A History of Money and Banking in the United States: The Colonial Era to World War II (30 page)

The close Rockefeller-Stillman alliance was cemented by the marriage of the two daughters of Stillman to the two sons of William Rockefeller, brother of John D. Rockefeller, Sr., and longtime board member of the National City Bank.28

The meeting with the comptroller did not bear fruit, but the lead instead was taken by the secretary of the Treasury himself, Leslie Shaw, formerly presiding officer at the second Indianapolis Monetary Convention, whom President Roosevelt appointed to replace Lyman Gage. The unexpected and sudden shift from McKinley to Roosevelt in the presidency meant more than just a turnover of personnel; it meant a fundamental shift from a Rockefeller-dominated to a Morgan-dominated administration.

In the same way, the shift from Gage to Shaw was one of the many Rockefeller-to-Morgan displacements.

On monetary and banking matters, however, the Rockefeller and Morgan camps were as one. Secretary Shaw attempted to continue and expand Gage’s experiments in trying to make the Treasury function like a central bank, particularly in making open market purchases in recessions, and in using Treasury deposits to bolster the banks and expand the money supply.

Shaw violated the statutory institution of the independent Trea-26Baker was head of the Morgan-dominated First National Bank of New York, and served as a director of virtually every important Morgan-run enterprise, including: Chase National Bank, Guaranty Trust Company, Morton Trust Company, Mutual Life Insurance Company, AT&T, Consolidated Gas Company of New York, Erie Railroad, New York Central Railroad, Pullman Company, and United States Steel. See Burch,
Elites
, pp. 190, 229.

27On the meeting, see Livingston,
Origins
, p. 155.

28Burch,
Elites
, pp. 134–35.

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

sury, which had tried to confine government revenues and expenditures to its own coffers. Instead, he expanded the practice of depositing Treasury funds in favored big national banks.

Indeed, even banking reformers denounced the deposit of Treasury funds to pet banks as artificially lowering interest rates and leading to artificial expansion of credit. Furthermore, any government deficit would obviously throw a system dependent on a flow of new government revenues into chaos. All in all, the reformers agreed increasingly with the verdict of economist Alexander Purves, that “the uncertainty as to the Secretary’s power to control the banks by arbitrary decisions and orders, and the fact that at some future time the country may be unfortunate in its chief Treasury official . . . [has] led many to doubt the wisdom” of using the Treasury as a form of central bank.29

In his last annual report of 1906, Secretary Shaw urged that he be given total power to regulate all the nation’s banks. But the game was up, and by then it was clear to the reformers that Shaw’s as well as Gage’s proto–central bank manipulations had failed. It was time to undertake a struggle for a fundamental legislative overhaul of the American banking system to bring it under central banking control.30

CHARLES A. CONANT, SURPLUS CAPITAL,

AND ECONOMIC IMPERIALISM

The years shortly before and after 1900 proved to be the beginnings of the drive toward the establishment of a Federal Reserve System. It was also the origin of the gold-exchange standard, the fateful system imposed upon the world by the British in the 1920s and by the United States after World War II at Bretton Woods. Even more than the case of a gold standard 29Livingston,
Origins
, p. 156. See also ibid., pp. 161–62.

30On Gage’s and Shaw’s manipulations, see Rothbard, “Federal Reserve,” pp. 94–96; and Milton Friedman and Anna Jacobson Schwartz,
A Monetary History of the United States, 1867–1960
(Princeton, N.J.: National Bureau of Economic Research, 1963), pp. 148–56.

The Origins of the Federal Reserve

209

with
a central bank, the gold-exchange standard establishes a system, in the name of gold, which in reality manages to install coordinated international inflationary paper money. The idea was to replace a genuine gold standard, in which each country (or, domestically, each bank) maintains its reserves in gold, by a pseudo-gold standard in which the central bank of the client country maintains its reserves in some key or base currency, say pounds or dollars. Thus, during the 1920s, most countries maintained their reserves in pounds, and only Britain purported to redeem pounds in gold. This meant that these other countries were really on a pound rather than a gold standard, although they were able, at least temporarily, to acquire the prestige of gold. It also meant that when Britain inflated pounds, there was no danger of losing gold to these other countries, who, quite the contrary, happily inflated their own currencies on top of their expanding balances in pounds sterling. Thus, there was generated an unstable, inflationary system—all in the name of gold—

in which client states pyramided their own inflation on top of Great Britain’s. The system was eventually bound to collapse, as did the gold-exchange standard in the Great Depression and Bretton Woods by the late 1960s. In addition, the close ties based on pounds and then dollars meant that the key or base country was able to exert a form of economic imperialism, joined by its common paper and pseudo-gold inflation, upon the client states using the key money.

By the late 1890s, groups of theoreticians in the United States were working on what would later be called the “Lenin-ist” 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 idea was that capitalism in the developed countries was “overproducing,” not simply in the sense that more purchasing power was needed in recessions, but more deeply in that the rate of profit was therefore inevitably falling. The ever lower rate of profit from the “surplus capital” was in danger of
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A History of Money and Banking in the United States:
The Colonial Era to World War II

crippling capitalism, except that salvation loomed in the form of foreign markets and especially foreign investments. New and expanded foreign markets would increase profits, at least temporarily, while investments in undeveloped countries would be bound to bring a high rate of profit. 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.

