A History of Money and Banking in the United States: The Colonial Era to World War II (4 page)

37Ibid.

38See, for example, David Eakins, “Business Planners and America’s Postwar Expansion,” in
Corporations and the Cold War,
David Horowitz, ed. (New York: Modern Reader, 1969), pp. 143–71.

39Rothbard, “Economic Determinism,” p. 4.

Introduction

25

historian must be equipped with a worldview—an interrelated set of ideas about the causal relationships governing how the world works—in order to ascertain which facts are relevant in the explanation of a particular historical event. According to Rothbard, “Facts, of course, must be selected and ordered in accordance with judgments of importance, and such judgments are necessarily tied into the historian’s basic world outlook.”40

Specifically, in Mises’s approach to history, the worldview comprises the necessary preconceptions regarding causation with which the historian approaches the data and which are derived from his knowledge of both the aprioristic and natural sciences. According to Mises:

History is not an intellectual reproduction, but a condensed representation of the past in conceptual terms. The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only
relevant
facts. He does not approach the documents without presuppositions, but equipped with the whole apparatus of his age’s scientific knowledge, that is, with all the teachings of contemporary logic, mathematics, praxeology, and natural science.41

So, for example, the fact that heavy speculation against the German mark accompanied its sharp plunge on foreign-exchange markets is not significant for an Austrian-oriented economic historian seeking to explain the stratospheric rise in commodity prices that characterized the German hyperinflation of the early 1920s. This is because he approaches this event armed with the supply-and-demand theory of money and the purchasing-power–parity theory of the exchange rate.

40Murray N. Rothbard,
Conceived in Liberty,
vol. 1,
A New Land, A New
People: The American Colonies in the Seventeenth Century,
2nd ed. (Auburn, Ala.: Mises Institute, 1999), p. 9.

41Mises,
Human Action
, pp. 47–48.

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

These “presuppositions” derived from praxeology lead him to avoid any attribution of causal significance to the actions of foreign exchange speculators in accounting for the precipitous decline of the domestic purchasing power of the mark. Instead they direct his attention to the motives of the German Reichsbank in expanding the money supply. In the same manner, a modern historian investigating the cause and dissemination of bubonic plague in fourteenth-century Europe would presuppose that the blossoming of religious heresy during that period would have no significance for his investigation.

Instead he would allow himself to be guided by the conclusions of modern medical science regarding the epidemiology of the disease.

The importance of Rothbard’s theoretical guide is that it adds something completely new to the historian’s arsenal of scientific preconceptions that aids him in making judgments of relevance when investigating the motives of those who promote or oppose specific political actions. The novelty and brilliance of this guide lies in the fact that it is neither a purely aprioristic law like an economic theorem nor an experimentally established “fact” of the natural sciences. Rather it is a socio-logical generalization grounded on a creative blend of thymological experience and economic theory. At the core of this generalization is the insight that the State throughout history has been essentially an organization of a segment of the population that forsakes peaceful economic activity to constitute itself as a ruling class. This class makes its living parasitically by establishing a permanent hegemonic or “political” relationship between itself and the productive members of the population.

This political relationship permits the rulers to subsist on the tribute or taxes routinely and “legally” expropriated from the income and wealth of the producing class. The latter class is composed of the “subjects” or, in the case of democratic states, the “taxpayers,” who earn their living through the peaceful

“economic means” of production and voluntary exchange. In contrast, constituents of the ruling class may be thought of as

“tax-consumers” who earn their living through the coercive
Introduction

27

“political means” of taxation and the sale of monopoly privileges.42

Rothbard argues that economic logic dictates that the king and his courtiers, or the democratic government and its special interest groups, can never constitute more than a small minority of the country’s population—that all States, regardless of their formal organization, must effectively involve oligarchic rule.43 The reasons for this are twofold. First, the fundamentally parasitic nature of the relationship between the rulers and the ruled by itself necessitates that the majority of the population engages in productive activity in order to be able to pay the tribute or taxes extracted by the ruling class while still sustaining its own existence. If the ruling class comprised the majority of the population, economic collapse and systemic breakdown would swiftly ensue as the productive class died out. The majoritarian ruling class itself then would either be forced into productive activity or dissolve into internecine warfare aimed at establishing a new and more stable—that is, oligarchic—relationship between rulers and producers.

The second reason why the ruling class tends to be an oligarchy is related to the law of comparative advantage. In a world where human abilities and skills vary widely, the division of labor and specialization pervades all sectors of the economy as well as society as a whole. Thus, not only is it the case that a relatively small segment of the populace possesses a comparative advantage in developing new software, selling 42For expositions of the view of the origin and nature of the state as a coercive organization of the political means for acquiring income, see Franz Oppenheimer,
The State
(New York: Free Life Editions, [1914] 1975); Albert J. Nock,
Our Enemy, The State
(New York: Free Life Editions, [1935]

1973); and Murray N. Rothbard,
For a New Liberty: The Libertarian
Manifesto,
2nd ed. (San Francisco: Fox and Wilkes, 1996), pp. 45–69.

43Rothbard,
For a New Liberty
, pp. 49–50; and idem, “Economic Determinism,” pp. 4–5.

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

mutual funds, or playing professional football, it is also the case that only a fraction of the population tends to excel at wielding coercive power. Moreover, the law of comparative advantage governs the structure of relationships within as well as between organizations, accounting for the hierarchical structure that we almost invariably observe within individual organizations.

Whether we are considering a business enterprise, a chess club, or a criminal gang, an energetic and visionary elite invariably comes to the fore, either formally or informally, to lead and direct the relatively inert majority. This “Iron Law of Oligarchy,” as this internal manifestation of the law of comparative advantage has been dubbed, operates to transform an initially majoritarian democratic government, or even a decentralized republican government, into a tightly centralized State controlled by a ruling elite.44

The foregoing analysis leads Rothbard to conclude that the exercise of political power is inherently an oligarchic enterprise.

