  7Palyi, Twilight of Gold, pp. 38–39.

  8For an early English critique of not going back at a realistic par, see Lionel Robbins, The Great Depression (New York: Macmillan, 1934), esp. pp. 77–87.

  9The pound sterling was depreciated by 45 percent before the end of the Napoleonic War. When the war ended, the pound returned nearly to its prewar gold par. This appreciation was caused by (a) a general expectation that Britain would resume the gold standard, and (b) a monetary contraction of 17 percent in one year, from 1815 to 1816, accompanied by a price deflation of 63 percent. See Frank W. Fetter, Development of British Monetary Orthodoxy, 1797–1875 (Cambridge, Mass.: Harvard University Press, 1965).

  10Moggridge, British Monetary Policy, p. 18; and Palyi, Twilight of Gold, p. 75.

  11R.S. Sayers, “The Return to Gold, 1925” (1960) in The Gold Standard and Employment Policies Between the Wars, Sidney Pollard, ed. (London: Metheun, 1970), p. 86.