Inflation and Mercantilism in America: Five Cases

By: Murray N. Rothbard
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If inflation is the health of the State, how and in what way has government generated inflation in the history of the United States? The following case studies illustrate this process, as well as the important connection between inflation and centralized State control of the economy. They illustrate also the connection of inflation with mercantilism—the use of economic regulation and intervention by the State to create special privileges for a favored group of merchants or businessmen. Until very recently, conservative as well as left-wing historians have accepted the neo-Marxian myth that struggles over inflation and hard money in America have all been “class struggles” of the farmers and workers (“debtor classes”) in favor of inflation, as against merchant-creditors on behalf of hard money. The case studies indicate how recent historical scholarship has refuted this widely accepted thesis.

The Massachusetts Land Bank of 1740

One inflationist paper-money scheme, the Massachusetts Land Bank of 1740, has generally been regarded by historians as a plan instituted by a mass of small farmer-debtors, over the opposition of the merchant-creditors of Boston. This stereotype was first fashioned by the contemporary opponents of the plan, who dismissed the proponents of the bank as “plebeians”; it was systematized by such conservative economic historians as Andrew M. Davis, writing at a time when agrarian Populist inflationism was a threat to sound finance, and then taken over by neo-Marxist historians in the 1930s, to become established in the history textbooks. Actually, as Dr. Billias has shown in an important paper, the major proponents of the plan were as wealthy and as connected with business as its opponents; merchants were debtors too, and the chief advocates of a land bank “were all businessmen, politicians, or professional men residing in Boston”; the leading proponent of the plan was John Colman, a prominent Boston merchant and the founder of the Massachusetts Land Bank. Colman, indeed, tried to stir up support among the farmers by promising them that the inflation arising from the establishment of the bank would raise the prices of farm products. Businessmen were particularly eager for inflation after 1720, because after that date the Massachusetts government adopted a policy of granting unsettled frontier land to speculators, who then sold these lands to the actual settlers at far higher prices. Expanded bank credit was wanted to finance business speculation in government land grants as well as to raise land prices. Joined with inflation was another mercantilist feature: a subsidy to home manufacturing, through permitting repayment of bank debts in certain specified manufactured commodities.1

Nicholas Biddle, Planner and Central Banker

The famous Bank War between Andrew Jackson and the Second Bank of the United States has also suffered grievous misinterpretation by historians. Jackson has been considered a wild-eyed agrarian inflationist, out to wreck conservative “sound finance,” as represented by Nicholas Biddle, head of the Bank. Here, again, this interpretation began with Jackson’s contemporary enemies, was forged amidst conservative battles with agrarian Populists in the late nineteenth century, and then was adopted—with heroes and villains, of course, reversed—by the neo-Marxist historians of the 1920s and 1930s. Actually, as recent historians have pointed out, the true ancestor of the New Deal was not Andrew Jackson but his opponents, including Nicholas Biddle. Biddle, son of a leading merchant of Philadelphia, enthusiastically embraced the mercantilist “American System” of the Whigs. Biddle’s mercantilist views emerge clearly from the eulogistic biography by Professor Govan, who writes:

Biddle’s study of political economy led him to reject the doctrines of the classical liberals. . . . He had seen too clearly during the course of the War of 1812 and its aftermath how business activity responded to the expansion and contraction of the money supply to believe that economic activity was governed by natural laws with which men interfered at their peril. He advocated a protective tariff for national reasons, primarily to free the country from economic domination by England. . . . Wages and profits of workers and factory owners could be maintained at higher levels than the world outside, and farmers and merchants would receive recompense in the large and constantly increasing home market….Internal improvements and a national bank were essential elements in such a program. The construction of roads and canals and the improvement of rivers and harbors would facilitate the movement of goods and people, and the Bank of the United States, by providing a uniform currency and regulating the rates of domestic exchange, would similarly facilitate the pecuniary aspects of these same transactions.

No single mind created this concept of a predominantly private economy which was directed, supported, and controlled in the public interest by responsible national authorities. Its origin was the state papers of Alexander Hamilton.2

Stephen Colwell, Conservative Socialist

The neglected mercantilistic affinities of conservatism and socialism have never been better illustrated than in the case of a leading protectionist ideologue of the first half of the nineteenth century, Stephen Colwell.3 Colwell was an important Pennsylvania ironmaster and was prominent in railroad investments. Iron manufacture, of course, was always a leading beneficiary of the protective tariff and of bank credit expansion as well.4 In a series of articles published during the 1840s in the Presbyterian Biblical Repertory and Princeton Review, Colwell “attempted to weld together in the name of Christianity the proslavery, the high-tariff, pro-bank, and anti-democratic forces of the nation.” Colwell fulminated against the “moneyed power” (commerce), which “must be regulated by a judicious tariff or it will consult its own greedy interest, regardless of the sufferings it imposes on labor in the process,” the laborer, “crushed, starved, and cast aside by bitter competition,” is a worse “slave” than the slave in the South.5 In fact, the slave benefits from slavery and would benefit still more from high tariffs. A wise and proper protective tariff would also enable men to fix prices not cheaply, but with reference to the quantity of labor expended on the product. Laissez-faire was denounced by Colwell as abstract and as emphasizing selfishness and materialism rather than religion, morals, history, and the well-being of the whole man The laissez-faire theorists, in fact, wickedly placed the “claims of free trade” higher than the “claims of labor,” which include the protection and discipline of the slave system. Colwell also wrote “The government alone can survey the whole field of national industry and ascertain the condition of all the laborers how many are suffering from the influx of foreign products.”

