A History of Money and Banking in the United States: The Colonial Era to World War II (32 page)

The United States first confronted the problem of silver currencies in a Third World country when it seized control of Puerto Rico from Spain in 1898 and occupied it as a permanent colony. Fortunately for the imperialists, Puerto Rico was already ripe for currency manipulation. Only three years earlier, in 1895, Spain had destroyed the full-bodied Mexican silver currency that its colony had previously enjoyed and replaced it with a heavily debased silver “dollar,” worth only 41¢ in U.S. currency. The Spanish government had pocketed the large seigniorage profits from that debasement. The United States was therefore easily able to substitute its own debased silver dollar, worth only 45.6¢ in gold. Thus, the United States silver currency replaced an even more debased one and also the Puerto Ricans had no tradition of loyalty to a currency only recently imposed by the Spaniards. There was therefore little or no opposition in Puerto Rico to the U.S. monetary takeover.42

The major controversial question was what exchange rate the American authorities would fix between the two debased coins: the old Puerto Rican silver peso and the U.S. silver dollar. This was the rate at which the U.S. authorities would compel the Puerto Ricans to exchange their existing coinage for the new American coins. The treasurer in charge of the currency reform for the U.S. government was the prominent Johns Hopkins economist Jacob H. Hollander, who had been special commissioner to revise Puerto Rican tax laws, and who was one of the new breed of academic economists repudiating laissez-faire for comprehensive statism. The heavy debtors in Puerto Rico—

mainly the large sugar planters—naturally wanted to pay their 42See the illuminating article by Emily S. Rosenberg, “Foundations of United States International Financial Power: Gold Standard Diplomacy, 1900–1905,”
Business History Review
59 (Summer 1985): 172–73.

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peso obligations at as cheap a rate as possible; they lobbied for a peso worth 50¢ American. In contrast, the Puerto Rican banker-creditors wanted the rate fixed at 75¢. Since the exchange rate was arbitrary anyway, Hollander and the other American officials decided in the time-honored way of governments: more or less splitting the difference, and fixing a peso equal to 60¢.43

The Philippines, the other Spanish colony grabbed by the United States, posed a far more difficult problem. As in most of the Far East, the Philippines was happily using a perfectly sound silver currency, the Mexican silver dollar. But the United States was anxious for a rapid reform, because its large armed forces establishment suppressing Filipino nationalism required heavy expenses in U.S. dollars, which it of course declared to be legal tender for payments. Since the Mexican silver coin was also legal tender and was cheaper than the U.S. gold dollar, the U.S.

military occupation found its revenues being paid in unwanted and cheaper Mexican coins.

Delicacy was required, and in 1901, for the task of currency takeover, the Bureau of Insular Affairs (BIA) of the War Department—the agency running the U.S. occupation of the Philippines—hired Charles A. Conant. Secretary of War Elihu Root was a redoubtable Wall Street lawyer in the Morgan ambit who sometimes served as J.P. Morgan’s personal attorney. Root took a personal hand in sending Conant to the Philippines. Conant, 43Also getting their start in administering imperialism in Puerto Rico were economist and demographer W.H. Willcox of Cornell, who conducted the first census on the island as well as in Cuba in 1900, and Roland P.

Falkner, statistician and bank reformer first at the University of Pennsylvania, and then head of the Division of Documents at the Library of Congress. Faulkner became commissioner of education in Puerto Rico in 1903, then went on to head the U.S. Commission to Liberia in 1909 and to be a member of the Joint Land Commission of the U.S. and Chinese governments. Harvard economist Thomas S. Adams served as assistant treasurer to Hollander in Puerto Rico. Political scientist William F.

Willoughby succeeded Hollander as treasurer (Silva and Slaughter,
Serving Power
, pp. 137–38).

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

fresh from the Indianapolis Monetary Commission and before going to New York as a leading investment banker, was, as might be expected, an ardent gold-exchange-standard imperialist as well as the leading theoretician of economic imperialism.

