AMERICAN UNEXCEPTIONALISM
PAUL WARBURG’S ECONOMIC VISION AND THE ALDRICH PLAN, 1903-1911
A Thesis
Presented to the faculty of the Department of History
California State University, Sacramento
Submitted in partial satisfaction of
the requirements for the degree of
MASTER OF ARTS
in
History
by
Joshua James Handang Thomas
SPRING
2014
AMERICAN UNEXCEPTIONALISM
PAUL WARBURG’S ECONOMIC VISION AND THE ALDRICH PLAN, 1903-1911
A Thesis
by
Joshua James Handang Thomas
Approved by:
__________________________________, Committee Chair
Christopher Castaneda
__________________________________, Second Reader
Joseph Palermo
____________________________
Date
ii
Student: Joshua James Handang Thomas
I certify that this student has met the requirements for format contained in the University
format manual, and that this thesis is suitable for shelving in the Library and credit is to
be awarded for the thesis.
__________________________, Graduate Coordinator
Mona Siegel
Department of History
iii
___________________
Date
Abstract
of
AMERICAN UNEXCEPTIONALISM
PAUL WARBURG’S ECONOMIC VISION AND THE ALDRICH PLAN, 1903-1911
by
Joshua James Handang Thomas
Paul Warburg’s contributions to the movement for technocratic central banking reflected
a teleological vision of the modern economy that rejected American exceptionalism. He
believed that the US could only become a fully civilized country if it created a European
–style technocratic central bank. In his vision of modernity, all civilized nations moved
along the same teleological-evolutionary line. By virtue of its longer history and greater
urbanization, Europe was more modern, making it the model the US had to emulate to
sustain progress. The US had a larger economy, but Warburg explained that away by
reference to its superior natural resources. In publicly disseminating his vision, he had to
contend with the widespread notion of American exceptionalism, which lead him to
modify and temper the presentation of his teleological vision in the years from 19071910. Thus, American exceptionalism significantly shaped the movement for
technocratic central banking.
_______________________, Committee Chair
Christopher Castaneda
_______________________
Date
iv
TABLE OF CONTENTS
Page
Chapter
1. INTRODUCTION .................................................................................................. 1
2. REVIEW OF THE LITERATURE ...................................................................... 12
3. THE TELEOLOGICAL VISION ......................................................................... 27
4. EMBODYING THE TELEOLOGICAL VISION................................................ 47
5. CHALLENGES TO THE TELEOLOGICAL VISION ......................................... 51
6. MODIFYING THE TELEOLOGICAL VISION ................................................... 61
7. CONCLUSION ....................................................................................................... 69
Bibliography .............................................................................................................. 74
v
1
Chapter One: Introduction
The Federal Reserve was a monumental Progressive Era reform. Perhaps more so
than any other institution, the Federal Reserve shapes the livelihoods of workers,
businesses, and governments around the world. By raising interest rates, it can slow the
economy, constrain lending, and suppress wages. Conversely, by lowering interest rates,
it can encourage lending, promote full employment, and possibly create bubbles. This
power would have been unfathomable to Americans of the nineteenth century, who had
discarded a central bank altogether in the 1830s. Even for most Americans of the
Progressive Era, this kind of power would have been distressing, and they likely would
not recognize the modern Federal Reserve as the same institution they created in 1913.
Despite the significance of the Federal Reserve, historians have mostly ignored it.
There have been only two monographs in the field of history that examine the creation of
the Federal Reserve, and another two that extensively cover it. For the most part,
economists and political scientists have been more interested in the origins of Federal
Reserve than historians have been. They tend to perceive the movement for central
banking as more or less a technical attempt to fix a broken banking system. Culture and
ideas play but a minor role in their accounts of banking reform. This study contends that
the movement for banking reform in the early twentieth century was not separate from
the broader currents of American history.
In Banks and Politics During the Progressive Era, Richard McCulley identified
three major banking traditions in the United States: the Main Street tradition of farmers
and country bankers contending that the quantity of money directly affects prices and that
2
the Federal Government should serve as a counterweight to the power of urban bankers,
the La Salle Street tradition of Midwestern and Chicago bankers supporting laissez-faire
banking and a self-regulating gold standard, and the Wall Street Hamiltonian tradition
advocating an alliance between government and finance in a way that benefits private
business interests.1 This study borrows McCulley’s classification scheme, but its purview
is cultural and intellectual. It will illustrate how the notion of American exceptionalism
informed the movement for banking reform.
Americans and foreigners have long expressed the sentiment that the culture,
people, institutions, and history of the people of the United States are exceptional. John
Winthrop’s 1630 address, “A Model of Christian Charity,” contains one of the earliest
and most famous sentiments of American exceptionalism. Winthrop declared that New
England was like a “city upon a hill” with the eyes of the world watching it.2 During the
Revolutionary Era, French-American writer J. Hector St. John De Crevecoeur mused that
the American is a “new man” who leaves “behind him all his ancient prejudices and
manners” and “whose labor and posterity will one day cause great changes in the
world.”3 In the 1830s, Alexis de Tocqueville observed that due to geography, proximity
to Europe, Puritanical origins, and commercial habits, “the position of the Americans
is…quite exceptional, and it may be believed that no democratic people will ever be
1
Richard T. McCulley, Banks and Politics During the Progressive Era: The Origins of the Federal
Reserve System, 1897-1913 (New York: Garland Pub, 1992), vii-viii.
2
John Winthrop, "City upon a Hill." Digital History.
http://www.digitalhistory.uh.edu/disp_textbook.cfm?smtID=3&psid=3918 (accessed
February 24, 2014).
3
St. John de Crèvecoeur, J. Hector, and Susan Manning, Letters from an American Farmer (Oxford
[England]: Oxford University Press, 2009), 34.
3
placed in a similar one.”4 In the Gettysburg Address, Abraham Lincoln talked of the Civil
War as a test to see if a new nation, under God, and conceived in liberty could survive.5
Frederick Jackson Turner postulated in 1893 that the rugged conditions of the American
frontier and the abundance of free land led to the development of unique American
institutions.6 In the twentieth and twenty-first centuries, most American presidents have
paid homage to American exceptionalism, including America’s current president, Barack
Obama, who stated that “America has a continued extraordinary role in leading the world
towards peace and prosperity,” and that America is “different” and “exceptional,”
especially when it comes to national virtue.7
There are many definitions of American exceptionalism; this study borrows from
David Weiss and Jason A. Edwards, who define American exceptionalism as “the distinct
belief that the United States is unique, if not superior, when compared to other nations.”8
As for banking reform, American exceptionalism encompasses the perception that the
United States cannot simply copy institutions that exist in other countries without
dramatic modifications, due to its unique history, culture, or geography. Noting that
American exceptionalism affected the movement for banking reform in the United States
is not to deny that other countries have their own notions of exceptionalism. This was,
4
Alexis de Tocqueville, Democracy in America: and Two essays on America (London: Penguin, 2003),
525-526.
5
Abraham Lincoln, “The Gettysburg Address,” Abraham Lincoln Online,
http://www.abrahamlincolnonline.org/lincoln/speeches/gettysburg.htm (accessed February 24, 2014).
6
Frederick Jackson Turner, “The Significance of the Frontier in American History,” The Frontier in
American History (New York: H. Holt and Co, 1920), 2.
7
Karen Tumulty, “American Exceptionalism, Explained,” The Washington Post,
http://www.washingtonpost.com/blogs/the-fix/wp/2013/09/12/american-exceptionalism-explained/
(accessed February 24, 2014).
8
Jason A. Edwards and David Weiss, The Rhetoric of American Exceptionalism: Critical Essays
(Jefferson, N.C.: McFarland & Co, 2011), 1.
4
after all, an era of nationalisms, and a broader study could explore that angle further.
Though the notion of exceptionalism is not unique to the United States, it is still a notion
that has a force of its own. As this study makes clear, the cultural currents of
exceptionalism infused even a movement as abstruse as central banking.
A thesis paper could not adequately cover the formation of the Federal Reserve,
which reflected contributions of multiple factions in American society, so this study
approaches the topic indirectly through the formation of the Aldrich Plan. The Aldrich
Plan was a proposal for central banking reform that Rhode Island Senator Nelson Aldrich
presented to The National Monetary Commission in January of 1911. It had five
architects: Rhode Island Senator Nelson Aldrich, Assistant Secretary to the Treasury
Abram Piatt Andrew, National City Bank President Frank Vanderlip, J.P. Morgan partner
Henry Davison, and Kuehn, Loeb, and Co partner Paul Warburg. In December of 1910
these men secretly met off the coast of Georgia at a place called Jekyll Island and
formulated the Plan. Because these men met privately to form a plan that would
transform the banking system of the United States, Elmus Wicker dubbed them the
“Jekyll Island Cabal,” a term this study borrows.9 As the Aldrich Plan reflected the
efforts of these five men alone, its scope is narrow enough for a short study to explore.
However, the Aldrich Plan’s influence on the Federal Reserve Act was great enough to
constitute a significant source of insight for the origins of central banking in the United
States.
9
Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed
(Columbus: Ohio State University Press, 2005), 94.
5
Most Federal Reserve scholars agree that the Aldrich Plan served as the model for
the Federal Reserve Act of 1913. Writing on the Glass Bill, which in a modified form
became the Federal Reserve Act of 1913, Economic historian Robert Craig West
commented, “With only a few exceptions, the Glass Bill, especially in its first draft, is
identical to the Aldrich Bill.”10 Richard McCulley noted that the Aldrich Plan succeeded
in uniting business organizations and the American Bankers Association behind a plan
that “gave national expression and shape to the broader movement for banking
cooperation and self-regulation.” Though Democrats rejected the Aldrich Plan, the Plan’s
uniting impulse created the momentum for banking reform.11 Political scientist J.
Lawrence Broz agreed that the Aldrich Plan created the momentum for Federal Banking
Reform, and added, “In most important areas, the Federal Reserve Act was in broad
sympathy with the Aldrich Plan.”12 Furthermore, “in terms of its international aspects, the
Federal Reserve Act was nearly identical to the Aldrich Plan.”13 Economics professor
John H. Wood argued, “except for the composition of the central board and its authority
over the branches, the Aldrich bill resembled the Federal Reserve Act of December
1913.”14 In the most recent scholarly monograph on the origins of the Federal Reserve,
economic historian Elmus Wicker wrote that the Aldrich Bill “served as the basis both in
10
Roger Craig West, Banking Reform and the Federal Reserve, 1863-1923 (Ithaca: Cornell University
Press, 1977), 106.
11
McCulley, Banks and Politics During the Progressive Era, 247.
12
J. Lawrence Broz, The International Origins of the Federal Reserve System, (Ithaca, N.Y.: Cornell
University Press, 1997), 193.
13
Broz, The International Origins of the Federal Reserve System, 201-202.
14
John H. Wood, A History of Central Banking in Great Britain and the United States (Cambridge:
Cambridge University Press, 2005), 163.
6
substance and wording for the Federal Reserve Act.”15 In a 2010 Federal Reserve
conference paper, economists Michael Bordo and David Wheelock asserted, “The
[Federal Reserve Act] almost completely replicated the key monetary and international
policy provisions of the Warburg Plan and the Aldrich Bill.”16
The scholarly consensus is that Paul Warburg wielded preeminent influence on
the Aldrich Plan as well as on the movement for technocratic central banking.
Technocratic here refers to a banking system free from political oversight and run
according to the discretion of “banking experts,” which for Warburg was bankers.
Though many individuals expressed a preference for central banking in general in the late
nineteenth and early twentieth century, it was only after 1910 that most banking
organizations in the United States insisted that only the kind of technocratic central bank
embodied in the Aldrich Plan represented legitimate reform. As to Warburg’s
contributions to the Aldrich Plan, the movement for technocratic central banking, and the
creation of the Federal Reserve System, noted economist John Kenneth Galbraith
observed, “Warburg has, with some justice, been called the father of the System.”17
According to Robert Craig West, Paul Warburg was “the single most powerful force in
shaping the direction of American banking reform” in this period.18 J. Lawrence Broz
cited Robert Craig West’s assessment of Paul Warburg approvingly, and he noted,
15
Wicker, The Great Debate on Banking Reform, 93.
Michael D. Bordo and David C. Wheelock, “The Promise and Performance of the Federal Reserve as
Lender of Last Resort 1914-1933,” The Origins, History, and Future of the Federal Reserve: A Return to
Jekyll Island (Cambridge: Cambridge University Press: 2013), 71.
17
John Kenneth Galbraith, Money: Whence It Came, Where It Went (Boston, Mass. u.a: Houghton Mifflin,
1995), 124.
18
West, Banking Reform and the Federal Reserve, 54.
16
7
“Warburg created for his peers in New York a comprehensive plan for banking.”19
Though he gave primary credit to Nelson Aldrich for making central banking the center
of the debate over reform, Elmus Wicker acknowledged that only Paul Warburg’s
contributions to the Aldrich Plan are readily identifiable. He outlined five key provisions
of the Aldrich Plan that appeared in the writings of Warburg, and he concluded, “The
main blue-print for the Aldrich proposals had been laid out by Warburg, and he deserves
more credit than the rest for the so-called technical contributions.”20 Contemporaries also
attested to Warburg’s contributions. Frank Vanderlip described Warburg as the
academically best-equipped contributor to the Aldrich Plan.21 One of the most prominent
American economists of the early twentieth century, Edwin R.A. Seligman, claimed, “It
may be stated without fear of contradiction that in its fundamental features the Federal
Reserve Act is the work of Mr. Warburg more than of any other man in the country.”22
Paul Warburg’s vision of the modern economy constitutes the subject of this
study. This thesis argues that Warburg’s contributions to the movement for technocratic
central banking comprised more than just a technical analysis of the American banking
system. They also reflected a teleological vision of the modern economy that rejected
American exceptionalism. Warburg believed that the US could only become a fully
civilized country if it created European political and economic institutions such as a
technocratic central bank free from political oversight. In his vision of modernity, all
19
Broz, The International Origins of the Federal Reserve System, 152.
Wicker, The Great Debate on Banking Reform, 61-62.
21
Frank A. Vanderlip and Boyden Sparkes, From Farm Boy to Financier (New York: D. AppletonCentury Co, 1935), 216.
22
Edwin R.A. Seligman and Paul Warburg, “Introduction,” Essays on Banking Reform in the United States
(New York: Academy of Political Science, 1914), xiii.
20
8
civilized nations moved along the same teleological-evolutionary line. By virtue of its
longer history and greater urbanization, Europe was more modern, making it the model
the US would have to emulate to sustain progress. The US had a larger economy, but
Warburg explained that away by reference to its superior natural resources. However, in
publicly disseminating his vision, he had to contend with the widespread notion of
American exceptionalism, which compelled him to modify the presentation and the
embodiment of his teleological vision in the years from 1907-1910. Though Warburg
rejected American exceptionalism, confrontation and compromise with this widespread
belief meant that the notion of American exceptionalism still significantly shaped the
contours of the movement for technocratic central banking.
This paper covers the period of Warburg’s public writings, speeches, and lectures
from 1907-1910. Warburg also helped coordinate the mass educational campaigns from
1911-1913, which popularized the Aldrich Plan among the banking community. While
that is an interesting and important bridge between the Aldrich Plan and the Federal
Reserve Act, this study is concerned with the actual ideas embodied in the Aldrich Plan.
Warburg articulated his ideas in the period between 1907 and 1910. After the Jekyll
Island Cabal formed the Aldrich Plan, Paul Warburg’s role became less about articulating
and modifying his ideas in the face of American exceptionalism than in promoting ideas
already embodied in a legislative proposal. From the perspective of intellectual history,
Warburg’s writings from 1907 to 1910 are more important than his writings from 1911 to
1913.
9
Most of the other members of the Jekyll Island Cabal also expressed notions of
“American unexceptionalism.” Nelson Aldrich became a convert to central banking after
visiting the Reichsbank in the summer of 1908.23 Frank Vanderlip wrote extensively on
the superiority of the German model of education and social welfare.24 Abram Piatt
Andrew contrasted European-banking systems with American banking systems and
found that American banking systems lacked in comparison.25 Henry Davison, on the
other hand, did not publish anything nor give any speeches, which makes sense in light of
J.P. Morgan’s ferocious aversion to the media.26 Additionally, in the early twentieth
century it was taboo on Wall Street to make public utterances.27 In that regard, Warburg
and Vanderlip were highly unusual, and for most of his career, Vanderlip’s banking peers
considered him a radical.28
Despite the “unexceptionalist” sentiments of the other Jekyll Island Cabal
members, there are sound reasons to dedicate a study to the writings of Paul Warburg.
Though most of the other members of the Jekyll Island Cabal expressed notions of
American unexceptionalism, none of them wrote largely on banking reform in this
period. Nelson Aldrich kept his admiration of German central banking mostly private,
Frank Vanderlip wrote much more on education than on banking, most of Abram
Andrews’ writings were academic reviews, and as already noted, Henry Davison did not
23
Wicker, The Great Debate on Banking Reform, 57.
Frank A. Vanderlip, Business and Education (New York: Duffield, 1909).
25
Abram Piatt Andrew, “The Problem before the National Monetary Commission,” Banking Problems
(Philadelphia: American Academy of Political and Social Science, 1910), 3-10.
26
Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of
Modern Finance ( New York: Atlantic Monthly Press, 1990), 109.
27
Sparkes and Vanderlip, From Farm Boy to Financier, 105.
28
Sparkes and Vanderlip, From Farm Boy to Financier, 281.
24
10
publish anything. Only Paul Warburg fully articulated a vision that made American
unexceptionalism imperative, especially as it pertained to banking institutions.
Additionally, focusing on Warburg alone allows for a closer reading of his texts. This
study emphasizes depth over breadth in its analysis.
This study also analyzes on Paul Warburg’s public writings and speeches over his
private correspondence. There is a wealth of insight in his private correspondence, but his
audience, methods, and focus differed greatly between his private and his public writings.
In private correspondence, he appealed to the particular individual’s values, beliefs,
prejudices, and understandings. In contrast, his public writings and speeches addressed
broad and diverse audiences, widespread beliefs, and popular concerns. In a sense, when
Warburg published in a journal or addressed an audience, he was speaking to “America”
rather than to individuals. In most of his public writings, he was at least partially
conversing with the notion of American exceptionalism. Consequently, this study
provides close readings of his public writings and speeches. In doing so, this study seeks
to answer several questions. First, what was the meaning and significance of the creation
of the Aldrich Plan? Second, what were the cultural and historical factors that contributed
to its formation? Finally, what are the roles of ideas and contingency in the formation of
economic institutions?
This study only extensively covers the aspects of Warburg’s proposals that
emanated from or embodied his teleological vision. Likewise, this study is not about
examining theories of banking and money, such as the validity of the quantity theory of
money versus the real bills theory, the advantages of branch banking over independent
11
banking, or the efficacy of clearinghouses in ameliorating banking panics. Nor does this
study in general evaluate the veracity of Warburg’s claims. For instance, when Warburg
claimed that the corporation was a result of natural evolution (as opposed to nation-state
competition and the need to finance overseas violence), this study is only concerned with
how that claim was relevant to his teleological vision and in turn how that informed his
banking proposals. The historical accuracy of the claim is not within the purview of this
study. Finally, this is not a complete history of the Aldrich Plan or of the movement for
banking reform.
The next chapter reviews the scholarly studies on the origins of the Federal
Reserve as well as how those studies covered the creation of the Aldrich Plan and the
general movement for central banking. In most cases, works on the Federal Reserve
either attribute its creation to “ideology,” used in this sense to mean the notion that
collective ideas result purely from technological or economic forces, or fail to allow for
potential contingencies in the movement for central banking. After the review of
literature, Chapter Three describes the full articulation of Paul Warburg’s teleological
vision between January of 1907 and March of 1908 when he gave an address on the Panic
of 1907. Chapter Four outlines Paul Warburg’s attempts to embody his teleological
vision in legislation. Chapter Five expounds on “exceptionalist” challenges to central
banking. Chapter Six explores how Paul Warburg incorporated criticisms of his vision
into his proposal for a United Reserve Bank, which served as the model for the Aldrich
Plan. Chapter Seven concludes this study and broaches issues of internationalism,
transatlanticism, contingency, and exceptionalism in history.
12
Chapter Two: Review of the Literature
This chapter reviews the major works on the origins of the Federal Reserve,
examining how these studies handle the formation of the Aldrich Plan and the movement
for central banking. This review argues that these studies could have been enhanced had
their coverage of the Aldrich Plan emphasized less the ideological inevitability of the
Plan than the individual ideas and efforts that went into its creation. “Ideology” in this
study is loosely based on the Marxist definition of ideology as “an inverted mirror-image
of the material world,” but this work eschews the Marxist notion of ideology as the false
consciousness of the ruling class.29 This use of ideology denotes collective beliefs or
ideas that form because of shared material or technological experiences. This study
assumes that though collective experiences may be responsible for the receptivity to and
the spread of new ideas among groups, the formation of ideas are by no means
technologically determined. Even if general ideas are merely manifestations of shared
material experiences, it still does not necessarily follow that the specific contours or
details of the ideas are inevitable.
Robert Wiebe’s Businessmen and Reform was the earliest of what James
Livingston called the “structural-functional” approach to the origins of the Federal
Reserve System. A structural-functional approach assumes that reform represents the
attempts of an interest group to create a legal structure that favors the function it serves
within the economy. As pointed out in the introduction, Businessmen and Reform is not
exclusively about the origins of the Federal Reserve. Wiebe places the Federal Reserve
29
Michael Freeden, Ideology: A Very Short Introduction (Oxford: Oxford University Press, 2003), 5-6.
13
within a broader program of reforms led by local interest groups responding to and trying
to insulate themselves from “the nationalizing forces of technological change in the postCivil War era.”30
Wiebe ignored the Aldrich Plan, supposing it a given within the Eastern
financiers’ movement to capture regulatory reform. There was no mention of the Jekyll
Island meeting, and Paul Warburg first appeared in 1909 to gauge general banker
receptivity to central banking. Wiebe discussed none of Warburg’s ideas between 1907
and 1908, and after Wiebe noted a 1909 poll, his analysis jumped to Congress’s
announcement of the Aldrich Plan in January of 1911.31 Wiebe read the dogmatic
insistence on technocratic central banking that defined the position of Wall Street from
1911 to 1913 back all the way to a plot in the 1906 New York Chamber Currency Report
that put forward two Wall Street proposals for comprehensive banking reform. This
attribution makes no sense considering that Wall Street did not even propose a
technocratic central bank in 1906. Without citing any relevant primary evidence, Wiebe
asserted that in 1906 the “haughty, often narrow-minded” Vanderlip was already
advocating for a technocratic central bank. Wiebe dismissed the second proposal of the
1906 New York Chamber of Commerce Currency Report (discussed in detail in chapter
3) for LaSalle Street’s preferred reform of asset-based currency as “token assistance” to
“the bill of the Midwestern city bankers.” Wiebe claimed that behind these “token”
concessions was a growing interest in a banker-controlled central bank, even though the
30
31
Livingston, Origins of the Federal Reserve System, 19.
Wiebe, Businessmen and Reform, 76.
14
primary proposal of the Currency Report was a democratic central bank.32 In short,
because Wiebe assumed that the movement for technocratic central banking emanated
from the shared interests and experiences of Wall Street, he also assumed that their
earlier proposals, none of which were a technocratic central bank, represented
Machiavellian maneuvering rather than groping attempts at reform in the absence of a
coherent vision of the modern economy. He attributed an agency for technocratic central
banking in 1906 that did not exist.
A year after Robert Wiebe published Businessmen and Reform, another structuralfunctionalist work came out, Gabriel Kolko’s Triumph of Conservatism: A
Reinterpretation of American History, 1900-1916. Like Businessmen and Reform,
Triumph is not about the origins of the Federal Reserve. Kolko located the formation of
the Federal Reserve System within the broader business movement for the creation of
“political capitalism,” which he defined as “the utilization of political outlets to attain
conditions of stability, predictability, and security—to attain rationalization—in the
economy.”33 Triumph was a revisionist history of the Progressive Era. Contra traditional
portrayals of the Progressive as a “middle-class defense against the status pretensions of
the new industrialists,” Kolko argued that the national Progressive Movement was
actually the attempts of conservative interests to preserve their power and status through
Federal regulatory regimes that could insulate them from the threat of smaller
competitors, state laws, and referendum democracy. 34
32
Wiebe, Businessmen and Reform, 65.
Gabriel Kolko, The Triumph of Conservatism; A Re-Interpretation of American History, 1900-1916
(New York: Free Press of Glencoe, 1963), 3.
34
Kolko, Triumph of Conservatism, 7.
33
15
Kolko implied that the movement for central banking evolved from the failure of
the late nineteenth century mergers to protect the financial power and status of Eastern
financiers against Western and nontraditional banking institutions.35 He acknowledged
that though bankers and businessmen generally agreed on the need for some type of
centralization, the differences on “the type of backing for a more elastic currency, or the
form and control of the centralization, seemed insurmountable.”36 Nevertheless, when it
came to actually showing how reformers narrowed the many diverse alternatives to the
provisions in the Aldrich Plan, Kolko’s analysis faltered. His narrative leaps from
acknowledging the diverse alternatives of banking reform to the political and educational
campaigns in 1911 that attempted to convince the public that the Aldrich Plan was not a
proposal for a central bank. Thus, Kolko assumed the eventual agreement over banking
reform among Wall Street away as a historical inevitability, subsuming it under his
narrative of big businessmen using the Federal government to preserve their status and
power. While Kolko was correct in his assertion that “central banking of the German and
English type was widely appreciated,” it is obvious only in retrospect that Wall Street
would converge on a proposed banking system modeled on the Reichsbank.37
Roger Craig West’s Banking Reform and the Federal Reserve: 1863-1923 was the
first monographic study of the origins of the Federal Reserve System. As a Monetarist,
West focused on defining the historical relationship between banking theory and practice.
His argument, that the Federal Reserve was a reflection of the real bills doctrine, was
35
Kolko, Triumph of Conservatism, 146.
Kolko, Triumph of Conservatism, 181.
37
Kolko, Triumph of Conservatism, 183.
36
16
extensively critiqued by James Livingston in Origins of the Federal Reserve System and
Elmus Wicker in The Great Debate on Banking Reform. Both concluded that the Real
Bills doctrine, at least in the strong form articulated by West, did not serve as the
theoretical foundations of the Federal Reserve Act.38 Overall, Banking Reform is an
excellent source on the various proposals and debates on banking reform. Nevertheless,
his exposition of banking reform as a matter of practical and banking experts trying to fix
a broken banking system using the era’s predominant but flawed theory of banking and
currency leaves little room for cultural analysis, even though early in his narrative he
noted that banking reform in the United States took place within a “unique
environment.”39
James Livingston’s Origins of the Federal Reserve System: Money, Class, and
Corporate Capitalism, 1890-1913 was the first historical monograph on the origins of the
Federal Reserve System. Livingston’s goal in Origins was to demonstrate that social
factors were just as important as economic factors in the creation of the Fed. He argued
that the movement for banking reform from 1894 to 1913 was a symptom of and
attempted cure to the decline of competitive entrepreneurial capitalism. Livingston
revealed that the debate over banking reform extended beyond the circles of bankers and
academics to include a wide swath of businessmen from metropolitan centers throughout
the country who sought to make their class the ultimate authority on all economic
issues.40 Recognizing that purely profit seeking motives led to unmanageable crises that
38
Livingston, Origins of the Federal Reserve System, 24-25. Wicker, The Great Debate on Banking
Reform, 95-103.
39
West, Banking Reform and the Federal Reserve, 15.
40
Livingston, Origins of the Federal Reserve System, 125.
17
impaired social stability, a new class of corporate managers decided that centralizing and
coordinating the investment function would smooth the business cycle, thus reconciling
short-term profits with long-term political and social stability.41
With its Marxist framework, Livingston’s analysis is the most ideological of all
the works reviewed so far. While Livingston’s narrative showed that the movement for
banking reform was broad and perhaps reflected a burgeoning class consciousness among
the nation’s economic elites, his explanation for the creation of the Aldrich Plan left
much to be desired. His narrative adequately covered Warburg’s earlier analysis of the
American banking system as well as the general banker shift in favor of central banking
between 1907 and 1910. However, after describing Warburg’s critiques in 1907 and
1908, Livingston failed to account for Warburg’s writings between the summer of 1908
and 1910, precisely the period when he was adapting his arguments to appeal to the
“exceptionalist” sentiments of a broader American audience. He depicted The Aldrich
Plan as simply the culmination of the general class-based movement towards central
banking rather than as a product of historical compromise and adaptation. Even though
bankers increasingly supported some form of central bank between 1907 and 1909, the
variety of central banking proposals they wanted in no way resembled the consensus
from 1911 to 1913 when most banking organizations championed the technocratic central
banking reforms of the Aldrich Plan.
Richard T. McCulley’s Banks and Politics During the Progressive Era: the
Origins of the Federal Reserve System, 1897-1913 is the second and only other historical
41
Livingston, Origins of the Federal Reserve System, 228.
18
monograph on the creation of the Federal Reserve. His analysis relied on the three
metaphors (Main Street, LaSalle Street, and Wall Street) defined in the introduction.
These three groups were grounded in the agricultural, commercial, and financial sectors
of the economy.42 His framework indicated that the interplay of ideas in the debates over
banking reform was simply a manifestation of material experiences and interests. The
narrative began with the Indianapolis Monetary Convention of 1897, which represented
the banking reform proposals of LaSalle Street. After the Panic of 1907, Wall Street took
the initiative on banking reform, and when Democrats took control of Congress and the
White House in 1912, the initiative shifted to Main Street.
Metaphors can be clarifying, but they can also over generalize and obscure. In
delineating three broad groups centered on economic interest, McCulley erased important
diversities within these groups. He depicted the Aldrich Plan as the embodiment of Wall
Street interests, rather than as a document representing the insights, visions, and
compromises of its individual creators. They undoubtedly shared Wall Street interests,
but they also had to construct a plan that was palatable to the public. Furthermore, the
members of the Jekyll Island Cabal had experiences that were not common among Wall
Street. Warburg’s international experiences as a German-Jewish immigrant, for instance,
were unique among his American cohort.
Richard H. Timberlake’s Monetary Policy in the United States: An Intellectual
and Institutional History is an expansion of his 1978 book, The Origins of Central
Banking in the United States. Timberlake is an economist and supporter of private money
42
McCulley, Banks and Politics During the Progressive Era, vii.
19
and free banking. Monetary Policy in the United States was an effort to show that no
matter how well intentioned, men cannot design a system of monetary control that is
superior to “what would prevail as a natural development under general rules of law.”43
Timberlake argued the Federal Reserve was created due to ignorance and cultural as well
as class prejudice. His narrative explained that the movement for banking reform among
bankers and economists was originally a reaction against Treasury Secretary Leslie
Shaw’s excessive interventions in the money markets. Reformers became acutely aware
that a central reserve institution had to be free from politics, although McCulley did not
explain why they believed a central reserve institution was necessary.44 However, the
populist concept, or as Timberlake phrased it, “the fallacious people-control-it-throughthe-government doctrine,” eventually infected the debate over banking reform, along with
the Progressive notion that the Federal Reserve Banks should serve as a “public utility.”45
Populist prejudice against bankers culminated in the formation of a banking system with
multiple branches operating under the false belief that a banking system could be
democratic as long as it was decentralized. McCulley never even mentioned the Aldrich
Plan, which encapsulates the limited and agenda-driven nature of his study.
J. Lawrence Broz’s The International Origins of the Federal Reserve System is
more of a work of social science than of history. Broz was not as concerned with
delineating the unique historical conditions that led to the creation of a U.S. central bank
than with using the creation of the Federal Reserve as “data” for a model of collective
43
Richard H. Timberlake, Monetary Policy in the United States: An Intellectual and
Institutional History (Chicago: University of Chicago Press, 1993), xx-xxi.
44
Timberlake, Monetary Policy in the United States, 214.
45
Timberlake, Monetary Policy in the United States, 222-225.
20
action theory. Broz believed that the “joint products” model, which explains that
collective action arises from situations that yield both public and private benefits,
explained the creation of the Federal Reserve. Before 1913, the United States faced two
major problems of financial organization—a deficient payment systems, which affected
everyone, and a currency that lacked international status, which was mainly a concern for
Wall Street. International opportunities motivated Wall Street to internationalize the
dollar, but for them to get what they wanted they had to provide a public good, namely, a
reformed payments system.46
Chronology undermines Broz’s argument. Between 1896 and 1902, the United
States generated a two billion dollar trade surplus, while in all of its history up to 1896 it
only managed a net trade surplus of 383 million dollars.47 Those huge surpluses indicated
a rapid shift from debtor to creditor status. Despite these dramatic shifts, Wall Street was
averse to reform and generally unconcerned with any major reforms until 1906 when
interest rates became unbearably volatile (explored further in chapter three). The reforms
Wall Street proposed before 1907 were for an elastic currency. If Wall Street was
primarily motivated to internationalize the currency, there should have been more interest
in reform in the years before 1906 when the place of the United States within the global
economy was most rapidly changing. The chronology implies that stability was the first
concern of Wall Street. Only when banking reform became an imperative issue after 1907
did Wall Street become interested in the internationalization of the dollar. Broz read
46
Broz, The International Origins of the Federal Reserve System, 4-7.
Frank Vanderlip, “The American Commercial Invasion of Europe” Business and Education (New York:
Duffield and Co, 1907), 101.
47
21
history from his model, and he attributed motives and agency to Wall Street that makes
little sense in light of the chronology of their actions. It is an ideological explanation,
because it attributes a coherent Wall Street vision and agency to material conditions
(international incentives). Though international incentives likely made Wall Street
receptive to internationalizing reforms, there is little to suggest that the incentives created
the widespread agency for reform.
In The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the
Fed, economic historian Elmus Wicker argued that Nelson Aldrich was the most
important figure in the movement for technocratic central banking. More so than any
other figure, Aldrich removed the most formidable obstacles to creating a central bank in
the United States. These obstacles were the shibboleth against a central bank dating back
to the dispute between Andrew Jackson and Nicholas Biddle about the renewal of the
charter of the Second Bank of the United States, the popularity of asset-based currency
reform proposals that had gained popularity between 1894 and 1908, and the complete
absence of strong congressional leadership of the banking reform movement before 1908.
As a six term Republican senator, Nelson Aldrich was at the height of his power in the
early twentieth century. Through his “courage, guile, and political power,” he was able to
disavow the “deeply ingrained prejudice against a central bank.” Furthermore, the
nationwide campaign he and his associates launched to popularize the idea of a central
bank “did more than perhaps anything else to increase public support for a central
bank.”48
48
Wicker, The Great Debate on Banking Reform, 4-5.
22
The ideology in Wicker’s argument is tacit, as he assumed away the consensus for
a technocratic central bank among Wall Street. Instead of exploring how Wall Street
came to demand a technocratic central bank, Wicker’s study focused on how, in the face
of cries against “Wall Street domination and influence,” the daring Aldrich was able to
create “an imaginative blueprint for a U.S. style central bank…”49 He reduced Warburg’s
contributions to technical details. Wicker also failed to distinguish between a “central
bank” and a “technocratic central bank.” In the 1890s, the group that most fervently
claimed heritage with Andrew Jackson, the Populists, proposed a subtreasury system that
entailed “centralized government in the rural economy without an American precedent,”
and they expressed great interest in the Bank of France’s centralized credit system. 50 The
public did not fear a central bank as much as they feared a Wall Street central bank.
Considering that the Federal Reserve was decentralized to undermine Wall Street power,
it hardly follows that Aldrich changed public perception on that matter.
The same year The Great Debate on Banking Reform came out, economics
professor John H. Wood published A History of Central Banking in Great Britain and the
United States. This work took a more explicitly comparative approach than the other
works. It was also of a broader scope, covering the First and Second Banks of the United
States in the early nineteenth century. As for the origins of the Federal Reserve, Wood
argued that the Federal Reserve Act of 1913 was possible because of “the intersection of
the traditional Federalist-Whig Republican broad interpretation of the national
government’s constitutional powers and the capture of the Democratic Party by
49
50
Wicker, The Great Debate on Banking Reform, 66 and 69.
Charles Postel, The Populist Vision (Oxford: Oxford University Press, 2007), 142 and 154.
23
Woodrow Wilson’s New Freedom.”Additionally, by 1913 the “populist fear of a monster
central bank…was relegated to the fringes…”51 The Panic of 1907 heightened awareness
of currency problems and made reforming the monetary system a logical object of the
Wilson administration.52 Under Wilson’s deft political supervision, the Federal Reserve
Act had something for everyone. For Wall Street, the Federal Reserve Act shifted
nation’s burden of reserves to a public institution that did not compete with privately
owned banks and reduced the legal impediments to participation in international finance.
It obviated the concerns of state banker by making membership in the Reserve
Association voluntary. Finally, it appeased populists and progressives by placing the
board of directors in Washington and by replacing bank notes with government
currency.53
There is much merit to Wood’s account of the Federal Reserve origins, but his
analysis lacked in its description of how the “Federal-Whig Republican” faction came to
support a technocratic central bank. Wood did not go so far as to assert ideological
inevitability, as he acknowledged “a central bank was far from inevitable in the early
years of the century” because Republicans did not support a national bank to the degree
that Whigs of the 1830s and 1840s did.54 After that acknowledgement, there was no
analytical exploration of how the Republican position changed, except to note that the
Panic of 1907 made currency problems a more prominent issue. Implicitly, he depicted
the Republican support for central banking as an ideological inevitability derived from
51
Wood, A History of Central Banking in Great Britain and the United States, 157.
Wood, A History of Central Banking in Great Britain and the United States, 161.
53
Wood, A History of Central Banking in Great Britain and the United States, 165-166.
54
Wood, A History of Central Banking in Great Britain and the United States, 161.
52
24
nineteenth century Whig traditions. All that was required for a central banking movement
was the impetus from a crisis like the Panic of 1907 and a politician like Woodrow
Wilson to push through concrete reforms. As chapter three will show, there was no
Federal-Whig imperative for technocratic central banking that a crisis could catalyze.
To mark the centenary of the Jekyll Island Meeting, the Federal Reserve Bank of
Atlanta and Rutgers University held a conference on November 5 and 6, 2010, to
examine the 100 year track record of the Federal Reserve. Of the eight papers presented,
three examined the origins of the Federal Reserve. In all three papers, the authors treat
the movement for banking reform as technical attempts to fix a broken or outdated
banking system, with populist prejudice and the flawed economic theories of the day
preventing ideal reforms.
In “To Establish a More Effective Supervision of Banking”: How the Birth of the
Fed Altered Bank Supervision,” Eugene White explored the supervisory aspects of the
Federal Reserve. In the late nineteenth century and early twentieth century, there was an
explosion of banks chartered under state laws as well as trusts that were subject to less
stringent regulatory requirements than national banks. In serving the function of a lender
of last resort, the Federal Reserve sought to incentivize state banks to join the Federal
Reserve System, thus subjecting them to the more stringent Federal rules.55 Michael C.
Bordo and David C. Wheelock argued that the recurrent instability of the National
Banking Era was the principal motivation for the reform movement that led to the Federal
Eugene N. White, “To Establish a More Effective Supervision of Banking”: How the Birth of the Fed
Altered Bank Supervision,” The Origins, History, and Future of the Federal Reserve: A Return to Jekyll
Island (Cambridge: Cambridge University Press: 2013), 8-38.
55
25
Reserve Act in “The Promise and Performance of the Federal Reserve as Lender of Last
Resort 1914-1933”.56 The instability derived from a lack of a lender of last resort as well
as from interstate banking laws that prohibited branch banking, which makes it easier to
pool risks. In “Where it all Began: Lending of Last Resort at the Bank of England
Monitoring During the Overend-Gurney Panic of 1866,” Marc Flandreau and Stefano
Ugolini argued that it was the historical experience of the Bank of England that shaped
the Fed founders vision of monetary reform.57
The first two articles ignored that the appeal of the Aldrich Plan was in factors
related to the distribution of power and of authority in society just as much as the
technical problems that the Federal Reserve Association could solve. In the article from
Marc Flandreau and Stefano Ugolini, the assertion that the Bank of England was the
model for reform is simply incorrect. While the members of the Jekyll Island Cabal were
aware of the Bank of England, they generally idealized the Reichsbank.
Several other works have asserted origins of the Federal Reserve, but their
coverage lacks enough substance to merit critique. Gary Gorton stated, “It is almost
literally true that the Federal Reserve System, as originally conceived, was simply the
nationalization of the private clearinghouse system.”58 His article, however, merely
elaborated on the function that clearinghouses performed in the private banking system
without any attention to what the founders of the Fed actually wrote, said, and conceived.
56
Bordo and Wheelock, 61.
Marc Flandreau and Stefano Ugolini, “Where it all Began: Lending of Last Resort at the Bank of
England Monitoring during the Overend-Gurney Panic of 1866,” The Origins, History, and Future of the
Federal Reserve: A Return to Jekyll Island (Cambridge: Cambridge University Press: 2013), 114-115.
58
Gary Gorton. 1985. "Clearinghouses and the Origin of Central Banking in the United States" (The
Journal of Economic History. 45, no. 02), 277.
57
26
Ellis Tallman and Jon R. Moen noted, “One crisis, the bank panic of 1907, disrupted
financial markets to such an extent that it became an important catalyst for creating the
Federal Reserve and the U.S. banking system as it operates today.”59 The article itself is
just a case study of the Panic of 1907. Mark Toma argued that public finance
considerations, such as government revenue requirements, are the determining factors in
changes to monetary institutions, and then undermined that argument by acknowledging
that public finance considerations “played a relatively minor role in this political and
economic debate leading up to the founding of the Fed.”60
This literature review has demonstrated that most of works on the Federal Reserve
have relied on ideology for the origins of the Fed. Consequently, they have taken the
formation of the Aldrich plan for granted. However, a contingent vision informed the
Aldrich Plan. The next chapter elaborates the vision of the most instrumental person in
banking reform, Paul Warburg.
Ellis Tallman and Jon R. Moen, 1990. “Lessons from the Panic of 1907” (Federal Reserve Bank of St.
Louis. Economic Review, May/June), 2.
60
Mark Toma, Competition and Monopoly in the Federal Reserve System, 1914-1951: A Microeconomics
Approach to Monetary History (Cambridge: Cambridge University Press, 1997), 30.
59
27
Chapter Three: The Teleological Vision
Though Paul Warburg was the key contributor to the Aldrich Plan, he only came
to the United States from Germany in 1902 because his American mother-in-law fell
seriously ill. In New York, he worked as a partner for his father-in-law’s investment
bank, Kuhn, Loeb, and Co, even though he found the pursuit of money crass and vulgar.
The boom and busts on Wall Street, the fragmented banking system, and the wild
oscillations of the stock market appalled him. He had wanted to be a teacher or a civil
engineer. With a scholarly perspective, he built an encyclopedic knowledge of European
central banks that he applied to his critiques of the American banking system.61 His
experience in foreign exchange, such as in issuing securities for Scandinavian countries,
imbued him with an internationalist perspective that was absent on Wall Street. 62
In 1902, he presented an essay advocating for a technocratic central bank to the
president of Kuhn, Loeb, and Co, Jacob Schiff. Schiff generally agreed with Warburg’s
assessments of the volatile American banking system, but urged him to be cautious, lest
he develop a reputation for radicalism among the near universally conservative Wall
Street crowd. Schiff advised him to share his essay with James Stillman, president of the
largest bank in the United States. Stillman asked Warburg why, as Wall Street was
making record profits, he felt the need to change things. When Warburg replied that when
the next panic hit Stillman would wish that his “responsibilities were smaller,” Stillman
retorted that Warburg was entirely wrong, as in Warburg’s paraphrasing, “American
methods represented an improvement upon, and an evolution of, the European system,
61
62
Ron Chernow, The Warburgs (New York: Random House, 1993), 85-89.
Chernow, The Warburgs, 43.
28
America having already discarded its central bank.” To Stillman, progress would be
achieved not by copying European methods but by “elaborating our own.”63
Stillman and many of his banking peers believed that American economic
institutions represented Anglo-Saxon institutions adapted to the unique geography and
cultural traditions of the United States. They were convinced that, as Great Britain had
spread its civilization to the colonies of North America who adapted and spread this
civilization from coast to coast, it was the destiny of the United States to spread its brand
of Anglo-Saxonism throughout the world. This belief, which Emily Rosenberg called
“liberal-developmentalism,” was one of several notions of American exceptionalism
prevalent among American bankers, businessmen, and academics in the early twentieth
century.64 The widespread notion of American exceptionalism, however, did not embody
a coherent and collective vision of the modern economy, for it failed to specify the
reforms and institutions a modern economy needed. Nevertheless, the perception of
exceptionalism, which justified the possibility of unique American banking institutions,
blocked the creation of a European-style technocratic central bank in the United States. In
the face of this widely shared perception as well as Stillman’s dismissal, Warburg put his
essay away and waited until Wall Street was more receptive to banking reform.65
The arguments Warburg put forward in that essay, as well as in subsequent
writings and addresses, comprised more than just a technical analysis of a dysfunctional
banking system. They also articulated a vision of the modern economy. Warburg believed
63
Paul Moritz Warburg, The Federal Reserve System: Its Origin and Growth: Reflections and
Recollections, Vol.1 (New York: Macmillan, 1930), 18-19.
64
Emily S. Rosenberg, Spreading the American Dream: American Economic and Cultural Expansion,
1890-1945 (New York: Hill and Wang, 1982), 7-13.
65
Warburg, The Federal Reserve System: Vol.1, 18.
29
that the United States could only become a completely civilized country if it created
European political and economic institutions. As credit was the foundation of a modern
economy, a technocratic central bank constituted the most important European economic
institution for the United States to adopt. He rejected the notion of American
exceptionalism widely held by his American peers. Warburg believed that the United
States had the richest economy in the world only because its abundant natural resources
enabled it to prosper in spite of its primitive economic and political institutions.
However, under conditions of increasing scarcity following the exhaustion of the frontier,
the United States would have to adopt European institutions to sustain progress. After
1906, even the conservative Wall Street recognized that extensive banking reforms were
necessary. Though Wall Street preferred a central bank as a solution, only Paul Warburg
argued for a technocratic central bank. His arguments demanding a technocratic central
bank reflected a teleological vision that rejected American exceptionalism.
On January 4, 1906, Jacob Schiff declared before the New York Chamber of
Commerce “if the currency conditions of this country are not changed materially, I
predict you will have such a panic in this country as to make all previous panics look like
child’s play.”66 Six years earlier, Congress had passed the Gold Standard Act, which was
supposed to provide stability and a “perfectly operating, self-adjusting monetary
system…”67 But just three years after the passage of the Gold Standard Act, the stock
market endured a meltdown dubbed the “Rich Man’s Panic of 1903.” By 1905, an arms
race between Germany and Great Britain provoked a quest for gold among the world’s
66
67
McCulley, Banks and Politics during the Progressive Era, 126.
McCulley, Banks and Politics during the Progressive Era, 44.
30
central banks, pushing up interest rates on money to record peacetime highs. As the
United States was experiencing robust growth and widespread demands for credit, the
soaring interest rates were especially noxious.68 In response to these conditions and to
Schiff’s speech, the New York Chamber of Commerce commissioned a currency
committee to explore solutions to the volatile interest rates on Wall Street. The committee
reflected Wall Street interests and was primarily the work of Frank Vanderlip, who was
Stillman’s protégé, a rising financial magnate, and the youngest ever vice president of
National City Bank.69 In October of 1906, the committee submitted its currency report,
and in November, the Chamber adopted it.
The currency report proposed two solutions. The preferred solution was a
government-controlled central bank with a board of governors appointed by the President
of the United States regulating the money supply through the distribution and the
redemption of treasury notes. The second proposal was an asset-based currency that
would allow national banks to issue currency based on their capital.70 At the time,
treasury bonds were the basis of currency. Banks chartered under the National Bank Act
of 1863 could purchase United States Treasury Bonds and then issue currency at about 90
percent of the face value against those bonds. Most financial commentators of this era
remarked that a bond-secured currency was problematic because it meant that
68
McCulley, Banks and Politics during the Progressive Era, 120.
On the composition of the Currency Committee, see McCulley, Banks and Politics During the
Progressive Era, 126. On the biographical details of Vanderlip, see Wiebe Businessmen and Reform, 65.
Also, “The Younger Set in the World of Finance: Interesting Personalities of Leading Men, All Under Fifty
Years of Age, Who Rank High Among the Bankers of New York City,” New York Times, February 21,
1909, accessed November 20, 2013, http://query.nytimes.com/mem/archivefree/pdf?res=F30B11F93C5C15738DDDA80A94DA405B898CF1D3.
70
New York Chamber of Commerce, The Currency: Report (New York: S.n, 1906), 9-11.
69
31
government borrowing rather than economic needs determined the supply of currency.71
Wall Street accepted that either central bank issued currency or an asset-based currency
were viable solutions to the problem of a money supply that failed to respond to
fluctuating demands for currency, such as during the crop moving season when farmers
demanded payment in cash.72 They referred to the inability of the currency to adjust to
economic demands “inelasticity.” “Elasticity” would be the magic reference that
dominated debates over the creation of the Federal Reserve.73 Indeed, the text of the
Federal Reserve Act states that part of its purpose is “to furnish an elastic currency.”74
Less than six years after the New York Chamber of Commerce issued its currency report
in favor of two different solutions to the problem of inelasticity, most of the major
banking and commercial associations would only accept proposals that adhered to the
Aldrich Plan, which entailed a banker-controlled central bank mostly independent of
political oversight.75
That Wall Street was content with a number of reforms in 1906, including one
where a politician appointed all or most of the board members, indicates that it lacked a
coherent vision of an economy making one kind of reform imperative, much less the kind
of reform embodied in the Aldrich Plan. Vanderlip, who was also Wall Street’s leading
voice for banking reform, publicly expressed receptivity to multiple paths of reform as
late as 1908. He wrote, “Whether [an expansive currency] be secured as a result of an
71
Livingston, Origins of the Federal Reserve System, 73.
Broz, The International Origins of the Federal Reserve System, 26.
73
Galbraith, Money: Whence It Came, Where It Went, 130.
74
United States, The Federal Reserve Act of 1913, With Amendments and Laws Relating to Banking
(Washington: U.S. Govt. Print. Off, 1913), 1.
75
Roger T. Johnson, Historical Beginnings, the Federal Reserve (Boston: Banking and Public Services,
Federal Reserve Bank of Boston, 1977), 28.
72
32
extension of the powers of the treasury or by giving the right to all national banks to issue
asset currency, or by the organization of a central bank, is one of the questions which a
better educated public opinion is needed to answer."76 His perspective greatly changed by
1913, when he wrote that practical bankers must run the new system and “be beyond the
reach of politicians…”77 A vision necessitating the formation of a technocratic central
bank was first articulated in January of 1907 when The New York Times invited Paul
Warburg to publish an article on the banking problems. He accepted the invitation and
brought out his 1902 essay, thus beginning his advocacy for technocratic central banking.
In his New York Times article, “Defects and Needs of Our Banking System,”
Warburg started by explaining that the problems with the US banking system stemmed
from the failure of US banks to adopt bills of exchange, or “modern commercial paper.”
A bill of exchange is a kind of commercial paper issued for a short-term loan, and at least
two banks or financiers of good standing endorse it. Since more than one banker endorses
a bill of exchange, the lender can sell it on the open market at a discount if he wants a
cash infusion. The bill of exchange was the dominant form of commercial paper in most
major European countries, but in the United States, the promissory note was more
common. Banks issued promissory notes for loans of 30, 60, or 90 days. Because
promissory notes were contracts between two individuals and governed by state laws,
banks could not easily sell them on the open market. Consequently, they had to put
On Vanderlip’s role as the leading voice of banking reform, see Sparkes and Vanderlip, From Farm Boy
to Financier, 181 and 281. Quote is from Frank A. Vanderlip, "The Panic as a World Phenomenon," The
ANNALS of the American Academy of Political and Social Science, 31, no. 2(1908): 6.
77
Wiebe, Businessmen and Reform, 130.
76
33
money away in reserve in case the borrower failed to repay, resulting in a tightening of
the money supply.78
Warburg suggested that the promissory note and the bill of exchange were not just
two kinds of commercial paper, but also representations of different stages of civilization.
Over time, the bill of exchange was supposed to supplant the more primitive promissory
note. Just as “evolution led to the creation of the corporation” so that “the unsalable part
of ownership was transformed into bonds and stocks,” so too did evolution lead to the
creation of bills of exchange that could be sold as easily in a financial marketplace as
stocks and bonds.79 In this vision, currency systems evolve linearly, and by virtue of its
predominant use of the promissory note, the banking system of the United States had
only reached the “same point that had been reached by Europe by the time of the
Medicis, and by Asia, in all likelihood, at the time of Hammurabi.”80 Thus, the use of the
promissory note in the United States reflected not a commercial system adapted to unique
circumstances, but a less than “completely civilized” banking system.
Warburg’s notion of currency evolution was teleological, which means that
instead of a myriad of economic institutions arising as adaptations to unique material and
cultural circumstances, “perfect” institutions emerge embodying universal laws of society
that are revealed over time through the workings of market forces. He asserted that
history was “being written with the same ink” and that “man is man, with similar virtues
and similar vices on both sides of the Atlantic.” A country could only become
Paul Moritz Warburg, “Defects and Needs of Our Banking System,” The Federal Reserve System: Its
Origin and Growth: Reflections and Recollections, Vol.2 (The Federal Reserve System. New York:
Macmillan, 1930), 9-10.
79
Paul Moritz Warburg, “The Discount System in Europe,” The Federal Reserve System, Vo.l 2, 184.
80
Warburg, “Defects and Needs of Our Banking System,” 9.
78
34
“completely civilized” when it had adopted “perfect” systems like modern bills of
exchange.81 The term “perfect” appears repeatedly in Warburg’s writings and addresses,
and at one point, he says that a modern system of bills of exchange renders a currency
system a “perfect one.”82 His notion of evolution also indicated that these institutions
were practical because they developed over time, were natural as well as scientific
because they formed in response to market forces, and were apolitical because arbitrary
power did not determine them.
On both sides of the Atlantic, Warburg’s business and financial contemporaries
subscribed to a similar teleological vision of economic and social evolution. Warburg’s
vision reflected an Enlightenment understanding of progress prevalent in the liberalism of
his middle class German-Jewish milieu.83 To most of his transatlantic peers, gold
established a universal, stable, and natural standard of value. The use or disuse of the
gold standard separated the civilized from the uncivilized.84 In his peer’s vision of
history, all societies recognize that certain kinds of commodities are more suitable to be
currency than other commodities, but “primitive” societies fail to recognize gold as the
ultimate form of currency. Consequently, their evolution stalls.85 Warburg extended this
notion of teleological evolution to include bills of exchange and technocratic central
banking.
Paul Moritz Warburg, “American and European Banking Methods and Bank Legislation Compared,” The
Federal Reserve System, Vol.2, 64-67.
82
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 40.
83
James J. Sheehan, German Liberalism in the Nineteenth Century (Chicago: University of Chicago Press,
1978), 16.
84
Gretchen Ritter, Goldbugs and Greenbacks: The Antimonopoly Tradition and the Politics of Finance in
America (Cambridge [England]: Cambridge University Press, 1997), 83. See also Michael O’Malley, Face
Value: The Entwined History of Money and Race in America (University of Chicago Press, 2012), 4.
85
O’Malley, 18-23 and 114-119.
81
35
Implicit in Warburg’s writings was the specter of Asia, which constituted a
critical example of retrogression. Warburg implied that Asian countries lost their
economic predominance to Europe because they had failed to surpass the levels of
banking development reached during the time of Hammurabi, even though Europe would
only reach those levels thousands of years later. 86 Though Warburg was never explicitly
racist, Orientalism pervaded his vision, as it did the worldview of his peers. Edward Said
showed that as far back as the eighteenth century a style of thought in the West had
emerged that contrasted a static and decadent East with a dynamic West.87 By the late
nineteenth century, it had become popular in the United States to depict China as a
civilization that was unable “to do its duty among the nations of the earth” due to its
traditionalism and stagnation.88 This disdain of China reflected a widespread idea of
progress. As Vanderlip wrote, “Neither state nor individual may stand still…They must
either go forward or backward.”89 Throughout the Atlantic world, there was an obsession
with the lost golden ages of people’s who had ceased to progress.90 As a corollary, even if
the United States had achieved the richest economy in the world, it could always regress
if it ceased to continue to become more civilized.
Just as Jacob Schiff predicted in his speech before the New York Chamber of
Commerce, the United States suffered one of its worst banking panics ever in October of
Warburg, “Defects and Needs of Our Banking System,” 9.
Edward W. Said, Orientalism (New York: Vintage Books, 1979), 42.
88
Carol C. Chin, Modernity and National Identity in the United States and East Asia, 1895-1919 (Kent,
Ohio: Kent State University Press, 2010), 26-30.
89
Frank Vanderlip, “The Ultimate Dependence of New England upon Foreign Trade,” Business and
Education, 287.
90
Penny Edwards, Cambodge The Cultivation of a Nation, 1860-1945 (Honolulu: University of Hawaii
Press, 2007), 33-36.
86
87
36
1907. The origins of the Panic reached as far back as the 1906 San Francisco earthquake.
As San Francisco was the center of finance in the West, the earthquake threatened the
entire region’s economy. Gold reserves from around the world, including from France,
Germany, England, and New York, flowed to San Francisco, forcing a contraction in
liquidity and credit in those markets. To stanch the exodus of gold, European central
banks raised their interest rates, resulting in severe credit shortages in New York by early
1907.91 Foreign banking policy would continue to strain the American money market
throughout 1907. In the summer, the Bank of England placed a prohibition on loans that
allowed U.S. firms to import gold, causing U.S. gold reserves to contract another 10
percent between May and August. New York’s municipal government, meanwhile, was
facing debt default, and in the natural resources sector, the volume of transactions was
declining precipitously.92 The confluence of all these factors exerted a continuous
downward trend on the prices of the New York City Stock Exchange between April 1906
and October of 1907. The official Panic of 1907 began in October when the National
Bank of Commerce declared that it would no longer clear checks for the Knickerbocker
Trust Company due its failed attempt to corner the copper market. However, the
conditions that precipitated the Panic had been building for some time within an
international context.93In response to the Panic, Edwin R.A. Seligman organized a series
of lectures at Columbia University between November of 1907 and March of 1908 from
91
Robert F. Brunner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market's Perfect
Storm (Hoboken, N.J.: John Wiley & Sons, 2007), 13-16.
92
Brunner and Carr, The Panic of 1907, 30-34.
93
Brunner and Carr, The Panic of 1907, 67-73.
37
important businessmen, bankers, and academics about the banking and currency problem
in the United States.
In his introduction to these lectures, Seligman set forth the “scientific principles”
of modern economic analysis while reviewing the predominant theories of economic
crises. He divided the explanations of the crisis into two categories. The first category,
which Seligman termed “the superficial theories,” consisted of attempts to associate crisis
with some government policy. He dismissed these theories as “puerile interpretations”
that are confined to “countries…where the political passions of a democracy have the
fullest sway.” His dismissal was mostly nonpartisan, as he derided Republicans for
ascribing the Panic of 1893 to the impending Democratic tariff of 1894 and businessmen
for declaring the crisis of 1907 the “Roosevelt Panic.” The second category consisted of
explanations that attributed crisis to either overproduction or underconsumption. Again,
Seligman dismissed these theories, and asserted, “There really cannot be any such
phenomenon as too much actual production of wealth.” Indeed, a “prodigious increase of
consumption” generally preceded crises.94 The cause of crisis, according to Seligman,
was not overproduction or the relation of production to consumption, but
overcapitalization, “the discrepancy between the investment and its returns.” Because
there is a “natural tendency of human nature to capitalize one’s hopes and expectations
too liberally,” investors tend to put more money into an enterprise than can possibly be
earned back in profits, culminating in a period where readjustment is necessary.95
94
Edwin R. A. Seligman, The Currency Problem and the Present Financial Situation; A Series of
Addresses Delivered at Columbia University, 1907-1908 (New York: Columbia University Press, 1908),
xi-xii.
95
Seligman, The Currency Problem and the Present Financial Situation, xiv-xv.
38
Seligman’s arguments included the dismissal of popular theories of crisis as well
as an assertion that crises are strictly matters of financial management. Along with many
economic and social elites, he dismissed widely publicized problems with the economy,
such as the ubiquitous issue of economic concentration, the trust question, and social,
economic, and political inequality, as unscientific understandings. Therefore, with the
exception of a flawed financial system, the economy worked well for everyone. Two
years later, Senator Nelson Aldrich summarized this Panglossian view of the economy,
stating as if common knowledge to the Economic Club of New York that
To the great majority of the people of the country the [Panic of 1907] came
without a warning. Most of our banking institutions were in excellent condition,
business of every kind was prosperous, labor was fully employed at satisfactory
wages, industries of every kind were flourishing. Our people were full of hope
and confidence for the future.96
The men Seligman invited to give lectures at Columbia all shared his “scientific”
understandings of the economy. Warburg was one of the invited men, and in light of the
recent and historic panic, he used his lecture, “American and European Banking Methods
and Bank Legislation Compared,” to provide a history lesson. His lecture included all of
the principles put forward in Seligman’s introduction, but it also elaborated and
substantiated a teleological vision of economic and social evolution that rejected
American exceptionalism.
Warburg began the lecture with the establishment of “the line on which modern
banking has developed.” He explained that exchange evolved from “the primitive method
96
Nelson W. Aldrich, An Address by Senator Nelson W. Aldrich Before the Economic Club of New York,
November 29, 1909, On the Work of the National Monetary Commission (Washington: Govt. Print. Off,
1910), 3-4
39
of bartering goods” to “the acceptance of an acknowledged standard of value.”
Eventually, the systems that prove the most durable and handy “evolve as the best
measure of value. Thus, gold and silver of officially certified weight and fineness have
developed as the coin and currency of nations.” In the next step, paper money backed by
precious metals replaces metal money, and during the final stage, bank credit supplants
currency notes as the primary means of exchange, starting out with checks and
promissory notes and ending with modern bills of exchange. Hence, the “vast majority of
payments are effected through transfer of credits” instead of through payment by money.
When instruments of credit replace money, “as a logical consequence,” reserves of
money are brought about to “redeem which cash may of right be demanded.97 By
“reserves of money,” Warburg meant gold.
Since credit replaced currency, the institutions and people issuing the credit had to
be as good as gold. As Warburg put it, “modern banking is built on gold—and
confidence.”98 Banking-panics represented nothing more than a breakdown in
confidence, a situation where depositors ceased to have faith in the institutions issuing
their credit, culminating in demands for gold instead. Panics were, in Warburg’s words,
“acute infections of the body politic by the germ distrust.”99 The fundamental source of
this distrust was inflation. Once an economy shifted from using metallic money to using
credit, the scarcity of precious metals alone could no longer prevent the excessive
expansion of currency. Wall Street and LaSalle Street blamed periods of “too easy
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 39-41.
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 57.
99
Paul Moritz Warburg, “Principles that Must Underlie Monetary Reform in the United States,” The
Federal Reserve System, Vol.2, 165.
97
98
40
money” for the overspeculation that created “fictitious prosperity” by pushing prices
above their natural values.”100 Absent hard currency, banks would expand credit beyond
an economy’s natural values, causing ruinous inflation and the subsequently violent
corrective of deflation. 101 Wall Street and LaSalle Street saw this especially as a problem
with smaller banks that could easily issue credit disproportionately to their own
resources.102 Thus, the economy needed a central institution to regulate credit issuance,
but this raised an important question: who could run such an institution?
Since the emergence of central banking was natural, so must be the emergence of
qualified bankers. Except for his final stage of banking evolution, Warburg’s narrative
was a reiteration of Adam Smith’s famous chapter, “Of the Origin and Use of Money,”
from The Wealth of Nations. In that chapter, Smith posited that when the division of labor
reaches a certain point, men begin to barter due to innate propensities for exchange.
Barter leads to the stockpiling of generally desirable goods that eventually becomes
money. In this manner, money “in all civilized nations” became “the universal instrument
of commerce.”103 Anthropologist David Graeber called this narrative “the myth of
barter.” He contended that this myth, which had become popular among economists and
economic elites in the nineteenth century, affirmed market institutions as manifestations
of natural and universal human impulse, as opposed to other institutions arbitrary power
100
Livingston, Origins of the Federal Reserve System, 161.
Paul Moritz Warburg, “A Central Bank System and the United States of America,” The Federal Reserve
System, Vol.2, 97.
102
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 51.
103
Adam Smith and Garnier, An Inquiry into the Nature and Causes of the Wealth of Nations ( Edinburgh:
Printed for W. Creech, ... [et al.], 1806), 30-39.
101
41
imposed. 104 Warburg placed his narrative within this widely held myth to convince his
American peers that central banking was just another step in the division of labor in
“civilized nations.” In other words, Warburg argued that central banking was an
endogenous institution, emerging from the natural evolution of the economy.
In depicting the emergence of central bank as an endogenous economic
development, Warburg challenged explanations that connected economic problems to
outside interference in the natural economy. Populists and many progressives ascribed
booms and busts to illegitimate monopolistic activity and corrupt political power.105 To
them the problems of the modern economy originated from the interference in and the
manipulation of the market by unnatural economic institutions such as corporations and
trusts. Resolving the problems of a modern economy required recreating the conditions
where markets could work objectively, “conditions of dispersed assets, competitive
markets, and control of one’s own labor power as the condition of self-determination.”
This entailed taking over the power of the Federal Government to limit or break up big
businesses.106 In Warburg’s “myth,” the movement towards corporatism was natural.
Therefore, economic problems had to be the manifestations of systemic flaws rather than
of political corruption or of economic malfeasance.
Warburg conceded banker behavior sometimes contributed to economic crisis, but
he insisted that it was actually structural banking and legislative flaws that caused the
actions others purported to greed and recklessness. Without bills of exchange, banks
104
David Graeber, Debt: The First 5000 Years (Brooklyn, New York: Melville House, 2011), 43-45.
Martin J. Sklar, The Corporate Reconstruction of American Capitalism, 1890-1916: The Market, the
Law, and Politics (Cambridge [Cambridgeshire]: Cambridge University Press, 1988), 54-55.
106
Livingston, Origins of the Federal Reserve System, 45.
105
42
lacked commercial paper that they could easily liquidate in periods when the demand for
cash was high, such as during the crop-moving season. To maintain liquidity, banks
issued call loans for stock market investment that they could always recall. Call loans had
high interest rates because they were risky, and the New York usury law prohibited banks
from charging more than six percent on other kinds of loans. This meant that during
periods of tight money, banks could only raise interest rates on call loans to attract
commercial bills from Europe.107 Even the failure to develop a modern bill of exchange
was mostly not the bankers fault according to Warburg. In lieu of the “want of uniformity
and precision in the laws governing bills of exchange and bankruptcy,” bankers were
forced “to prefer the well-defined promissory note.”108 The control over the economy that
various state and local regimes exerted represented the failure of the legal system to
evolve in accordance with the growth of international economic exchange, and this
political failure compelled the dysfunctional behavior of bankers.
Most national businessmen and bankers of the Progressive Era assented that the
rise of big corporations called for the replacement of state laws with uniform national
laws.109 Perhaps no individual represented national business interests better than George
W. Perkins did. He became a partner for J.P. Morgan in 1901. Before that, he served as
an empire-building executive at New York Life Insurance. In 1902, he pulled off one of
the biggest deals in history when he merged the McCormick Harvesting Machine
Company, the Deering Harvester Company, and three smaller companies into
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 49.
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 59.
109
Kolko, Triumph of Conservatism, 5.
107
108
43
International Harvester. Because of these kinds of transactions, he developed a reputation
as a skilled negotiator among competing business interests and was widely known as the
“Secretary of State” to the House of Morgan.110 Eventually, he would become one of
Roosevelt’s lieutenants, and he served as the executive secretary of the 1912 Progressive
Party.111 In 1907, Seligman invited him to give a lecture at Columbia. Perkins lectured on
the rise of the corporation, which he explained naturally evolved due to the expansion of
trade. The corporation was, in Perkin’s words, “the only bridge that can span the
ocean.”112 With the rise of international commerce and its handmaiden, the corporation,
businesses needed laws that better reflected their broader operations and interests. Perkins
claimed business interests would not oppose “high-minded supervision.” Indeed, he
asserted, “National supervision, under…practical men…would solve most of our difficult
problems.”113 Likewise, many Wall Street bankers were amenable to Warburg’s
argument that under the existing fragmented legal system, banks were “absolutely
helpless with regard to both” high rates and excessive money on the stock exchange.114
Replacing state laws with federal laws would help resolve these problems.
The coexistence of relative financial stability along with central banks in Europe
assured Warburg that within the proper legal constraints businessmen could effectively
coordinate the banking system. Of all the European central banks, Warburg considered
the German Reichsbank the “most perfect organization of its kind.” A salaried president
110
Wiebe, Businessmen and Reform, 46.
Chernow, House of Morgan, 109.
112
George W. Perkins, “The Modern Corporation,” The Currency Problem and the Present Financial
Situation, 157.
113
Perkins, “The Modern Corporation,” 166.
114
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 49.
111
44
exempt from political oversight managed the Reichsbank, which extended its control
throughout Germany with branches run by boards consisting of “ten or twenty men
representing the best financial and commercial men in the locality.” It affected rates of
lending, and therefore rates of economic growth, by setting the discount rate for bills of
exchange. Through the discount rate, the Reichsbank exerted a “moral and practical
influence.” It could act as a brake on unhealthy economic growth and determine between
“legitimate” and “illegitimate” economic activity. Free from political regulation and run
by business and banking experts employing the discount rate to manage the economy, the
Reichsbank embodied Warburg’s ideal of technocratic central banking.115
The formation of the Reichsbank also exemplified Warbug’s teleological vision
of economic and social evolution. The parallels between German and American history
convinced Warburg that United States could emulate Europe. Like the United States,
Germany started out with many independent states that ultimately formed a union. Each
state had a different legal system until a commission completed a code of laws to govern
the entire country. As in the United States, the numerous independent banks in Germany
obstinately opposed the creation of a central bank. Eventually, however, “the very banks
that were forced to abandon the right of issue…acknowledge to-day that they have
derived nothing but profit from the change, and that the central bank has conferred
unalloyed benefit on the entire country.”116 That independent banks eventually embraced
central banking in Germany was proof that central banking could be apolitical even in a
country as diverse as the United States. It also proved that Republican traditions hostile
115
116
Warburg, “Defects and Needs of Our Banking System,” 14-16.
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 64.
45
to economic concentration were changeable. Banking reform would act as a civilizing
process, dispelling sectionalist and Republican prejudices, leading to the universal
acceptance of central banking as well as other national institutions.
Warburg’s interpretation of American exceptionalism informed his evolutionary
imperative for a central regulating institution. He believed that the only reason the United
States did not have a technocratic central bank already was because as “nature’s spoilt
children,” the “immense national resources have enabled [the United States] to live and
prosper in spite of [its] present system.”117 He reasoned that when the United States had
ample resources, it could thrive with an “imperfect” and decentralized banking system.
However, if man was man on both sides of the Atlantic, then only natural resources could
differentiate between the sizes and rates of growth of the various transatlantic economies.
Paradoxically, this meant that Atlantic economies with slower rates of growth were more
advanced. When the United States evolved beyond “its period of rapid growth” to
“conditions of more advanced and slower development,” it would have to adopt modern
commercial paper and a central bank to manage scarce resources.118
The argument that natural resource exhaustion mandated economic reforms would
have resonated with many Americans. If, as Turner postulated, the abundant and pristine
geography of the frontier enabled the development of exceptional American institutions,
the exhaustion of the frontier designated the end of American exceptionalism.119 Anxiety
over the frontier’s imminent end had been building since the 1880s and contributed to
Warburg, “American and European Banking Methods and Bank Legislation Compared,” 55. Warburg,
“Defects and Needs of Our Banking System,” 20.
118
Warburg, “A Central Bank System and the United States of America,” 113.
119
Turner, “On the Significance of the Frontier in American History,” 2.
117
46
reform proposals calling for creation of internal frontiers by expanding arable land
through the application of new technologies, and more importantly for the national elites
among Warburg’s audience, the acquisition of external frontiers through a variety of
means, which included foreign trade.120 However, Warburg’s teleological narrative
indicated that the United States could only acquire external frontiers through a central
institution that could represent its economic interests on the global stage, namely, a
central bank. Along with a central bank, the United States needed to adopt the bill of
exchange, for it created a uniform commercial bill that would enable a coordinated and
discretionary central bank policy of attracting and protecting a supply of gold and foreign
commercial paper used in international transactions.121 However, for the bill of exchange
to be widely adopted, Congress would have to pass new laws to replace the various and
conflicting state laws and regulations. The next chapter explores Warburg’s first attempts
at legislative reform.
120
David M. Wrobel, The End of American Exceptionalism: Frontier Anxiety from the Old West to the New
Deal (Lawrence, Kan: University Press of Kansas, 1993), 38-62.
121
Warburg, “A Central Bank System and the United States of America,” 98-99.
47
Chapter Four: Embodying the Teleological Vision
After elaborating his vision, Warburg tried to embody it in legislative form, but
the road to financial reform was still fraught with insuperable impediments. Resolutions
from Midwestern bankers in the early 1900s had convinced Congress to avoid voting for
bills endorsed by big bankers.122 Main Street, though not as organized as LaSalle Street
and Wall Street, still constituted a legitimate political threat due to the enormous increase
in rural banking and wealth after 1896.123 Even after the Panic of 1907 made monetary
reform an imperative issue, Congress tried to postpone resolving the issue by establishing
the National Monetary Commission, made up of nine members of the House and nine
Senators, to investigate other banking systems and to explore solutions to the banking
problems in the United States.124 Even among Wall Street, many respected bankers still
opposed any reform whatsoever.125 Warburg inserted himself into this morass with little
success. However, these early proposals established the basic organizational structure of
his 1910 proposal that would serve as the foundation of the Aldrich Plan.
Warburg first outlined a plan for central banking in late 1907 during the height of
the Panic. In that plan, Warburg’s goal was “to show how it is possible to create a board
which would be independent of politics, which would comprise men of business
knowledge and experience, and which by its composition, would afford a reasonable
guarantee that it would not be swayed by selfish motives in its actions.” Its board of
directors would consist of delegates appointed by the clearinghouse associations of the
122
Kolko, Triumph of Conservatism, 149.
McCulley, Banks and Politics during the Progressive Era, 96-97.
124
Wicker, The Great Debate on Banking Reform, 49-50.
125
Sparkes and Vanderlip, From Farm Boy to Financier, 181.
123
48
central cities, the chambers of commerce of leading cities, and the Supreme Court. The
structure of the board was supposed to resemble the checks and balances of the U.S.
government. To provide some form of political representation, it included the Secretary
of the Treasury and the Comptroller of the Currency. Nevertheless, the clearinghouse
associations of the major banks and the chambers of commerce of the major cities would
appoint the overwhelming number of delegates, and country as well as state bankers
would have no representation on the central bank.
In anticipation of opposition, Warburg chided country bankers for indulging
selfish interests. He warned them “we need some centralized power to protect us against
others and to protect us from ourselves, some power to provide for the legitimate needs of
the country and able at the same time to apply the brakes when the car is moving too
fast.” To accomplish these purposes, the central bank would take the money of the US
government and deposit it with clearinghouse associations in central reserve cities against
some form of collateral, purchase foreign commercial paper to build up a reserve of gold,
and purchase commercial paper from domestic banks to regulate the general rate of
interest throughout the country.126
By the spring of 1908, Warburg became more intimately involved in the
legislative process of banking reform. He had met with Senator Nelson Aldrich in
December of 1907, and that meeting initiated a relationship that culminated in the
creation of the Aldrich Plan. Not much came of that first meeting, as Warburg still
believed that “as long as Aldrich was in power there was no hope whatever of weaning
Paul Moritz Warburg, “A Plan for a Modified Central Bank,” The Federal Reserve System: Vol.2, 3134.
126
49
the country from the system of a bond-secured currency…” He was in frequent
correspondence with two Congressmen, Herbert Parsons and Theodore Burton, which
would lead to his drafting of a banking bill, “A Modified Central Bank of Issue: a
Suggestion of a Bill.” 127
Warburg’s 1908 bill differed little from his 1907 plan, but it had a few changes to
appease Congress. It acknowledged that the eventual creation of a true central bank had
to be a long-term process. In the preface, he asserted that the United States must finally
develop a central banking system “based on modern commercial bills payable in gold”
that is “similar in principle, if not exactly alike in form, to those of the important
European central banks.” This could not happen all at once, because “economic
conditions” precluded “the possibility of creating at present an institution with powers
and efficiency equal to those of European government banks.” The specific goals this
central banking could accomplish was to centralize the issuance of notes into a few
organs, to vest power in political officers and businessmen combined, to limit if not
eliminate the Federal government’s role in note issuance, and to rediscount loans for
banks. It would refrain from competing with other banks for deposits and from lending
for investment like European banks. It would strictly be a bank of banks, but it would be
“endowed with all those inherent qualities, in a very embryonic form, which through
gradual evolution may make it…a modern and effective central bank.”128 Hence, this
limited central bank would initiate the civilizing process. The key difference in the
structure of this central bank from his earlier proposal was the addition of the Treasurer
127
128
Warburg, The Federal Reserve System: Vol. 1, 28-31.
Paul Moritz Warburg, “A Modified Central Bank of Issue,” The Federal Reserve System: Vol.2, 71-74.
50
of the United States and six members of Congress to the board of directors, which
increased political representation on the board from two of the forty-five seats to nine.
Warburg assured that this would eliminate “the danger of political domination as well as
the danger of control by business men,” but these token changes were insufficient to get
Congress to take it seriously. 129
Despite the legislative ineffectiveness, Warburg’s writings and legislative
proposals in 1907 and 1908 increasingly earned him attention from major businessmen,
bankers, and academics. In October of 1908, the Merchants Association of New York
invited Warburg to become a member of their committee on currency. At the time, they
supported an asset-based currency, but by 1910, Warburg won them over to his
proposals, and they distributed 30,000 copies of two of his articles. His correspondence
with economists became “constantly wider” after he read a paper at a conference for the
American Economic Association in December of 1909. Professor A. Piatt Andrew, who
was serving as the Special Assistant to the National Monetary Commission, invited
Warburg to write an article on “The Discount System in Europe,” which the commission
published in 1910.130 However, it was not just supporters whose attention Warburg
elicited. There were significant challenges to Warburg’s vision, which the next chapter
discusses.
129
130
Warburg, “A Modified Central Bank of Issue,” 77.
Warburg, The Federal Reserve System: Vol. 1, 33-35.
51
Chapter Five: Challenges to the Teleological Vision
By 1909, the interest in central banking provoked protests from prominent
American “exceptionalists.” They argued that the proposals for central banking failed to
account for the unique geographical, historical, cultural, and economic conditions in the
United States. In his history of the Federal Reserve, Warburg noted, “of the scientific
writers, the two most gifted exponents of the anti-central bank doctrine were Professor
O.M.W. Sprague, of Harvard, and Mr. Victor Morawetz, of New York.” 131 These were
the only writers Warburg addressed directly. He considered them “scientific writers”
because they shared the key economic tenets of the Wall Street cohort that were evident
in Seligman’s review of the theories of financial crisis.
Most importantly, Sprague and Morawetz subscribed to endogenous explanations
of economic crises. Morawetz rejected explanations that blamed banker greed or
corruption for economic crises, asserting, “In the main, the banks in the United States
have been managed honestly...”132Sprague explained that the stipulation in the National
Banking Act of 1863 prohibiting national banks from accepting real estate as collateral
for loans discouraged local investment, as real estate was the most common form of
wealth. This in turn encouraged banks to invest more in stock market speculation. To
Sprague a sound principle had informed this restriction, for “the wildest of the
speculative movements which preceded all our early crises were invariably in land.” As
land values stabilized, real estate became one of “the most conservative of investments.”
131
Warburg, The Federal Reserve System: Vol. 1, 35.
Victor Morawetz, The Banking and Currency Problem in the United States (New York:
North American Review, 1909), 34.
132
52
The stabilization of land values negated the foundations for the restriction on taking real
estate as collateral for loans. Thus, the failure of the laws to evolve with the economy
caused the problems in the banking system.133
Though Morawetz and Sprague embraced different banking reform proposals,
their criticisms of technocratic central banking converged on similar conceptions of
American exceptionalism. They believed that European central banking was impractical
in a country such as the United States with its vast geography and unparalleled economic
diversity. Furthermore, they could not foresee how to overcome the entrenched traditions
of Republicanism, localism, and individualism. Even if they could overcome these
traditions, they thought it unadvisable to do so completely. Unlike Warburg, Morawetz
and Sprague accepted America was exceptional in some qualitative sense. Morawetz
acceded that “if, in order to preserve to preserve our institutions, we must lose some of
the advantages of greater centralization of power as well as in matters of government, the
price is not too high.”134 In other words, Morawetz was willing to sacrifice some
economic efficiency to preserve American institutions.
Just a few months after Warburg drafted the central banking bill, Victor
Morawetz published The Banking and Currency Problem in the United States to analyze
the proposal for a central bank. Morawetz argued that a central bank could not work in
the United States, because the vastness of its geography generated an unparalleled
diversity of economic activity that would create unmanageable problems. In no other
133
O. M. W. Sprague, Banking Reform in the United States; A Series of Proposals, Including a Central
Bank of Limited Scope (Cambridge: Harvard University, 1911), 72-73.
134
Morawetz, The Banking and Currency Problem in the United States, 55.
53
country did the volume of currency and the demand for bank credits fluctuate as widely
as in the United States, “due to the great expanse of our territory, to the annual harvest
requirements of the agricultural sections, to the prevailing business activity and
enterprise, and to the rapid and unequal increase of population and wealth in different
sections.”135 From this extraordinary economic diversity sectionalism flourished, and a
central bank would inevitably exacerbate this source of conflict. The South would
demand the bank to help planters to raise the price of cotton and tobacco, the West would
demand the bank help farmers raise the price of wheat and corn, and the large money
centers would want the bank to help bankers and brokers when speculation ran high at
stock exchanges.136 Evidently, Morawetz did not share the part of Warburg’s teleological
vision of economic and social evolution where sectional conflict and prejudice slowly
dissolved after the establishment of nationalizing institutions. In Morawetz’s worldview,
American sectional traditions were as fixed as geography.
Morawetz also feared that if the United States became a creditor nation with a
central bank, its sheer size would strain the international banking system that maintained
the stability of the major European economies. Unlike most of the major European
countries, the United States was not yet a creditor nation. Great Britain had the advantage
of being world’s largest creditor nation and clearing-house. Other nations would not
allow its banking system to fail, as that would halt global credit flows and trade.
Morawetz observed that even the Bank of England had to obtain assistance from the
135
136
Morawetz, The Banking and Currency Problem in the United States, 47.
Morawetz, The Banking and Currency Problem in the United States, 53-54.
54
Bank of France on several occasions.137 As Barry Eichengreen described in Globalizing
Capital, other banks also bailed out the Bank of England. After the failure of the Baring
Brothers in 1890, the Bank of England borrowed gold from Russia, and in 1906 and
1907, it had to obtain support from the Reichsbank. Great Britain was not alone in the
need for bailouts. The Reichsbank obtained assistance from the Bank of England and the
Bank of France in 1898. The currencies of Great Britain, France, and Germany were vital
to the global system of exchange; therefore, they could also count on help from other
countries during times of crisis. Peripheral debtor countries in Latin America and Asia
held no such advantage, as their problems did not threaten to destabilize the global
system.138 Morawetz’s contention was that even if the United States were to become a
core creditor nation, it was still different from the other core nations in its sheer size,
which, in the event of a bailout, would surely overwhelm this system of solidarity.139
O.M.W. Sprague published the first of four articles on banking reform for the
Quarterly Journal of Economics in May of 1909. By the time he published his fourth
article in November of the next year, he had become receptive to some form of central
banking, but he continued to insist that European central banking was unsuitable for the
United States. In his first article, he attempted to address the “increasing measure of
favorable consideration” that “the proposal to establish a central bank in the United
States” was getting since the crisis of 1907. He believed that “to establish a central bank
as a remedy…would indeed involve a radical and revolutionary departure from our
137
Morawetz, The Banking and Currency Problem in the United States, 86.
Barry J. Eichengreen, Globalizing Capital: A History of the International Monetary System (Princeton,
N.J.: Princeton University Press, 2008), 33-37.
139
Morawetz, The Banking and Currency Problem in the United States, 85.
138
55
banking traditions and practice.”140 More than just a departure from traditions, Sprague
doubted the feasibility of European central banking in the United States because of the
incomparable geographies.
Like Morawetz, Sprague argued that geography made central banking
impracticable in the United States, albeit for more technical than cultural reasons. He
noted, “With the exception of Russia, there is no country of anything like the area of the
United States in which we may study the operations of a central bank…” Russia could
not offer any examples either because of “the relatively slight development of its
machinery…” With its massive geography, the United States would need thousands of
branches to enable its central bank to provide the same facilities as the Bank of France
and the Reichsbank. To dispatch money from the head office to banks throughout the
country within successive business days, gold reserves would still have to be
decentralized.141
The central bank would face another seemingly insurmountable difficulty in
having to issue and manage loans and reserves for the Federal Government as well as for
thousands of banks throughout the country. The United States had more than twice as
many deposit liabilities as any other country, and the reserves of the Federal Government
fluctuated to an unparalleled degree. 142 Sprague contended that placing American
deposits and government balances, which were “clearly quite unlike those of other
countries,” would create a banking power unlike anything in history.143 Lending to
140
Sprague, Banking Reform in the United States, 9.
Sprague, Banking Reform in the United States, 12-13.
142
Sprague, Banking Reform in the United States, 18.
143
Sprague, Banking Reform in the United States, 30-31.
141
56
thousands of banks absent the institution of branch banking also made the task of central
banking in the United States cumbersome, but there were good reasons why the
formation of branch banking in the United States was unlikely and undesirable.
Most European countries had branch banks, which is a kind of banking where
banks scattered through a region, country, or multiple countries all operate under the
oversight of a central administration. The Bank of America, for instance, is a modern
branch bank. In this period, the United States did not have interstate branch banks, due to
prohibitions in the 1863 National Banking Act. In a country with branch banking, a
central bank could simply distribute funds to the administrative centers of the various
branch banks, which then could determine how to allocate those funds among its
individual banks. In England, there were several thousand branches of less than one
hundred banks, whereas the United States had tens of thousands of independent banks.
Sprague believed that branch banking would function inefficiently in a country
where several regions had reached different stages of development. His interpretation of
different stages of development rather than of regions serving different functions within
the same economy revealed that he shared Warburg’s teleological notion of economic
evolution. Nevertheless, his vision did not entail a civilizing central institution, and he
averred that the United States should “wisely continue to prefer banks managed by
persons with extensive local knowledge to branch banks subject to bureaucratic
managers.”144
144
Sprague, Banking Reform in the United States, 12-13 and 48.
57
Sprague also pointed out that prejudice against eastern financiers was an
impediment to the formation of branch banking in the United States. He perceived that
this hostility was waning as the West accumulated capital and liquidated its debt, but with
the trust investigations in the early twentieth century, “a less sectionalized but more
diffused feeling against wealthy financiers” was developing.145 Although there were no
branch banks in the United States, many Americans decried Eastern control of banks
around the country through interlocking directorates and holding companies, as Louis
Brandeis would illuminate in a series of articles in 1913.146 After 1910, opposition to
banking plans that entailed regional banks with voting member banks rested on the belief
that member banks would merely be puppets of Eastern holding companies. The most
notable instance of this opposition flared up after Frank Vanderlip formed the National
City Company, a holding company with controlling interests in banking institutions all
over the United States. After its formation, the New York Times declared that currency
reform was waste of time “so long as one national bank, through a holding company, may
control twenty, fifty, or a hundred of the national banks.”147 Minnesota Congressman
Charles A. Lindbergh then introduced a resolution for an investigation of the “Money
Trust,” which culminated in the Pujo Investigation.148 Seizing upon this anti-trust
sentiment in his 1912 campaign, Woodrow Wilson, “The great monopoly in this country
is the money monopoly. So long as that exists, our old variety and freedom and
145
Sprague, Banking Reform in the United States, 14.
Louis Dembitz Brandeis and Melvin I. Urofsky. Other People's Money and How the Bankers Use It
(Boston: Bedford Books of St. Martin's Press, 1995), chapter III.
147
New York Times, 4 November 1911.
148
Broz, The International Origins of the Federal Reserve System, 190-191.
146
58
individual energy of development are out of the question.”149 Branch banking was simply
impossible in a country where so many people equated this form of banking with
oligarchy. Along with the intractable geographical issues and intransigent cultural
prejudices, the stage of development the United States had reached within the
international economy was another disqualifying factor.
Sprague explained that the source of instability in the United States stemmed from
unparalleled opportunities for rapid development, and not, as was the case in Europe,
from foreign trade. For European powers, all boasting large overseas empires, the sources
of instability derived from their colonies and peripheries. The purely domestic activities
of those countries were stable. Indeed, the foreign trade and financial operations of
leading European countries were of “enormous magnitude, both absolutely and relative to
the total business of those countries.” Financial troubles in the United States, conversely,
were of domestic origin. Compared with European countries, foreign trade and financing
constituted a small part of the economic activities in the United States. Moreover, the
United States did not finance a significant share of its foreign trade. Unlike in Europe, the
abundant opportunities for domestic development in the United States led to periods of
exuberant loan expansion and violent speculative movements. Since, as Sprague pointed
out, the rate of discount in European countries had a much greater impact on checking
loans of foreign origin than on loans of domestic origin, a central bank had little power to
William Bayard Hale and Woodrow Wilson, “Monopoly, or Opportunity?” The New Freedom: A Call
for the Emancipation of the Generous Energies of a People (New York: Doubleday, 1985), 185.
149
59
constrain credit creation in a country deriving most of its growth from domestic
development.150
Morawetz and Sprague challenged Warburg’s vision of how modern economies
evolved. They stated that a central bank would entail unprecedented concentrations of
financial power. Sprague also noted that there were wide differences between
“Continental” and “Anglo-Saxon” banking.151 In contrast, Warburg portrayed banking
systems as evolving universally, naturally, and apolitically, even though European
banking policy reflected the political and economic structures of power. The Bank of
France used a limping gold standard, which left the convertibility (exchanging paper
currency and bank notes for gold) to the discretion of the central bank, allowing it to
control capital flows in and out of France. Since France had a relatively small foreign
trading sector and a very large agrarian rentier class, the Bank of France supported the
price of rentes over the stability of foreign exchange. In England, merchant bankers were
the most dominant economic class dating back to the eighteenth century, so the Bank of
England ensured the stability of foreign exchange, even at the expense of its own
manufacturing sector. As military power united Germany in an age of imperial
competition, its central bank promoted the internalization of the Reichsmark.152 All of
this is to say that Warburg’s teleological vision obscured important differences between
various banking systems. The two writers in this chapter focused on “exceptional”
conditions in the U.S. to argue that a European style central bank was unsuitable for the
150
Sprague, Banking Reform in the United States, 44-47.
Sprague, Banking Reform in the United States, 37
152
Broz, The International Origins of the Federal Reserve System, 120-127.
151
60
United States. Warburg would try to incorporate these critiques into his analysis without
sacrificing the integrity of his teleological vision. That is the subject of the next chapter.
61
Chapter Six: Modifying the Teleological Vision
Though his fundamental principles of reform remained the same, Warburg
understood by 1910 that he had to modify the presentation of his arguments to stand a
chance in Congress. In March of 1910, Warburg addressed the Young Men’s Christian
Association. He was encouraged by a survey of over 5,600 bankers administered by the
Banking Law Journal revealing that over 59 percent of bankers would favor a central
bank if not controlled by Wall Street or any monopolistic interest.153 In this address, he
extensively commented on the arguments of Sprague and Morawetz. To make his
proposal palatable, He ceased using the term “central bank.” Instead, he proposed a
“United Reserve Bank,” which would concentrate reserves but give more people a say in
how regional branches would be run.
In “A United Reserve Bank of the United States,” Warburg tried to allay the fears
stoked by the geographical and populist arguments against central banking. He assured
that this new scheme was “based upon conditions peculiar to our country and our form of
government.” He designed the structure of the United Reserve Bank to appeal to bankers
and businessmen in the West, the South, and in other rural regions. Twelve regional
banks would issue circulating notes and buy commercial paper from voluntary
associations. Bank membership in these associations would simply entail keeping a
mandated percentage of capital stock in the regional bank, allowing for national banks
outside of the major cities to join. The associations would appoint their own board of
directors who would then appoint a president. The policy of the regional banks would
153
Warburg, “A United Reserve Bank of the United States,” 117.
62
still be coordinated at the United Reserve Bank in Washington, where discount rates and
reserve ratios for the regional banks would be set.154 The associations would appoint
Three-fifths of the directors in the Washington bank, the discount rate for each branch
could be different, and the branch offices would perform the actual business of the United
Reserve Bank.155 This new system would not be a full central bank, but businessmen and
bankers rather than politicians would run it.
Warburg repudiated the belief that a central bank was a step towards monopoly.
He emphasized that a central bank was “not an oligarchic but a democratic institution,”
and that “wherever a central bank exists, it is the backbone of the independent institutions
in their fight against the overpowering influence of the large stock banks.”156 Essentially,
the stability a central bank provided ensured that larger banks would not absorb smaller
independent banks. He believed that through gradual reforms, virtually all Americans
would eventually become receptive to a central bank. The United Reserve Bank would be
a civilizing institution, dispelling the prejudices of the people, encouraging national unity,
and allowing for greater reforms in a process culminating in the formation of a “perfect
system.” Until then, his new scheme accommodated “the diversity and dissimilarity of
interests, and even the traditional, sectional, and partisan prejudices of the people."157
Warburg concluded his address with an appeal to American history. He remarked
that in his first political speech Abraham Lincoln called for a protective tariff, a system of
Warburg, “A United Reserve Bank of the United States,” 119-121.
Warburg, “A United Reserve Bank of the United States,” 136-137.
156
Warburg, “A United Reserve Bank of the United States,” 159.
157
Warburg, “A United Reserve Bank of the United States,” 118.