In the 1850s Colwell concentrated on denunciation of hard money, a call for a central bank to regulate the currency, and demand for inconvertible paper money. In fact, under Colwell’s scheme, banks would not have to redeem their notes, being obligated only to receive their own notes in repayments of debt. Colwell denied that his contemplated inflation would increase prices greatly: the quantity theory of money was the product of “theorists” and was disproved by statistics. And anyway, high prices, even if they do follow, are beneficial, especially if joined with a high tariff to ensure that foreign competition will not disturb the idyll of high prices and high wages. Colwell denounced the banking system, with notes payable in specie, as “falsely predicated upon the assumption that whenever our importers, in consequence of having overtraded, must meet a heavily adverse balance, the business community as a whole should be denied its usual bank accommodation.”6

Inflation and Protectionism in the Reconstruction Period

Another myth that has dominated the ranks of historians until very recently is the neo-Marxist Beard-Beale concept of the Reconstruction period as the exploitation of the defeated South by the “rising capitalist class” of the North. The “exploitation” was supposed to have been imposed largely through sound money and the protective tariff. Here again, historians were guilty of reading back ideological and political conditions that had been obtained only after 1890. In fact, as a few historians have recently demonstrated, the Northern capitalists were split in their opinion of the Reconstruction program, and the Radical Republicans themselves were split on the issues of sound money and the tariff. Of the two famous leaders of the Radicals, Senator Charles Sumner favored hard money and free trade, while Representative Thaddeus Stevens, Pennsylvania iron-master, favored protection and the greenbacks. Once again, the Pennsylvania iron and steel industry was in the forefront of the battle for protection and for greenback inflationism. The Pennsylvanians realized that, in a period of inconvertible greenback money, inflation — and the consequent depreciation of greenbacks compared to gold and foreign exchange—was the equivalent of a protective tariff, in its artificial cheapening of American exports and making dear of American imports. Representative William D. (“Pig Iron”) Kelley of Pennsylvania was another leading devotee of greenback inflation and a protective tariff.

The Pennsylvania iron and steel interests feared the lower-cost competition of Great Britain. They were joined in backing protection and greenbacks by the marginal Pennsylvania coal industry, which feared the import of low-cost, Nova Scotia coal, and by stock speculators such as Henry Clews, who desired inflationary credit for the financing of stock speculation and the raising of stock prices. Nor were the wealthy mercantilist partisans above the use of anti-capitalist rhetoric.

Stephen Colwell was again active in the cause. And Representative Daniel J. Morrell, a leading iron manufacturer from Pennsylvania, attacked the hard-money forces as “enemies of the workingman” and as “money men, who wish to give their money more power over labor and its products.”7 Joseph Wharton, of the Bethlehem Iron Company, accused the hard-money Treasury policy of resuming specie payment as being engineered “by our English enemies.”8 The cause of protection and inflation was also persistently backed by the American Iron and Steel Association, the Union Meeting of American Iron Masters, the American Industrial League (composed largely of Pennsylvania ironmasters) and its organ Industrial Bulletin, as well as the magazines The American Manufacturer (Pittsburgh) and Iron Age.

One of the leading advocates of cheap money during this period was the prominent banker Jay Cooke. Cooke, a recipient of government land grants in his railroad ventures, benefited from inflation and credit expansion that drove up the price of land. Incidentally, Cooke had been a driving force behind the creation of the National Banking System during the Civil War, an innovation which brought federal control over the banking system for the first time since Jackson’s abolition of the Second Bank of the United States. Cooke was hired by the North to be the leading underwriter of government bonds, and he thereupon worked for the establishment of a national banking system whose reserves would rest on government bonds, thus forcing the banks to invest heavily in (Cooke’s) bonds.9

Paul Warburg, the Acceptance Market and the Federal Reserve System

From its inception the Federal Reserve System, curiously enough, set out to create a market for acceptance paper, a form of credit that scarcely existed in this country (in contrast to Europe). It was uneconomical in the United States, where credit channels preferred another form entirely: single-name promissory notes. Yet the “Fed” granted an enormous subsidy to the acceptance market by standing ready to buy any acceptances offered by the market—and at a specially favorable price, cheaper than the Federal Reserve’s ordinary rediscounts. This policy of unconditional support and subsidy of the acceptance market proved disastrous in the boom of the late 1920s, several times preventing the Federal Reserve from halting its expansion of credit. During the late l920s the Federal Reserve, purchasing acceptances in this way directly from private acceptance banks, came to hold almost half of the bankers’ acceptances outstanding in the country.10 Furthermore, it confined its generous subsidy policy to a few large  acceptance houses. It refused to buy acceptances directly from business, insisting on purchasing them from intermediary acceptance houses, and from only those with a capital of over $1 million. It also granted a few large dealers “repurchase agreements”—the option to buy back the acceptances at the current price.

