Banking, Flesh, and Blood
A History of Money and Banking in the United States: From the Colonial Era to World War II
Murray N. Rothbard, Edited by Joseph T. Salerno, Mises Institute, 2002, 510 pgs.
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 history of 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; 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 by no means was 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. "Debtors benefit from inflation and creditors lose; realizing this fact, older historians assumed that debtors were largely poor agrarians and creditors were wealthy merchants and that therefore the former were the main sponsors of inflationary nostrums. But of course, there are no rigid 'classes' of creditors and debtors; indeed, wealthy merchants and land speculators are often the heaviest debtors" (p. 58).
Bankers, then, favor monetary expansion; but why should the rest of us oppose it? Do we not require an "elastic" currency to deal with the failure of prices quickly to adjust to changing business conditions? Not at all, answers Rothbard. "As 'Austrian' business cycle theory has pointed out, any bank credit inflation creates conditions of boom-and-bust" (p. 94).
"Suppose all this is true," we can imagine an expansionist protesting. "Do we not still need monetary expansion to rescue us from recession?" Rothbard demurs; in his view, the business liquidations that accompany recessions are precisely the cure for the preceding boom. Efforts to interfere with these liquidations through inflation will induce another cycle.
Although Austrian theory provides the framework for Rothbard's history, its intricacies are not at the heart of the book. Let us then return to what I found the book's most valuable historical contribution, the discussion of the Morgan bank and its influence.
Rothbard makes clear that the Morgan interests aimed at much more than profits. To this very powerful group, the interests of Great Britain and her empire were paramount; and the Morgan bank constantly aimed to subordinate the interests of the United States to this superior power. After the onset of World War I, "the Morgans played a substantial role in bringing the United States into the war on Britain's side, and, as head of the Fed, Benjamin Strong obligingly doubled the money supply to finance America's role in the war effort" (p. 270).
Rothbard's point serves to introduce a story within the larger story of Morgan influence. Benjamin Strong, the Governor of the New York Federal Reserve Bank, was by far the most influential figure in the entire Federal Reserve system from its inception until his death in 1928. He entered into close association with Montagu Norman, Governor of the Bank of England. Both men had enlisted in the Morgan camp: "While the close personal relations between Strong and Norman were of course highly important for the collaboration that formed the international monetary world of the 1920s, it should not be overlooked that both were intimately bound to the House of Morgan" (p. 374).
At Norman's behest, Strong inflated the U.S. monetary supply, in order to enable Britain to maintain in operation the gold-exchange standard. By doing so, Rothbard claims, Strong bears heavy responsibility for the onset of the 1929 stock market crash and the ensuing depression. "The United States inflated its money and credit in order to prevent inflationary Britain from losing gold to the United States, a loss which would endanger the new, jerry-built 'gold standard' structure. The result, however, was eventual collapse of money and credit in the U.S. and abroad, and a worldwide depression. Benjamin Strong was the Morgans's architect of a disastrous policy of inflationary boom that led inevitably to bust" (p. 271).
Rothbard goes even further in his assault on Federal Reserve inflationism. Contrary to Milton Friedman, the Federal Reserve did not follow a contractionist policy once the depression began. Rothbard assails "the spuriousness of the monetarist legend that the Federal Reserve was responsible for the great contraction of money from 1929 to 1933. On the contrary, the Fed and the administration tried their best to inflate, efforts foiled by the good sense, and by the increasing mistrust of the banking system, of the American people" (p. 275).
The book's narrative is a complex one, and by no means reduces to an account of the vicissitudes of the House of Morgan. A rival banking group, consisting most importantly of Rockefeller interests, challenged it for supremacy. For Rothbard, the New Deal can best be viewed as the victory of the Rockefeller group. Although the Morgans recovered some of their influence after the mid-1930s, they henceforward occupied a subordinate position.
Throughout the book, Rothbard pursues with tenacity a biographical method of analysis that stresses the ties of influential figures to central financial groups, such as the Morgans. In his intricate tracing of patrons and clients, Rothbard brings to mind the great works of Ronald Syme and Lewis Namier. But Rothbard has the advantage over these renowned historians in that he does not restrict himself to the amassing of biographical detail. He has in addition a carefully worked out theory, Austrian economics, to guide him. I have endeavored in this review to mirror Rothbard's constant movement between detail and general theory, but I have at best been able to provide a small taste of this outstanding book.