A History of Money and Banking in the United States: The Colonial Era to World War II (31 page)

To the first charge, the
Investor
fell back on “the experience of the race for, perhaps ninety centuries, [which] has been in the direction of foreign acquisitions as a means of national prosperity.” But, more practically, the
Investor
delighted over the good-ies that imperialism would bring to American business in the way of government contracts and the governmental development of what would now be called the “infrastructure” of the colonies. Furthermore, as in Britain, a greatly expanded diplo-matic service would provide “a new calling for our young men of education and ability.”

To the
Republican’s
second charge, on surplus capital, the
Investor
, like Conant, developed the idea of a new age that had just arrived in American affairs, an age of large-scale and hence overproduction, an age of a low rate of profit, and consequent formation of trusts in a quest for higher profits through suppression of competition. As the
Investor
put it,
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A History of Money and Banking in the United States:
The Colonial Era to World War II

“The excess of capital has resulted in an unprofitable competition. To employ Franklin’s witticism, the owners of capital are of the opinion they must hang together or else they will all hang separately.” But while trusts may solve the problem of specific industries, they did not solve the great problem of a general

“congestion of capital.” Indeed, wrote the
Investor
, “finding employment for capital . . . is now the greatest of all economic problems that confront us.”

To the
Investor
, the way out was clear:

[T]he logical path to be pursued is that of the development of the natural riches of the tropical countries. These countries are now peopled by races incapable on their own initiative of extracting its full riches from their own soil. . . . This will be attained in some cases by the mere stimulus of government and direction by men of the temperate zones; but it will be attained also by the application of modern machinery and methods of culture to the agricultural and mineral resources of the undeveloped countries.35

By the spring of 1901, even the eminent economic theorist John Bates Clark of Columbia University was able to embrace the new creed. Reviewing pro-imperialist works by Conant, Brooks Adams, and the Reverend Josiah Strong in a single cele-bratory review in March 1901 in the
Political Science Quarterly
, Clark emphasized the importance of opening foreign markets and particularly of investing American capital “with an even larger and more permanent profit.”36

J.B. Clark was not the only economist ready to join in apologia for the strong state. Throughout the land by the turn of the twentieth century, a legion of economists and other social scientists had arisen, many of them trained in graduate schools in Germany to learn of the virtues of the inductive method, the German Historical School, and a collectivist, organicist state.

35
The Investor,
19 January 1901, pp. 65–66, cited in Etherington,
Theories
of Imperialism
, p. 17. Also ibid., pp. 7–23.

36Parrini and Sklar, “New Thinking,” p. 565, n. 16.

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Eager for positions and power commensurate with their graduate training, these new social scientists, in the name of professionalism and technical expertise, prepared to abandon the old laissez-faire creed and take their places as apologists and planners in a new, centrally planned state. Professor Edwin R.A.

Seligman of Columbia University, of the prominent Wall Street investment banking family of J. and W. Seligman and Company, spoke for many of these social scientists when, in a presidential address before the American Economic Association in 1903, he hailed the “new industrial order.”37 Seligman prophesied that in the new, twentieth century, the possession of economic knowledge would grant economists the power “to control . . . and mold” the material forces of progress. As the economist proved able to forecast more accurately, he would be installed as “the real philosopher of social life,” and the public would pay “deference to his views.”

In his 1899 presidential address, Yale President Arthur Twining Hadley also saw economists developing as society’s philosopher-kings. The most important application of economic knowledge, declared Hadley, was leadership in public life, becoming advisers and leaders of national policy. Hadley opined, I believe that their [economists’] largest opportunity in the immediate future lies not in theories but in practice, not with students but with statesmen, not in the education of individual citizens, however widespread and salutary, but in the leadership of an organized body politic.38

Hadley perceptively saw the executive branch of the government as particularly amenable to access of position and influence 37Seligman was also related by marriage to the Loebs and to Paul Warburg of Kuhn, Loeb. Specifically, E.R.A. Seligman’s brother, Isaac N., was married to Guta Loeb, sister of Paul Warburg’s wife, Nina. See Stephen Birmingham,
Our Crowd: The Jewish Families of New York
(New York: Pocket Books, 1977), app.

38Quoted in Edward T. Silva and Sheila A. Slaughter,
Serving Power:
The Making of the Academic Social Science Expert
(Westport, Conn.: Greenwood Press, 1984), p. 103.

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

to economic advisers and planners. Previously, executives were hampered in seeking such expert counsel by the importance of political parties, their ideological commitments, and their mass base in the voting population. But now, fortunately, the growing municipal reform (soon to be called the Progressive) movement was taking power away from political parties and putting it into the hands of administrators and experts. The “increased centralization of administrative power [was giving] . . . the expert a fair chance.” And now, on the national scene, the new American leap into imperialism in the Spanish-American War was providing an opportunity for increased centralization, executive power, and therefore for administrative and expert planning. Even though Hadley declared himself personally opposed to imperialism, he urged economists to leap at this great opportunity for access to power.39

The organized economic profession was not slow to grasp this new opportunity. Quickly, the executive and nominating committees of the American Economic Association (AEA) created a five-man special committee to organize and publish a volume on colonial finance. As Silva and Slaughter put it, this new, rapidly put-together volume permitted the AEA to show the power elite how the new social science could serve the interests of those who made imperialism a national policy by offering technical solutions to the immediate fiscal problems of colonies as well as providing ideological justifications for acquiring them.40

Chairman of the special committee was Professor Jeremiah W.

