A History of Money and Banking in the United States: The Colonial Era to World War II (2 page)

Introduction

11

always interpreted in terms of the motivations of those who have contributed to their formation. For Rothbard, a particular price datum is, no less than the Spanish-American War, a
historical event,
and its causes must be traced back to the subjective aims governing human plans and choices.

In flatly rejecting the positivist approach to economic history, Rothbard adopts the method of historical research first formulated by Ludwig von Mises. In developing this method, Mises correctly delineated, for the first time, the relationship between theory and history. It is Rothbard’s great contribution in this volume—and his earlier
America’s Great Depression
—to be the first to consistently apply it to economic history.4 It is worth summarizing this method here for several reasons. First, Mises’s writings on the proper method of historical research have inexplica-bly been almost completely ignored up to the present, even by those who have adopted Mises’s praxeological approach in economics.5 Second, familiarity with Mises’s method of historical research illuminates the source and character of the remarkable distinctiveness of Rothbard’s historical writings. In particular, it serves to correct the common but mistaken impression that Rothbard’s historical writings, especially on the origin and development of the U.S. monetary system, are grounded in nothing more substantial than an idiosyncratic “conspiracy theory of history.” Third, it gives us an opportunity to elucidate the important elaboration of Mises’s method that Rothbard contributed and which he deploys to great effect in explicating the topic of this volume. And finally, we find in Mises’s method a 4Murray N. Rothbard,
America’s Great Depression
, 5th ed. (Auburn, Ala.: Mises Institute, 2000).

5As Rothbard has written of
Theory and History
, the book in which Mises gives this method its most detailed exposition, this work “has made remarkably little impact, and has rarely been cited even by the young economists of the recent Austrian revival. It remains by far the most neglected masterwork of Mises.” Murray N. Rothbard, Preface to Ludwig von Mises’s
Theory and History: An Interpretation of Social and
Economic Evolution
, 2nd ed. (Auburn, Ala.: Mises Institute, 1985), p. xi.

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

definitive refutation of the positivist’s claim that it is impossible to acquire real knowledge of subjective phenomena like human motives and that, therefore, economic history must deal exclusively with observable and measurable phenomena.

To begin with, Mises grounds his discussion of historical method on the insight that ideas are the primordial stuff of history. In his words:

History is the record of human action. Human action is the conscious effort of man to substitute more satisfactory conditions for less satisfactory ones. Ideas determine what are to be considered more and less satisfactory conditions and what means are to be resorted to to alter them. Thus ideas are the main theme of the study of history.6

This is not to say that all history should be intellectual history, but that ideas are the ultimate cause of all social phenomena, including and especially economic phenomena. As Mises puts it, The genuine history of mankind is the history of ideas. It is ideas that distinguish man from all other beings. Ideas engender social institutions, political changes, technological methods of production, and all that is called economic conditions.7

Thus, for Mises, history

establishes the fact that men, inspired by definite ideas, made definite judgments of value, chose definite ends, and resorted to definite means in order to attain the ends chosen, and it deals furthermore with the outcome of their actions, the state of affairs the action brought about.8

Ideas—specifically those embodying the purposes and values that direct action—are not only the point of contact 6Ibid., pp. 224–25.

7Ibid., p. 187.

8Ludwig von Mises,
The Ultimate Foundation of Economic Science: An
Essay on Method
, 2nd ed. (Kansas City, Mo.: Sheed Andrews and McMeel, 1978), p. 45.

Introduction

13

between history and economics, but differing attitudes toward them are precisely what distinguish the methods of the two disciplines. Both economics and history deal with individual choices of ends and the judgments of value underlying them.

On the one hand, economic theory as a branch of praxeology takes these value judgments and choices as given data and restricts itself to logically inferring from them the laws governing the valuing and pricing of the means or “goods.” As such, economics does not inquire into the individual’s motivations in valuing and choosing specific ends. Hence, contrary to the positivist method, the truth of economic theorems is substantiated apart from and without reference to specific and concrete historical experience. They are the conclusions of logically valid deduction from universal experience of the fact that humans adopt means that they believe to be appropriate in attaining ends that they judge to be valuable.9

The subject of history, on the other hand, “is action and the judgments of value directing action toward definite ends.”10

This means that for history, in contrast to economics, actions and value judgments are not ultimate “givens” but, in Mises’s words, “are the starting point of a specific mode of reflection, of the specific understanding of the historical sciences of human action.” Equipped with the method of “specific understanding,” the historian, “when faced with a value judgment and the resulting action . . . may try to understand how they originated in the mind of the actor.”11

9It is true that in deriving theorems that apply to the specific conditions characterizing human action in our world, a few additional facts of a lesser degree of generality are inserted into the deductive chain of reasoning. These include the facts that there exists a variety of natural resources, that human labor is differentiated, and that leisure is valued as a consumer’s good. See Mises,
Human Action
; Rothbard,
The Logic of
Action I
; and Hoppe,
Economic Science and the Austrian Method.

10Mises,
Theory and History
, p. 298.

11Ibid., p. 310.

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

The difference between the methods of economics and history may be illustrated with the following example. The economist qua economist “explains” the Vietnam War-era inflation that began in the mid-1960s and culminated in the inflationary recession of 1973–1975 by identifying those actions of the Fed with respect to the money supply that initiated and sustained it.12 The historian, including the economic historian, however, must identify and then assign weights to all those factors that
motivated
the various members of the Fed’s Board of Governors (or of the Federal Open Market Committee) to adopt this course of action. These factors include: ideology; partisan politics; pressure exerted by the incumbent administration; the grasp of economic theory; the expressed and perceived desires of the Fed’s constituencies, including commercial bankers and bond dealers; the informal power and influence of the Fed chairman within the structure of governance; and so on.