Realizing that the Filipino people loved their silver coins, Conant devised a way to impose a gold U.S. dollar currency upon the country. Under his cunning plan, the Filipinos would continue to have a silver currency; but replacing the full-bodied Mexican silver coin would be an American silver coin tied to gold at a debased value far less than the market exchange value of silver in terms of gold. In this imposed, debased bimetallism, since the silver coin was deliberately overvalued in relation to gold by the U.S. government, Gresham’s Law inexorably went into effect. The overvalued silver would keep circulating in the Philippines, and undervalued gold would be kept sharply out of circulation.

The seigniorage profit that the Treasury would reap from the debasement would be happily deposited at a New York bank, which would then function as a “reserve” for the U.S. silver currency in the Philippines. Thus, the New York funds would be used for payment outside the Philippines instead of as coin or specie. Moreover, the U.S. government could issue paper dollars based on its new reserve fund.

It should be noted that Conant originated the gold-exchange scheme as a way of exploiting and controlling Third World economies based on silver. At the same time, Great Britain was introducing similar schemes in its colonial areas in Egypt, in Straits Settlements in Asia, and particularly in India.

Congress, however, pressured by the silver lobby, balked at the BIA’s plan. And so the BIA again turned to the seasoned public relations and lobbying skills of Charles A. Conant.

Conant swung into action. Meeting with editors of the top financial journals, he secured their promises to write editorials pushing for the Conant plan, many of which he obligingly wrote himself. He was already backed by the American banks
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of Manila. Recalcitrant U.S. bankers were warned by Conant that they could no longer expect large government deposits from the War Department if they continued to oppose the plan.

Furthermore, Conant won the support of the major enemies of his plan, the American silver companies and pro-silver bankers, promising them that if the Philippine currency reform went through, the federal government would buy silver for the new U.S. coinage in the Philippines from these same companies.

Finally, the tireless lobbying, and the mixture of bribery and threats by Conant, paid off: Congress passed the Philippine Currency Bill in March 1903.

In the Philippines, however, the United States could not simply duplicate the Puerto Rican example and coerce the conversion of the old for the new silver coinage. The Mexican silver coin was a dominant coin not only in the Far East but throughout the world, and the coerced conversion would have been endless. The U.S. tried; it removed the legal tender privilege from the Mexican coins, and decreed the new U.S. coins be used for taxes, government salaries, and other government payments. But this time the Filipinos happily used the old Mexican coins as money, while the U.S. silver coins disappeared from circulation into payment of taxes and transactions to the United States.

The War Department was beside itself: How could it drive Mexican silver coinage out of the Philippines? In desperation, it turned to the indefatigable Conant, but Conant couldn’t join the colonial government in the Philippines because he had just been appointed to a more far-flung presidential commission on international exchange for pressuring Mexico and China to go on a similar gold-exchange standard. Hollander, fresh from his Puerto Rican triumph, was ill. Who else? Conant, Hollander, and several leading bankers told the War Department they could recommend no one for the job, so new then was the profession of technical expertise in monetary imperialism. But there was one more hope, the other pro-cartelist and financial imperialist, Cornell’s Jeremiah W. Jenks, a fellow member with Conant
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A History of Money and Banking in the United States:
The Colonial Era to World War II

of President Roosevelt’s new Commission on International Exchange (CIE). Jenks had already paved the way for Conant by visiting English and Dutch colonies in the Far East in 1901 to gain information about running the Philippines. Jenks finally came up with a name, his former graduate student at Cornell, Edwin W. Kemmerer.

Young Kemmerer went to the Philippines from 1903 to 1906

to implement the Conant plan. Based on the theories of Jenks and Conant, and on his own experience in the Philippines, Kemmerer went on to teach at Cornell and then at Princeton, and gained fame throughout the 1920s as the “money doctor,” busily imposing the gold-exchange standard on country after country abroad.