Jenks of Cornell, the major economic adviser to New York Governor Theodore Roosevelt. Another member was Professor E.R.A. Seligman, another key adviser to Roosevelt. A third colleague was Dr. Albert Shaw, influential editor of the
Review of
Reviews,
progressive reformer and social scientist, and longtime crony of Roosevelt’s. All three were longtime leaders of the 39Ibid., pp. 120–21.

40Ibid., p. 133.

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217

American Economic Association. The other two, non-AEA leaders, on the committee were Edward R. Strobel, former assistant secretary of state and adviser to colonial governments, and Charles S. Hamlin, wealthy Boston lawyer and assistant secretary of the Treasury who had long been in the Morgan ambit, and whose wife was a member of the Pruyn family, longtime investors in two Morgan-dominated concerns: the New York Central Railroad and the Mutual Life Insurance Company of New York.

Essays in Colonial Finance
, the volume quickly put together by these five leaders, tried to advise the United States how best to run its newly acquired empire. First, just as the British government insisted when the North American states were its colonies, the colonies should support their imperial government through taxation, whereas control should be tightly exercised by the United States imperial center. Second, the imperial center should build and maintain the economic infrastructure of the colony: canals, railroads, communications. Third, where—as was clearly anticipated—native labor is inefficient or incapable of management, the imperial government should import (white) labor from the imperial center. And, finally, as Silva and Slaughter put it, the committee’s fiscal recommendations strongly intimated that trained economists were necessary for a successful empire. It was they who must make a thorough study of local conditions to determine the correct fiscal system, gather data, create the appropriate administrative design and perhaps even implement it. In this way, the committee seconded Hadley’s views in seeing as an opportunity for economists by identifying a large number of professional positions best filled by themselves.41

With the volume written, the AEA cast about for financial support for its publication and distribution. The point was not simply to obtain the financing, but to do so in such a way as to 41Ibid., p. 135. The volume in question is
Essays in Colonial Finance
(Publications of the American Economic Association, 3rd series, August 1900).

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

gain the imprimatur of leading members of the power elite on this bold move for power to economists as technocratic expert advisers and administrators in the imperial nation-state.

The American Economic Association found five wealthy businessmen to put up $125, two-fifths of the full cost of publishing
Essays in Colonial Finance
. By compiling the volume and then accepting corporate sponsors, several of whom had an economic stake in the new American empire, the AEA was signaling that the nation’s organized economists were (1) wholeheartedly in favor of the new American empire; and (2) willing and eager to play a strong role in advising and administering the empire, a role which they promptly and happily filled, as we shall see in the following section.

In view of the symbolic as well as practical role for the sponsors, a list of the five donors for the colonial finance volume is instructive. One was Isaac N. Seligman, head of the investment banking house of J. and W. Seligman and Company, a company with extensive overseas interests, especially in Latin America.

Isaac’s brother, E.R.A. Seligman, was a member of the special committee on colonial finance and an author of one of the essays in the volume. Another was William E. Dodge, a partner of the copper mining firm of Phelps, Dodge, and Company and member of a powerful mining family allied to the Morgans. A third donor was Theodore Marburg, an economist who was vice president of the AEA at the time, and also an ardent advocate of imperialism as well as heir to a substantial American Tobacco Company fortune. Fourth was Thomas Shearman, a single-taxer and an attorney for powerful railroad magnate Jay Gould. And last but not least, Stuart Wood, a manufacturer who had a Ph.D.

in economics and had been a vice president of the AEA.

CONANT, MONETARY IMPERIALISM,

AND THE GOLD-EXCHANGE STANDARD

The leap into political imperialism by the United States in the late 1890s was accompanied by economic imperialism, and one key to economic imperialism was monetary imperialism. In
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brief, the developed Western countries by this time were on the gold standard, while most of the Third World nations were on the silver standard. For the past several decades, the value of silver in relation to gold had been steadily falling, due to (1) an increasing world supply of silver relative to gold, and (2) the subsequent shift of many Western nations from silver or bimetallism to gold, thereby lowering the world’s demand for silver as a monetary metal.

The fall of silver value meant monetary depreciation and inflation in the Third World, and it would have been a reasonable policy to shift from a silver-coin to a gold-coin standard.

But the new imperialists among U.S. bankers, economists, and politicians were far less interested in the welfare of Third World countries than in foisting a monetary imperialism upon them.

For not only would the economies of the imperial center and the client states then be tied together, but they would be tied in such a way that these economies could pyramid their own monetary and bank credit inflation on top of inflation in the United States.

Hence, what the new imperialists set out to do was to pressure or coerce Third World countries to adopt, not a genuine gold-coin standard, but a newly conceived “gold-exchange” or dollar standard.

Instead of silver currency fluctuating freely in terms of gold, the silver-gold rate would then be fixed by arbitrary government price-fixing. The silver countries would be silver in name only; a country’s monetary reserve would be held, not in silver, but in dollars allegedly redeemable in gold; and these reserves would be held, not in the country itself, but as dollars piled up in New York City. In that way, if U.S. banks inflated their credit, there would be no danger of losing gold abroad, as would happen under a genuine gold standard. For under a true gold standard, no one and no country would be interested in piling up claims to dollars overseas. Instead, they would demand payment of dollar claims in gold. So that even though these American bankers and economists were all too aware, after many decades of experience, of the fallacies and evils of bimetallism, they were
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A History of Money and Banking in the United States:
The Colonial Era to World War II

willing to impose a form of bimetallism upon client states in order to tie them into U.S. economic imperialism, and to pressure them into inflating their own money supplies on top of dollar reserves supposedly, but not de facto redeemable in gold.