In short, the economic historian must supply the motives underlying the actions that are relevant to explaining the historical event. And for this task, his only suitable tool is understanding. Thus, as Mises puts it,

The scope of understanding is the mental grasp of phenomena which cannot be totally elucidated by logic, mathematics, praxeology, and the natural sciences to the extent that they cannot be cleared up by all these sciences.13

To say that a full explanation of any historical event, including an economic one, requires that the method of specific understanding be applied is not to diminish the importance of pure economic theory in the study of history. Indeed, as Mises points out, economics

12Some economists would date this inflation from 1965 to 1979, but the precise dates do not matter for our present purposes. See, for example, Thomas Mayer,
Monetary Policy and the Great Inflation in the United
States: The Federal Reserve and the Failure of Macroeconomic Policy
(Northampton, Mass.: Edward Elgar, 1999).

13Mises,
Human Action
, p. 50.

Introduction

15

provides in its field a consummate interpretation of past events recorded and a consummate anticipation of the effects to be expected from future actions of a definite kind.

Neither this interpretation nor this anticipation tells anything about the actual content and quality of the actual individuals’ judgments of value. Both presuppose that the individuals are valuing and acting, but their theorems are independent of and unaffected by the particular characteristics of this valuing and acting.14

For Mises, then, if the historian is to present a complete explanation of a particular event, he must bring to bear not only his “specific understanding” of the motives of action but the theorems of economic science as well as those of the other

“aprioristic,” or nonexperimental, sciences, such as logic and mathematics. He must also utilize knowledge yielded by the natural sciences, including the applied sciences of technology and therapeutics.15 Familiarity with the teachings of all these disciplines is required in order to correctly identify the causal relevance of a particular action to a historical event, to trace out its specific consequences, and to evaluate its success from the point of view of the actor’s goals.

For example, without knowledge of the economic theorem that, ceteris paribus, changes in the supply of money cause inverse changes in its purchasing power, a historian of the price inflation of the Vietnam War-era probably would ignore the Fed and its motives altogether. Perhaps, he is under the influence of the erroneous Galbraithian doctrine of administered prices with its implication of cost-push inflation.16 In this case, he might concentrate exclusively and irrelevantly on the motives of union leaders in demanding large wage increases and on the objectives of the “technostructure” of large business firms in 14Mises,
Theory and History
, p. 309.

15Ibid., p. 301.

16John Kenneth Galbraith,
The New Industrial State
(New York: New American Library, 1967), pp. 189–207, 256–70.

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

acceding to these demands and deciding what part of the cost increase to pass on to consumers. Thus, according to Mises, If what these disciplines [i.e., the aprioristic and the natural sciences] teach is insufficient or if the historian chooses an erroneous theory out of several conflicting theories held by the specialists, his effort is misled and his performance is abortive.17

But what exactly is the historical method of specific understanding, and how can it provide true knowledge of a wholly subjective and unobservable phenomenon like human motivation? First of all, as Mises emphasizes, the specific understanding of past events is

not a mental process exclusively resorted to by historians. It is applied by everybody in daily intercourse with all his fellows. It is a technique employed in all interhuman relations.

It is practiced by children in the nursery and kindergarten, by businessmen in trade, by politicians and statesmen in affairs of state. All are eager to get information about other people’s valuations and plans and to appraise them correctly.18

The reason this technique is so ubiquitously employed by people in their daily affairs is because all action aims at rear-ranging future conditions so that they are more satisfactory from the actor’s point of view. However, the future situation that actually emerges always depends partly on the purposes and choices of others besides the actor. In order to achieve his ends, then, the actor must anticipate not only changes affecting the future state of affairs caused by natural phenomena, but also the changes that result from the conduct of others who, like him, are contemporaneously planning and acting.19

17Mises,
Theory and History
, p. 301.

18Ibid., p. 265.

19As Mises puts it, “Understanding aims at anticipating future conditions as far as they depend on human ideas, valuations, and actions.” Mises,
Ultimate Foundation
, p. 49.

Introduction

17

Understanding the values and goals of others is thus an inescapable prerequisite for successful action.

Now, the method that provides the individual planning action with information about the values and goals of other actors is essentially the same method employed by the historian who seeks knowledge of the values and goals of actors in bygone epochs. Mises emphasizes the universal application of this method by referring to the actor and the historian as “the historian of the future” and “the historian of the past,” respectively.20 Regardless of the purpose for which it is used, therefore, understanding

aims at establishing the facts that men attach a definite meaning to the state of their environment, that they value this state and, motivated by these judgments of value, resort to definite means in order to preserve or to attain a definite state of affairs different from that which would prevail if they abstained from any purposeful reaction. Understanding deals with judgments of value, with the choice of ends and of the means resorted to for the attainment of these ends, and with the valuation of the outcome of actions performed.21

Furthermore, whether directed toward planning action or interpreting history, the exercise of specific understanding is not an arbitrary or haphazard enterprise peculiar to each individual historian or actor; it is the product of a discipline that Mises calls “thymology,” which encompasses “knowledge of human valuations and volitions.”22 Mises characterizes this discipline as follows: