Hard Money: Research and Passion


The Origins of Central Banking in the United States, by Richard H. Timberlake, Jr. Cambridge, Mass.: Harvard University Press, 1978. 272 pp., $18.95.

Honest Money Now, by Howard S. Katz, New York: Books in Focus, 1979, 85 pp., $3.95 (paper).

With inflation persisting in the double-digit range, many of us have two important questions: How did we get into this mess? And how can we get out of it? Both are dealt with at length in these two books.

Timberlake's book is the most complete exposition I have read on the origins of central banking in the United States. It is detailed, complete, and framed upon sound economic thinking. Because it leans on original source documents (The Annals of Congress, The Congressional Record, annual reports of the Treasury, etc.) it is an especially interesting account of monetary history.

The period covered is 1811 through 1913: from the expiration of the charter of the First Bank of the United States to the passage of legislation setting up the Federal Reserve System. Instead of dwelling on the many details, quotes by people in power, debating points in favor of various monetary systems, etc., let's understand Timberlake's main conclusions.

First and foremost, it becomes clear from reading his account that a specie-based (gold- or silver-based) monetary system really works. It is self-regulating, internally and between countries. Moreover, from the record of the 19th and 20th centuries, when there was less variation in business activity, it is preferable to a monetary system controlled by central banks.

Second, when the 19th-century specie-based monetary system broke down into booms and panics, it was either caused or aggravated by government intervention. Contrary to popular opinion, the federal government was heavily involved in monetary affairs throughout the century, with the Treasury Department acting very much like a central bank. The depressions of 1819, 1837, 1868, 1873, and 1896 were all associated with the Treasury first injecting high-powered money (government debt, gold, or silver) into the banking system and then pulling it out. Private speculation played a part, but the original stuff for booms and depressions came from Washington. To repeat: this book provides proof, supported by detailed graphs and charts, that much of the instability of the 1800s was not caused by laissez-faire capitalism.

Third, Timberlake's many quotes from debate over creation of the Federal Reserve supports the view that no one group or force was behind it. Support came from farmers of the Midwest and South, Wall Street, bankers, industrialists, labor, Democrats, and Republicans. Recalling the oft-destabilizing actions of the Treasury and wishing to take control out of politics, many envisioned the Federal Reserve System as a "quasi-scientific, self-regulating machine for responding only to form-seasonal variations in the demand for money." Moreover, everyone except a few monetary cranks believed in the gold standard and stable money. The Fed's founders wanted only to create an "elastic" currency—one that would stretch and contract, but with total length regulated by gold.

Beyond the above three points, the book contains a most concise and understandable explanation of bimetalism and the political-economics behind silver's rise and fall from the mid-1870s to 1896, the year William Jennings Bryan lost his bid for president on the famous "Cross of Gold" speech. The price of gold had been rising relative to all commodities, including silver, causing some hardship. Silver was the "easy money" of the time and had significant political support, but its acceptance was actually torpedoed by Bryan's Democratic party with repeal of the silver-purchase clause in 1893. (Without going into details, I also found Timberlake's explanation for the falling velocity of money in the 1800s, observed by Milton Friedman and Anna Schwartz in their Monetary History of the United States, a useful improvement on present theory.)

What does all this history mean for us today? Timberlake clearly prefers a complete free market in money: "This record suggests that a market system for handling random or even periodic disturbances to the monetary system is more stable than one managed by authorities. Since the self-interest of private persons in business firms and households governs a market system, and since it is their interest to have a stable system, these people will develop market machinery to stabilize the system." Unfortunately, he believes that a laissez-faire monetary system "looks politically impossible." He concludes by advocating a monetary rule, à la Milton Friedman.

Timberlake's book is a painstakingly complete historical account, with new insights and sound economic analysis, and belongs in the library of every devotee of monetary economics, preferably next to the Friedman-Schwartz magnum opus. Unfortunately, as an advocacy book it also leaves much to be desired. The historical material is organized chronologically, leaving the reader to plow through great detail to find conclusions. In short, it is a strong, scholarly piece but not likely, without adaptation, to convince enough people to return to gold.

Timberlake's shortness on advocacy is more than made up for in Howard Katz's tract, Honest Money Now. Here, we find advocacy from beginning to end but, beyond that, little substance or supporting research.

Starting at the top, Katz tells us the only value is freedom itself. Since freedom no longer exists in this country, each of us should take to the streets to win it. Why aren't we free? It's those conspiring bankers, of course, who create inflation and exploit us. What should we fight for? Sound money, a gold standard. The rest of the book is devoted to laying out arguments for a gold standard that all the oppressed will understand and embrace.

Katz tells us that the proper and successful arguments for gold are not those used for years by conservatives, namely, that gold is mystical, eternal, and disciplined. "Tough" values won't win elections; as an alternative, he suggests populist (18th-century liberal) arguments of the Jefferson-Jackson hard-money movements. They were concerned with the liberty and welfare of the everyday person and understood that government-created inflation only benefits kings, big business, and bankers, all at the expense of the public. He points out that modern liberals have taken over classical liberalism's concern for people, leaving conservatives the stuffy and unpopular role of advocating austerity.

But what about unemployment? Won't a return to gold cause booms and depressions like those of the 1800s and the 1930s? Katz properly replies with Austrian trade-cycle theory: Expansion of unbacked paper money causes a boom and malemployment (a populist substitute for malinvestment). Eventually, the ratio of currency to gold becomes top-heavy, there's a run on the banks, and depression/deflation begins. Unemployment, then, is the result of prior inflation, so the way to eliminate unemployment is not to permit paper money in the first place.

The last chapter deals with the political requirement that we develop a unified movement encompassing the lower and middle classes. The rulers have successfully confused us, dividing these two natural allies into conflict. The real conflict is between the people and aristocracy—specifically, all of us versus big business and the bankers.

The problem with Honest Money Now is that there is so much oversimplification, careless lumping together of individuals, inaccuracy, and just plain error, that its valid points are obscured. For example, how can Katz be right that there is no way for an honest person to succeed in the United States today, when I daily see honest, successful, and happy people? How can Harry Browne's libertarian philosophy be interpreted to exclude voluntary cooperation for shared goals—isn't the major objection to coercion by the State? And if inflation is such a good deal for debtors and bankers, with everyone else losing, why don't we simply buy bank stocks on margin, then sit back and get rich? Even laborers, by directing pension fund administrators to buy bank stocks, would become tycoons by retirement. Yet, the fact is that bank stocks as a class have not been superior investments.

Then there's Katz's lumping us into classes. Some low-income people who purchased homes with minimum down-payments have benefited from inflation while many "captains of industry" have paid back debt, own stocks and bonds, and have been devastated by inflation. Katz's comment that "the people" are not debtors does not hold water.

Despite these problems, the fact is that Katz makes a generally valid argument. His case for gold is particularly strong: (1) gold is rational and scientific, paper money mystical; (2) gold is associated with human progress, paper money with corruption; and (3) gold is humanitarian, associated with human liberty and peace—government needs inflation to wage war. Katz has a good point when he insists that "tough" arguments for gold will not win adequate support. Freedom is the real issue, and we need to keep explaining that freedom serves everyone, particularly the disadvantaged.

John Windness is an investment manager for a securities firm in Chicago.