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




The Ludwig von Mises Institute dedicates this volume to all of its generous donors and wishes to thank these Patrons, in particular:

George W. Connell

James L. Bailey,
James Bailey Foundation
; Robert Blumen; Christopher P. Condon;

John William Galbraith; Hugh E. Ledbetter; Frederick L. Maier; Mr. and Mrs. R. Nelson Nash Richard Bleiberg; John Hamilton Bolstad;

Mr. and Mrs. J.R. Bost; Mr. and Mrs. Willard Fischer; Douglas E. French; Albert L. Hillman, Jr.; L. Charles Hilton, Jr.; Mr. and Mrs. Truman Johnson; Neil Kaethler; Robert Kealiher; Dr. Preston W. Keith; David Kramer; Mr. and Mrs. William W. Massey, Jr.; Hall McAdams; Dr. Dorothy Donnelley Moller; Francis Powers, M.D.; Donald Mosby Rembert; James M. Rodney;

Joseph P. Schirrick; James Whitaker, M.D.

J. Terry Anderson,
Anderson Chemical Company
; Mr. and Mrs. Ross K. Anderson; Toby O. Baxendale; Robert Bero; Dr. V.S. Boddicker; Dr. John Brätland; John Cooke; Carl Creager; Capt. and Mrs. Maino des Granges; Clyde Evans,
Evans Cabinet Corporation
; Elton B. Fox,
The Fox Foundation
; James W. Frevert; Larry R. Gies; Frank W. Heemstra; Donald L. Ifland; Dr. and Mrs. John W. Johnson; Richard J. Kossmann, M.D.; Alfonso Landa; John Leger; Arthur L. Loeb; Ronald Mandle;

Ellice McDonald, Jr., CBE, and Rosa Hayward McDonald, CBE; Norbert McLuckie; In honor of Mikaelah S. Medrano; Joseph Edward Paul Melville;

Dr. and Mrs. Donald Miller; Reed W. Mower; Terence Murphree,
United Steel Structures
; James O’Neill; Victor Pankey; Catherine Dixon Roland; John Salvador; Conrad Schneiker; Mark M. Scott;

Robert W. Smiley, Jr.,
Benefit Capital Companies
; Jack DeBar Smith; Val L. Tennent; David W. Tice; Lawrence Van Someren, Sr.; Dr. Jim Walker; Mr. and Mrs. Quinten E. Ward; Dr. Thomas L. Wenck; Keith S. Wood; Steven Lee Yamshon; Jeannette Zummo





Cover art:
Wall Street, 1886
. Permission for use of this print is granted to the Ludwig von Mises Institute by Old World Prints, Ltd.

Copyright © 2002 by the Ludwig von Mises Institute All rights reserved. Written permission must be secured from the publisher to use or reproduce any part of this book, except for brief quotations in critical reviews or articles. For information, write the Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36849-5301; www.mises.org.

ISBN: 0-945466-33-1



. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Joseph T. Salerno


The History of Money and Banking

Before the Twentieth Century . . . . . . . . . . . . . . . . . . . . . . . 45


The Origins of the Federal Reserve . . . . . . . . . . . . . . . . . . . . . 179


From Hoover to Roosevelt:

The Federal Reserve and the Financial Elites . . . . . . . . . . 259


The Gold-Exchange Standard

in the Interwar Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347


The New Deal and the

International Money System . . . . . . . . . . . . . . . . . . . . . . . . 431

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491



In this volume, Murray Rothbard has given us a comprehensive history of money and banking in the United States, from colonial times to World War II, the first to explicitly use the interpretive framework of Austrian monetary theory. But even aside from the explicitly Austrian theoretical framework under-girding the historical narrative, this book does not “look” or

“feel” like standard economic histories as they have been written during the past quarter of a century, under the influence of the positivistic “new economic history” or “cliometrics.” The focus of this latter approach to economic history, which today completely dominates this field of inquiry, is on the application of high-powered statistical methods to the analysis of quantitative economic data. What profoundly distinguishes Rothbard’s approach from the prevailing approach is his insistence upon treating economic quantities and processes as unique and complex historical events. Thus, he employs the laws of economic theory in conjunction with other relevant disciplines to trace each event back to the nonquantifiable values and goals of the particular actors involved. In Rothbard’s view, economic laws can be relied upon in interpreting these nonrepeatable historical events because the validity of these laws—or, better yet, their truth—can be established with certainty by praxeology, a science based on the universal experience of human action that is logically anterior to the experience of particular historical


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

episodes.1 It is in this sense that it can be said that economic theory is an
a priori

In sharp contrast, the new economic historians view history as a laboratory in which economic theory is continually being tested. The economic quantities observed at different dates in history are treated like the homogeneous empirical data generated by a controlled and repeatable experiment. As such, they are used as evidence in statistical tests of hypotheses regarding the causes of a class of events, such as inflations or financial crises, that are observed to recur in history. The hypothesis that best fits the evidence is then tentatively accepted as providing a valid causal explanation of the class of events in question, pending future testing against new evidence that is constantly emerging out of the unfolding historical process.

One of the pioneers of the new economic history, Douglass C.

North, a Nobel Prize-winner in economics, describes its method in the following terms:

It is impossible to analyze and explain the issues dealt with in economic history without developing initial hypotheses and testing them in the light of available evidence. The initial hypotheses come from the body of economic theory that has evolved in the past 200 years and is being continually tested and refined by empirical inquiry. The statistics provide the precise measurement and empirical evidence by which to test the theory.
The limits of inquiry are dictated by the
existence of appropriate theory and evidence
. . . . The evidence is, ideally, statistical data that precisely define and measure the issues to be tested.2

1For good discussions of praxeology, see Ludwig von Mises,
Action: A Treatise on Economics,
Scholar’s Edition (Auburn, Ala.: Mises Institute, 1998), pp. 1–71; Murray N. Rothbard,
The Logic of Action I:
Method, Money, and the Austrian School
(Cheltenham, U.K.: Edward Elgar, 1997), pp. 28–77; and Hans-Hermann Hoppe,
Economic Science and the
Austrian Method
(Auburn, Ala.: Mises Institute, 1995).

2Douglass C. North,
Growth and Welfare in the American Past: A
New Economic History
(Englewood Cliffs, N.J.: Prentice-Hall, 1966), pp. 1–2 (emphasis in original).



This endeavor of North and others to deliberately extend the positivist program to economic history immediately confronts two problems. First, as North emphasizes, this approach narrowly limits the kinds of questions that can be investigated in economic history. Those issues which do not readily lend themselves to formulation in quantitative terms or for which statistical data are not available tend to be downplayed or neglected altogether. Thus the new economic historians are more likely to seek answers to questions like: What was the net contribution of the railroad to the growth of real GNP in the United States? Or, what has been the effect of the creation of the Federal Reserve System on the stability of the price level and real output? They are much less likely to address in a meaningful way the questions of what
the huge government land grants for railroad rights-of-way or the passage of the Federal Reserve Act.

In general, the question of
“Cui bono?”
—or “Who benefits?”—from changes in policies and institutions receives very little attention in the cliometric literature, because the evidence that one needs to answer it, bearing as it does on human motives, is essentially subjective and devoid of a measurable or even quantifiable dimension. This is not to deny that new economic historians have sought to explain the
ex post
aggregate distribution of income that results from a given change in the institutional framework or in the policy regime. What their method precludes them from doing is identifying the
ex ante
purposes as well as ideas about the most efficacious means of accomplishing these purposes that motivated the specific individuals who lobbied for or initiated the change that effected a new income distribution. However, avoiding such questions leaves the quantitative data themselves ultimately unexplained.

The reason is that the institutions that contribute to their formation, such as the railroads or the Fed, are always the complex resultants of the purposive actions of particular individuals or groups of individuals aimed at achieving definite goals by the use of specific means. So the new economic history is not history in the traditional sense of an attempt to “understand” the

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

human motives underlying the emergence of economic institutions and processes.

The second and even more profound flaw in the new economic history is the relationship it posits between theory and history. For North, history is the source of the “empirical evidence”—that is, “ideally, statistical data”—against which the economic theory is tested. This means that the claim to validity of a particular theorem is always tentative and defeasible, resting as it does on its nonfalsification in previous empirical tests.

However, this also means that economic history must be continually revised, because the very theory which is employed to identify the causal relations between historical events can always be falsified by new evidence coming to light in the ongoing historical process. In other words, what the new economic historians characterize as “the intimate relationship between measurement and theory” is in reality the vicious circle that ensnares all attempts to invoke positivist precepts in the interpretation of history.3 For if the theory used to interpret past events can always be invalidated by future events, then it is unclear whether theory is the
or the
in historical research.

Rothbard’s approach to monetary history does not focus on measurement but on motives. Once the goals of the actors and their ideas about the appropriate means for achieving these goals have been established, economic theory, along with other sciences, is brought to bear to trace out the effects of these actions in producing the complex events and processes of history which are only partially and imperfectly captured in statistical data. This is not to say that Rothbard ignores the quantitative aspects of historical monetary processes. Indeed, his book abounds with money, price, and output data; but these data are 3Robert William Fogel, “The New Economic History: Its Findings and Methods,” in
The Reinterpretation of American History,
Robert William Fogel and Stanley L. Engerman, eds. (New York: Harper and Row, 1971), p. 7.

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