The Struggle for the Control of the Nation's Money

by David Gordon
by David Gordon
Recently by David Gordon: Woods Tells the Story of the Meltdown

A History of Money and Banking in the United States: From the Colonial Era to World War II. By Murray N. Rothbard, edited by Joseph T. Salerno. Mises Institute, 2002. 510 pages.

Murray Rothbard had a remarkable ability to throw unexpected light on historical controversies. Again and again in his work, he pointed out factors that earlier authors had overlooked. After Rothbard has finished with a topic, we can never see it in the same way again. This talent is much in evidence in the present book, a collection of several long articles by Rothbard that together constitute a comprehensive look at American monetary history for the period indicated in the book's title.

An example will illustrate Rothbard's technique. Everyone knows Lenin's theory of imperialism. Developed capitalist economies, Lenin maintained, characteristically produce more than they can sell domestically. To find an outlet for their surplus goods, capitalists seek markets abroad. Their endeavors bring about a struggle for colonies; thus, the "highest stage" of capitalism is imperialism.

So much is well known; but how did Lenin arrive at this account? Rothbard has unearthed a surprising source. The theory stems ultimately from capitalist supporters of imperialism:

By the late 1890s, groups of theoreticians in the United States were working on what would later be called the "Leninist" theory of capitalist imperialism. The theory was originated, not by Lenin but by advocates of imperialism, centering around such Morgan-oriented friends and brain trusters of Theodore Roosevelt as Henry Adams, Brooks Adams, Admiral Alfred T. Mahan, and Massachusetts Senator Henry Cabot Lodge. … The ever lower rate of profit from the "surplus capital" was in danger of crippling capitalism, except that salvation loomed in the form of foreign markets and especially foreign investments. … Hence, to save advanced capitalism, it was necessary for Western governments to engage in outright imperialist or neo-imperialist ventures, which would force other countries to open their markets for American products and would force open investment opportunities abroad. (pp. 209–10)

I have concentrated on this detail, not only for its own sake, but because from it, we can see in operation several themes in Rothbard's conception of American financial history. Most obviously, he agrees with Michelet that history is a resurrection of the flesh. Not for him are impersonal trends and forces: history always involves the motives and actions of particular persons. (Professor Salerno, in his excellent introduction, explains the theoretical basis for Rothbard's stress on the particular.)

To illustrate, Rothbard does not confine himself to a general statement of the monopoly capitalist origins of the Leninist theory. He describes in great detail the activities of Charles Conant, a leading advocate of imperialism. Conant, it transpires, did much more than theorize. He actively worked to install the gold-exchange standard, a key tool of American monetary imperialism, in Latin America and elsewhere. Rothbard describes Conant's activities in his unique style: "Conant, as usual, was the major theoretician and finagler" (p. 226).

Neither as theorist nor practitioner did Conant act on his own, and to see why not enables us to grasp a central plank of Rothbard's edifice:

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. (pp. 232–33)

Rothbard maintains that the House of Morgan held effective control of the American government for much of the late nineteenth and early twentieth centuries, down to the onset of Roosevelt's New Deal in 1933. He traces in detail Morgan backing for a central bank, culminating in the creation of the Federal Reserve System in 1913.

Through an overwhelming mass of detail, Rothbard makes his case; but a question here arises. Why did the Morgan interests (or anyone else, for that matter) wish to establish a central banking system?

Our author explains the main reason in great detail. A central banking system vastly increases the ability of bankers to lend more money than they possess in reserves. Absent central control, monetary expansion in a fractional reserve system faces limits. If a bank, desiring to increase its profits, expands too much, rival banks will call in its notes. If it cannot meet its obligations, it will collapse. A central banking system removes this obstacle.

The House of Morgan was by no means the first group in American history to seek the ill-gotten gains of centralized banking; Rothbard discusses in great detail, e.g., the struggles over the First and Second Banks of the United States.

Throughout his narrative, Rothbard stresses a point vital to the understanding of monetary history: A popular belief holds that poor people, likely to be in debt, favor easy money, while their rich creditors oppose it. Often, this turns out to be the reverse of the truth.

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