The small minority that excels in wielding political power will tend to coalesce and devote an extraordinary amount of mental energy and other resources to establishing and maintaining a permanent and lucrative hegemonic bond over the productive majority. Accordingly, since politics is the main source of their income, the policies and actions of the members of this oligarchic ruling class will be driven primarily by economic motives. The exploited producing class, in contrast, will not expend nearly as many resources on politics, and their actions in the political arena will not be motivated by economic gain to the same degree, precisely because they are absorbed in earning their livelihoods in their own chosen areas of specialization on the market. As Rothbard explains:

44One of the first expositions of the operation of this law, within the context of social democratic political parties can be found in Robert Michels,
Political Parties: A Sociological Study of the Oligarchical Tendencies
of Modern Democracy (
New York: Dover Publications, [1915] 1959).

Introduction

29

the ruling class, being small and largely specialized, is motivated to think about its economic interests twenty-four hours a day. The steel manufacturers seeking a tariff, the bankers seeking taxes to repay their government bonds, the rulers seeking a strong state from which to obtain subsidies, the bureaucrats wishing to expand their empire, are all professionals in statism. They are constantly at work trying to preserve and expand their privileges.45

The ruling class, however, confronts one serious and ongoing problem: how to persuade the productive majority, whose tribute or taxes it consumes, that its laws, regulations, and policies are beneficial; that is, that they coincide with “the public interest” or are designed to promote “the common good” or to optimize “social welfare.” Given its minority status, failure to solve this problem exposes the political class to serious consequences. Even passive resistance by a substantial part of the producers, in the form of mass tax resistance, renders the income of the political class and, therefore, its continued existence extremely precarious. More ominously, attempts to suppress such resistance may cause it to spread and intensify and eventually boil over into an active revolution whose likely result is the forcible ousting of the minority exploiting class from its position of political power. Here is where the intellectuals come in. It is their task to convince the public to actively submit to State rule because it is beneficial to do so, or at least to passively endure the State’s depredations because the alternative is anarchy and chaos. In return for fabricating an ideological cover for its exploitation of the masses of subjects or taxpayers, these “court intellectuals” are rewarded with the power, wealth, and prestige of a junior partnership in the ruling elite. Whereas in pre-industrial times these apologists for State rule were associated with the clergy, in modern times—at 45Rothbard, “Economic Determinism,” p. 5.

30

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

least since the Progressive Era in the U.S.—they have been drawn increasingly from the academy.46

Politicians, bureaucrats, and those whom they subsidize and privilege within the economy thus routinely trumpet lofty ideological motives for their actions in order to conceal from the exploited and plundered citizenry their true motive of economic gain. In today’s world, these motives are expressed in the rhetoric of “social democracy” in Europe and that of modern—or welfare-state—liberalism in the United States.47

In the past, ruling oligarchies have appealed to the ideologies of royal absolutism, Marxism, Progressivism, Fascism, National Socialism, New Deal liberalism, and so on to camouflage their economic goals in advocating a continual aggran-dizement of State power. In devising his theoretical guide, then, Rothbard seeks to provide historians with a means of piercing the shroud of ideological rhetoric and illuminating the true motives underlying the policies and actions of ruling elites throughout history. As Rothbard describes this guide, whenever the would-be or actual proprietors and beneficiaries of the State act,

when they form a State, or a centralizing Constitution, when they go to war or create a Marshall Plan or use and 46On the alliance between intellectuals and the State, see Rothbard,
For a New Liberty
, pp. 54–69. A particularly graphic example of this alliance can be found in late-nineteenth-century Germany, where the economists of the German Historical School were referred to as

“Socialists of the Chair,” because they completely dominated the teaching of economics at German universities. They also explicitly viewed their role as providing an ideological shield for the royal line that ruled Germany and proudly proclaimed themselves to be “the Intellectual Bodyguard of the House of Hohenzollern.” Ibid., p. 60.

47So-called “neoconservatism,” which dominates the conservative movement and the Republican Party in the United States, is merely a variant of modern liberalism. Its leading theoreticians envision a slightly smaller and more efficient welfare state, combined with a larger and more actively interventionist global-warfare state.

Introduction

31

increase State power in any way, their
primary
motivation is economic: to increase their plunder at the expense of the subject and taxpayer. The ideology that they profess and that is formulated and spread through society by the Court Intellectuals is merely an elaborate rationalization for their venal economic interests. The ideology is the smoke screen for their loot, the fictitious clothes spun by the intellectuals to hide the naked plunder of the Emperor. The task of the historian, then, is to penetrate to the essence of the transaction, to strip the ideological garb from the Emperor State and to reveal the economic motive at the heart of the issue.48

In characterizing the modern democratic State as essentially a means for coercively redistributing income from producers to politicians, bureaucrats, and special interest groups, Rothbard opens himself up to the charge of espousing a conspiracy theory of economic history. But it is his emphasis on the almost universal propensity of those who employ the political means for economic gain to conceal their true motives with ideological cant that makes him especially susceptible to this charge. Indeed, the Chicago School’s theory of economic regulation and the public choice theory of the Virginia School also portray politicians, bureaucrats, and industries regulated by the State as interested almost exclusively in maximizing their utility in the narrow sense, which in many, if not most, cases involves a maximization of pecuniary gain.49 However, economists of both schools are inured against the charge of conspiracy theory because in their applied work they generally eschew a systematic, thymological 48Rothbard, “Economic Determinism,” p. 5.