What was the reason for this policy, which proved highly inflationary, failed in the ultimate attempt to create a permanent and widespread acceptance market, and constituted a flagrant form of subsidy and special privilege to the major acceptance banks? Perhaps the reason centers around the leading role played in the creation of the Federal Reserve System by Paul M. Warburg, one of the system’s founders. Warburg came from Germany, where central banking was well established, to become a partner in the investment banking house of Kuhn, Loeb, and Company, and promptly embarked on a campaign on behalf of central banking in the United States.

Warburg was named first chairman of the Federal Reserve Board. After the war and during the 1920s he continued to be chairman of the influential Federal Advisory Council, a statutory group of bankers advising the Federal Reserve System. Interestingly enough, Warburg also became one of the nation’s leading acceptance bankers, thus benefiting greatly from the system he helped found and whose course he helped set. He was Chairman of the Board of International Acceptance Bank of New York, the world’s largest acceptance bank, was a director of the important Westinghouse Acceptance Bank and of several other acceptance houses, and was chief founder and chairman of the Executive Committee of the American Acceptance Council, a trade association organized in 1919. To write of Warburg’s influence is not far-fetched speculation, for he himself boasted of his success in persuading the Federal Reserve to loosen eligibility rules for purchase of acceptances and to establish its policy of buying all acceptances offered at a subsidized rate.11 Furthermore, Warburg had considerable influence on Benjamin Strong, head of the Federal Reserve Bank of New York, which in these years virtually set the policy of the Federal Reserve.

In these case studies we have seen that inflationism and State control of the monetary system have, in many critical periods of American history, been proposed and established, not by “workers and farmers” nor even by disaffected intellectuals, but by groups of merchants, manufacturers, and other businessmen eager to acquire special privilege, to use the State for their own advantage—in short, by men who were essentially modern mercantilists. This mercantilist drive has played a much greater role in the general movement toward statism and central planning than is generally recognized.

Excerpted from Money, the State, and Modern Mercantilism in Economic Controversies. Originally appeared in Modern Age 7, no. 3 (Summer, 1963): 279–89.
  • 1. George Athan Billias, “The Massachusetts Land Bankers of 1740,” University of Maine Bulletin (April 1959).
  • 2. Thomas Payne Govan, Nicholas Biddle: Nationalist and Public Banker, 1786–1844 (Chicago: University of Chicago Press, 1959), pp. 70–71; cf. pp. 50, 65.
  • 3. For an illuminating discussion of Colwell, see Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1946), vol. 2, pp. 809–26.
  • 4. The first prominent political leader of the organized protectionist movement in America, Representative Henry Baldwin, was a prominent Pittsburgh iron manufacturer. Baldwin, indeed, was dubbed the “Father of the American System.” See Murray N. Rothbard, The Panic of 1819: Reactions and Policies (New York: Columbia University Press, 1962), pp. 164ff.
  • 5. Ibid., pp. 811–12.
  • 6. Harry E. Miller, Banking Theories in the United States Before 1860 (Cambridge, Mass.: Harvard University Press, 1927), p. 138; cf. pp. 135–38.
  • 7. Robert P. Sharkey, Money, Class, and Party (Baltimore, Maryland: Johns Hopkins University Press, 1959), p. 159n
  • 8. Irwin Unger, “Business Men and Specie Resumption,” Political Science Quarterly (March 1959): 53.
  • 9. Sharkey, Money, Class, and Party, pp. 245ff. For other works of historical revision on this topic, see, in addition to Unger, “Business Men and Specie Resumption,” pp. 46–70; Stanley Coben, “Northeastern Business and Radical Reconstruction: A Re-examination,” Mississippi Valley Historical Review (June 1959): 67–90; Irwin Unger, “Review of Robert P. Sharkey, Money, Class and Party,” Political Science Quarterly (June 1960); and Julius Grodinsky, “Review of Robert P. Sharkey,” Mississippi Valley Historical Review (June 1960).
  • 10. 18See Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, D.C.: Brookings Institution, 1932), pp. 243–63. Hardy was certainly correct in concluding (p. 263) that “Nothing has been gained by forcing the acceptance form of credit into uses in which it cannot compete on its own merits.”
  • 11. n his presidential address before the American Acceptance Council, January 19, 1923. See Paul M. Warburg, The Federal Reserve System (New York: Macmillan, 1930), vol. 2, p. 822.

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