Relying on Conant’s behind-the-scenes advice, Kemmerer and his associates finally came out with a successful scheme to drive out the Mexican silver coins. It was a plan that relied heavily on government coercion. The United States imposed a legal prohibition on the importation of the Mexican coins, followed by severe taxes on any private Philippine transactions daring to use the Mexican currency. Luckily for the planners, their scheme was aided by a large-scale demand at the time for Mexican silver in northern China, which absorbed silver from the Philippines or that would have been smuggled into the islands. The U.S. success was aided by the fact that the new U.S.

silver coins, perceptively called “conants” by the Filipinos, were made up to look very much like the cherished old Mexican coins. By 1905, force, luck, and trickery had prevailed, and the conants (worth 50¢ in U.S. money) were the dominant currency in the Philippines. Soon the U.S. authorities were confident enough to add token copper coins and paper conants as well.44

44See Rosenberg, “Foundations,“ pp. 177–81. Other economists and social scientists helping to administer imperialism in the Philippines were: Carl C. Plehn of the University of California, who served as chief statistician to the Philippine Commission in 1900–01, and Bernard Moses,
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By 1903, the currency reformers felt emboldened enough to move against the Mexican silver dollar throughout the world. In Mexico itself, U.S. industrialists who wanted to invest there pressured the Mexicans to shift from silver to gold, and they found an ally in Mexico’s powerful finance minister, Jose Limantour. But tackling the Mexican silver peso at home would not be an easy task, for the coin was known and used throughout the world, particularly in China, where it formed the bulk of the circulating coinage. Finally, after three-way talks between United States, Mexican, and Chinese officials, the Mexicans and Chinese were induced to send identical notes to the U.S. secretary of state, urging the United States to appoint financial advisers to bring about currency reform and stabilized exchange rates with the gold countries.45

These requests gave President Roosevelt, upon securing congressional approval, the excuse to appoint in March 1903 a three-man Commission on International Exchange to bring about currency reform in Mexico, China, and the rest of the silver-using world. The aim was “to bring about a fixed relationship between the moneys of the gold-standard countries and the present silver-using countries,” in order to foster “export trade historian, political scientist, and economist at the University of California, an ardent advocate of imperialism who served on the Philippine Commission from 1901 to 1903, and then became an expert in Latin American affairs, joining in a series of Pan American conferences. Political scientist David P. Barrows became superintendent of schools in Manila and director of education for eight years, from 1901 to 1909. This experience ignited a lifelong interest in the military for Barrows, who, while a professor at Berkeley and a general in the California National Guard in 1934, led the troops that broke the San Francisco longshoremen’s strike.

During World War II, Barrows carried over his interest in coercion to help in the forced internment of Japanese Americans in concentration camps.

On Barrows, see Silva and Slaughter,
Serving Power
, pp. 137–38. On Moses, see Dorfman,
Economic Mind
, pp. 96–98.

45Parrini and Sklar, “New Thinking,” pp. 573–77; Rosenberg, “Foundations,” p. 184.

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The Colonial Era to World War II

and investment opportunities” in the gold countries and economic development in the silver countries.

The three members of the CIE were old friends and like-minded colleagues. Chairman was Hugh H. Hanna, of the Indianapolis Monetary Commission; the others were his former chief aide at that commission, Charles A. Conant, and Professor Jeremiah W. Jenks. Conant, as usual, was the major theoretician and finagler. He realized that major opposition to Mexico’s and China’s going off silver would come from the important Mexican silver industry, and he devised a scheme to get European countries to purchase large amounts of Mexican silver to ease the pain of the shift.

In a trip to European nations in the summer of 1903, however, Conant and the CIE found the Europeans less than enthusiastic about making Mexican silver purchases as well as subsidizing U.S. exports and investments in China, a land whose market they too were coveting. In the United States, on the other hand, major newspapers and financial periodicals, prodded by Conant’s public relations work, warmly endorsed the new currency scheme.

In the meanwhile, however, the United States faced similar currency problems in its two new Caribbean protectorates, Cuba and Panama. Panama was easy. The United States occupied the Canal Zone, and would be importing vast amounts of equipment to build the canal, so it decided to impose the American gold dollar as the currency in the nominally independent Republic of Panama. While the gold dollar was the official currency of Panama, the United States imposed as the actual medium of exchange a new debased silver peso worth 50¢. Fortunately, the new peso was almost the same in value as the old Colombian silver coin it forcibly displaced, and so, like Puerto Rico, the takeover could go without a hitch.