Given this doctrine—based on the fallacious Ricardian view that the rate of profit is determined by the stock of capital investment, instead of by the time preferences of everyone in society—

there was little for Lenin to change except to give an implicit moral condemnation instead of approval and to emphasize the necessarily temporary nature of the respite imperialism could furnish for capitalists.31

Charles Conant set forth the theory of surplus capital in his
A
History of Modern Banks of Issue
(1896) and developed it in subsequent essays. The existence of fixed capital and modern technology, Conant claimed, invalidated Say’s Law and the concept of equilibrium, and led to chronic “oversavings,” which he defined as savings in excess of profitable investment outlets, in the developed Western capitalist world. Business cycles, opined Conant, were inherent in the unregulated activity of modern industrial capitalism. Hence the importance of government-encouraged monopolies and cartels to stabilize markets and the 31Indeed, the adoption of this theory of the alleged necessity for imperialism in the “later stages” of capitalism went precisely from pro-imperialists like the
U.S. Investor,
Charles A. Conant, and Brooks Adams in 1898–99, read and adopted by the Marxist H. Gaylord Wilshire in 1900–01, in turn read and adopted by the English left-liberal anti-imperialist John A.

Hobson, who in turn influenced Lenin. See in particular Norman Etherington,
Theories of Imperialism: War, Conquest, and Capital
(Totowa, N.J.: Barnes and Noble, 1984). See also Etherington, “Reconsidering Theories of Imperialism,”
History and Theory
21, no. 1 (1982): 1–36.

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211

business cycle, and in particular the necessity of economic imperialism to force open profitable outlets abroad for American and other Western surplus capital.

The United States’s bold venture into an imperialist war against Spain in 1898 galvanized the energies of Conant and other theoreticians of imperialism. Conant responded with his call for imperialism in “The Economic Basis of Imperialism” in the September 1898
North American Review
, and in other essays collected in
The United States in the Orient: The Nature of the Economic Problem
and published in 1900. S.J. Chapman, a distinguished British economist, accurately summarized Conant’s argument as follows: (1) “In all advanced countries there has been such excessive saving that no profitable investment for capital remains,” (2) since all countries do not practice a policy of commercial freedom, “America must be prepared to use force if necessary” to open up profitable investment outlets abroad, and (3) the United States possesses an advantage in the coming struggle, since the organization of many of its industries “in the form of trusts will assist it greatly in the fight for commercial supremacy.”32

The war successfully won, Conant was particularly enthusiastic about the United States keeping the Philippines, the gate-way to the great potential Asian market. The United States, he opined, should not be held back by “an abstract theory” to adopt

“extreme conclusions” on applying the doctrines of the Founding Fathers on the importance of the consent of the governed.

The Founding Fathers, he declared, surely meant that self-government could only apply to those competent to exercise it, a requirement that clearly did not apply to the backward people of the Philippines. After all, Conant wrote, “Only by the firm hand of the responsible governing races . . . can the assurance of 32Review of Charles A. Conant’s
The United States in the Orient
, by S.J.

Chapman in
Economic Journal
2 (1901): 78. See Etherington,
Theories of
Imperialism
, p. 24.

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The Colonial Era to World War II

uninterrupted progress be conveyed to the tropical and undeveloped countries.”33

Conant also was bold enough to derive important domestic conclusions from his enthusiasm for imperialism. Domestic society, he claimed, would have to be transformed to make the nation as “efficient” as possible. Efficiency, in particular, meant centralized concentration of power. “Concentration of power, in order to permit prompt and efficient action, will be an almost essential factor in the struggle for world empire.” In particular, it was important for the United States to learn from the magnificent centralization of power and purpose in Czarist Russia.

The government of the United States would require “a degree of harmony and symmetry which will permit the direction of the whole power of the state toward definite and intelligent policies.” The U.S. Constitution would have to be amended to permit a form of czarist absolutism, or at the very least an enormously expanded executive power in foreign affairs.34

An interesting case study of business opinion energized and converted by the lure of imperialism was the Boston weekly, the
U.S. Investor
. Before the outbreak of war with Spain in 1898, the
U.S. Investor
denounced the idea of war as a disaster to business.

But after the United States launched its war, and Commodore Dewey seized Manila Bay, the
Investor
totally changed its tune.

Now it hailed the war as excellent for business, and as bringing about recovery from the previous recession. Soon the
Investor
was happily advocating a policy of “imperialism” to make U.S.

prosperity permanent. Imperialism conveyed marvelous benefits to the country. At home, a big army and navy would be valuable in curbing the tendency of democracy to enjoy “a too great freedom from restraint, both of action and of thought.” The
Investor
added that “European experience demonstrates that the 33David Healy,
U.S. Expansionism: The Imperialist Urge in the 1890s
(Madison: University of Wisconsin Press, 1970), pp. 200–01.

34Ibid., pp. 202–03.

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213

army and navy are admirably adopted to inculcate orderly habits of thought and action.”

But an even more important benefit from a policy of permanent imperialism is economic. To keep “capital . . . at work,” stern necessity requires that “an enlarged field for its product must be discovered.” Specifically, “a new field” had to be found for selling the growing flood of goods produced by the advanced nations, and for investment of their savings at profitable rates.

The
Investor
exulted in the fact that this new “field lies ready for occupancy. It is to be found among the semi-civilized and bar-barian races,” in particular the beckoning country of China.

Particularly interesting was the colloquy that ensued between the
Investor,
and the
Springfield (Mass.) Republican
, which still propounded the older theory of free trade and laissez-faire. The
Republican
asked why trade with undeveloped countries was not sufficient without burdening U.S. taxpayers with administrative and military overhead. The
Republican
also attacked the new theory of surplus capital, pointing out that only two or three years earlier, businessmen had been loudly calling for more European capital to be invested in American ventures.