154
155
63
internal improvements, the abolition of slavery, and a “United States Bank”. Warburg
went on to say that
It is seventy-seven years ago that this simple man from the woods, with his neverfailing instinct, laid down this remarkable program, of which only one single part,
a “United States Bank,” remains to be carried out. Let us hope that it will be the
pride of our generation to have achieved this step in the onward march of the
United States.158
Warburg implied that a central bank represented a progressive step along the lines of the
railroads (internal improvements) as well as the abolition of slavery. It was, in fact, a
fundamentally American institution. After all, if Lincoln, whose vision had laid the
framework for the emergence of modern America, supported a central bank, how could
Americans consider it un-American? The fact that it was the only unfulfilled part of
Lincoln’s vision indicated that they could trace the problems in the American economy to
the lack of a central bank. A central bank therefore represented the natural progression of
American economic and social evolution.
In this reiteration of his teleological vision of economic and social evolution,
Warburg emphasized how geography necessitated the creation of a central coordinating
function in American banking. Responding to Sprague and Morawetz’s argument that the
geography of the United States was too vast for a central bank to manage, Warburg stated
that “the immensity of our country…and our transactions render it absolutely necessary
for us to adopt the most efficient system in existence. The greater the area, the more
perfect the system must be in order to reach every remote point.” Thus, he flatly rejected
even the concept of multivalent banking systems. His vision only allowed for a hierarchy
158
Warburg, “A United Reserve Bank,” 160-161.
64
of banking systems running from the primitive to the advanced, and the more important a
country, the more advanced forms of banking it had to adopt. After all, “a small and
unimportant country could live with a less perfect system, and could lean upon the other
central bank countries in times of need.”159
With another appeal to American history, he likened the need for a central bank to
the need for united action during an invasion. If “a common foe” were to “attack Boston
and New York, would Illinois keep her soldiers at home, or would she differentiate
between Boston and New York?” Just as selfishness or localism could endanger the very
survival of a nation during a time of war, such as during the American Revolutionary
War, so could decentralization lead to economic instability and disintegration.160
Warburg would also make technical critiques of the exceptionalist arguments, but it is
important to remember that his appeals to subjective factors such as culture and history
were just as important as his technical analysis.
He also appealed to the growing sense of international importance within
American society. In the article he wrote for the National Monetary Commission, he
explained how American banks and exporters had to “pay tribute” to European banks for
currency exchange in overseas transactions due to the lack of a discount market in the
United States as well as the fact that its currency was not international. More than just the
economic inefficiency in this arrangement, Warburg claimed that it “reflects upon the
dignity of a nation of the political and economic importance of the United States.” 161
Warburg, “A United Reserve Bank of the United States,” 136.
Warburg, “A United Reserve Bank of the United States,” 136-145.
161
Warburg, “The Discount System in Europe,” 187-188.
159
160
65
Though it may seem obvious that Americans would not have wanted to pay “tribute” to
European banks, it is actually not self-evident that American exporters and businessmen
should have identified more or less with Eastern financiers than with European
financiers. It was common in this period for even businessmen to view Eastern financiers
as distant and foreign.162 However, as Carol Chin has argued, Americans were
increasingly developing a shared sense of national identity in the early twentieth century,
as evidenced by books such as Herbert Croly’s 1909 book The Promise of American Life
and Theodore Roosevelt’s New Nationalism.163 Warburg was tapping into a prevalent
discourse of modernity and nationalism.
In a sense, Warburg was trying to reconfigure American exceptionalism from the
qualitative state of cultural difference as described by Frederick Jackson Turner to a
quantitative state of being the first among nations. In this reconfiguration, the United
States would not be fundamentally different from other modern countries, but it would
have the world’s leading economy. This sentiment cohered with the period’s prevailing
notions of internationalism, which is different from globalism and globalization.
Globalization refers the predominance of economic institutions, such as multinational
corporations, unmoored from national concerns or interests, as well as the free movement
of capital and people across borders. Internationalism refers to the relationships and
behavior between nations.164 As far back as 1899, Roosevelt talked about the need for the
162
Eric Rauchway, Blessed Among Nations: How the World Made America (New York: Hill and Wang,
2006), 24.
163
Chin, Modernity and National Identity in the United States and East Asia, 138-142.
164
Chin, Modernity and National Identity in the United States and East Asia, 12-14.
66
United States to prepare itself “if she is to do her duty among the nations of the earth.”165
Roosevelt was specifically speaking about imperialism, but imperialism and finance were
often entwined. In what one historian has called “dollar diplomacy dependency,” the
United States extended cultural and economic hegemony over Latin American countries
through loans that entailed substantial financial supervision. Coincidentally, in 1907
Warburg’s employer, Kuhn, Loeb, and Co, became the financial supervisors of the
Dominican Republic’s government, which was the first dollar diplomacy dependency.166
Expansionism constituted a component of many visions of American exceptionalism. In
these visions, it was the duty and “manifest destiny” for the United States to assist
“inferior” people in developing civilized ideals and institutions, of which finance was an
important part.167 Like Warburg, Vanderlip believed in universal and scientific laws of
finance and commerce.168 He had argued that economic progress in both cores and
peripheries depended on wealthy regions exporting the “machinery of civilization” to less
developed regions, which included financial capital.169
Warburg did not share the sentiment that the United States was already the most
advanced nation in the world with Roosevelt and Vanderlip, but he would say before the
American Economic Association in a 1911 address that with a modern financial system
“the United States…will attain that place among the nations which should be hers by
Theodore Roosevelt and William Saffire, “The Strenuous Life,” Lend Me Your Ears: Great Speeches in
History (New York: Norton, 1992), 541.
166
Emily S. Rosenberg, Financial Missionaries to the World: The Politics and Culture of Dollar
Diplomacy, 1900-1930 (Cambridge, Mass: Harvard University Press, 1999), 41-46.
167
Chin, Modernity and National Identity in the United States and East Asia, 22-24.
168
Frank Vanderlip, “A New College Degree,” Business and Education, 23.
169
Vanderlip, “The Ultimate Dependence of New England upon Foreign Trade,” 283-284.
165
67
destiny.”170 Even though Warburg was repudiating qualitative American exceptionalism,
he was still appealing to the American sense of destiny that “obligated Americans to go
forth and civilize.”171 Geography had created the illusion that the United States could
forever differ qualitatively from other nations. Scientific laws of commerce and
civilization allowed for only one kind of institution. Nevertheless, even as “nature’s spoilt
children” ceased to enjoy the exceptional institutions permitted by abundance, the United
States could still be a paragon of sound, scientific management, directing and developing
other nations through its financial institutions. Thus, the United States could still see
itself as a “chosen people” with the manifest destiny to spread the light of civilization
throughout the world. However, Warburg had to address the arguments from other
“scientific” writers that the place of the United States within the world meant that it did
need a central bank.
Warburg incorporated into his teleological narrative the concerns of Morawetz
and Sprague about the place of the United States in the global economy. He made it clear
that though the United States was still a debtor nation, a central bank would enable it
finally become a creditor nation. As a corollary, foreign trade would become a larger part
of the U.S. economy.172 Once the U.S. economy became a financier of global trade, its
representation in the system of international solidarity was essential, not just for the
stability of the U.S. economy, but also for the stability of all economies. It is evident,
Warburg elucidated, “that one of the functions of the United Reserve Bank would be to
Paul Warburg, “Circulating Credits,” The Federal Reserve System: Vol.2, 233.
Chin, Modernity and National Identity in the United States and East Asia, 52.
172
Warburg, “A United Reserve Bank of the United States,” 132.
170
171
68
accumulate…large amounts of foreign bills of exchange to hold as a gold reserve against
emergencies…” In accumulating foreign bills of exchange, the United Reserve Bank
would signal to other central banks a condition of stringency in the United States and thus
allow the other banks to take appropriate actions.173 If a panic were to strike a more
internationally important U.S. economy that lacked the mechanism to collaborate with
other countries, it would devastate the global economic system. Solidarity in the global
monetary system was not a flaw, but the best solution possible to the financial
instabilities that occur in a global economic system. The bigger a core country, the more
necessary it was for it to participate in this global system of solidarity. Therefore, the
arguments put forward by Sprague and Morawetz were not refutations of Warburg’s
critiques, but affirmations of his teleological vision.
173
Warburg, “A United Reserve Bank of the United States,” 157.
69
Chapter Seven: Conclusion
In December of 1910, Paul Warburg met with Senator Nelson Aldrich, fellow
Wall Street bankers Henry Davison and Frank Vanderlip, as well as former Harvard
professor A. Piatt Andrew at Jekyll Island. Out of that meeting came the Aldrich Plan for
Banking Reform, which Nelson Aldrich presented to Congress in January of 1911. A
definitive allocation of responsibility for the each part of the Aldrich Plan is not possible,
as none of these men ever described the details of their meeting. Nevertheless, the major
provisions in the bill—twelve regional banks with board members chosen by voluntary
banking associations, a central reserve board in Washington, and the use of loan
rediscounting to regulate interest rates—reproduced key features of Paul Warburg’s
United Reserve Bank.174 By 1913, the presidents of 47 state banking associations and 191
clearinghouse associations made it clear that they wanted the Aldrich Plan. Though the
Democrats explicitly rejected the Aldrich Plan after capturing the White House and a
majority of both houses in Congress by 1912, enough Democrats were willing to side
with the Republican minority to kill any bill that failed to conform to the principles of the
Aldrich Plan.175 Ultimately, The Federal Reserve System resembled Warburg’s United
Reserve Bank in the formation of regional banks ran by local commercial men and
bankers, whose policy would be coordinated through a central board of directors which
regulated interest rates through loan rediscounting. However, the Federal Reserve Act
174
Nelson W. Aldrich, Suggested Plan for Monetary Legislation Submitted to the National Monetary
Commission (Washington: G.P.O., 1911), 6-20.
175
Johnson, Historical Beginnings, the Federal Reserve, 28-30.
70
critically diverged from Warburg’s technocratic central bank with the political
appointment of the Washington Board of Directors.176
Warburg’s role in the formation of the Federal Reserve System illustrates the
importance of ideology and ideas, and as a corollary, of contingency and transatlantic
movements in American history. A number of scholars elaborated the ideological factors
in the origins of the Federal Reserve, but a complete study must account for the fact that
that before 1907, no group in the United States believed that they needed the kind of
banking system represented in the Aldrich Plan of 1911. Something changed after 1907,
and it is likely that Paul Warburg’s teleological vision that rejected American
exceptionalism played a significant part in that shift. Certainly, ideology made Wall
Street and other national bankers receptive to visions of technocratic central banking, but
not all of these visions emerged organically emerged from evolving American conditions.
Warburg ended up in the United States happenstance. The ideas that motivated the
movement for central banking in the United States were contingent, and they point to the
influence of the transatlantic movement of people and ideas on American history.
Due to its limited scope, this work ignored or only briefly covered a number of
important areas. As stated in the introduction, all of the members of the Jekyll Island
Cabal expressed sentiments of “American unexceptionalism.” A broader work could
explore how their ideas of American exceptionalism or unexceptionalism and of
international consciousness influenced the movement for banking reform. This analysis
could also be expanded beyond the Jekyll Island Cabal, as there were many writers in this
176
Wicker, The Great Debate on Banking Reform, 86-92.
71
era commenting on the place of the United States in the world and in history. Completely
absent from this work was private activism. The members of the Jekyll Island Cabal
wrote frequent correspondence with their peers. The role of private correspondence in
promoting the idea of technocratic central banking could be explored to an even greater
extent than it was in Livingston’s Origins of the Federal Reserve System. Gender is
another topic this study did not touch on at all, but the association of money and women
has a long history.177 The role of racial thinking, social Darwinism, and imperialism in
the formation of economic institutions could also be further explored. Though many
works have addressed this issue, new interpretations of why the Democrats banking bill
so resembled the Aldrich Plan in which they rejected would be welcome.
To return to the central theme of this study, why does American exceptionalism
matter? As Eric Rauchway observed in Blessed Among Nations, compared to other
industrialized nations in this period, American behavior was in many ways exceptional,
especially in the small size of its welfare state and its overseas empire and eventually in
the decentralized structure of its central bank. Rauchway pointed out that though
emphasis on American difference “too easily slides into a celebration of American
exceptionalism,” the attempts to show that the United States is not exceptional have led
to unpersuasive arguments about the past, such as that the United States was an empire
just like all the others or that limited nineteenth century pensions policies constituted a
kind of social insurance just like all the others.178 The history of the United States cannot
177
Michael, O'Malley, The Aporetic, "The Female Dollar."
Last modified September 19, 2013. Accessed February 24, 2014. http://theaporetic.com/?p=4800.
178
Rauchway, Blessed Among Nations, 10-14.
72
be adequately understood outside of its international contexts. As this study has indicated,
Americans of this period were very much engaged in debates about the existing and
changing position of the United States in the world, and the most important figure in the
movement for technocratic central banking was a German-Jewish immigrant. However,
how Americans behaved within these international contexts was largely constrained and
informed by existing cultural ideas and traditions.
This is not to say that these traditions and ideas were static. “Tradition” has often
been used as a discrediting opprobrium. Perhaps the most notable example of this is
characterization of the Populists as traditional, when they were in fact very much modern,
especially in their belief in the transforming power of science and technology. 179 Even as
the Populists claimed the Jeffersonian and Jacksonian traditions, they supported
increasing the power of the central government.180 Every group responding to the
transformations of industrialism, from corporate CEOs to rural farmers, constituted a
social movement attempting to make industrialism serve their own interests.181 Likewise,
every group accused the others of being “traditional” and resistant to modernity, although
for some reason, perhaps because of the continuing power of business within society, the
label of “traditional” has successfully stuck to Populists.
In all these social movements, there was preservation, in the sense of preserving
their own status, interests, and values, as well as pragmatism, the adaptation to changing
to conditions. As Marx remarked, “men make their own history, but they do not make it
179
Postel, The Populist Vision, 4.
Postel, The Populist Vision, 142-154.
181
Skylar, The Corporate Reconstruction of American Capitalism, 5-12.
180
73
just as they please…The tradition of all the dead generations weighs like a nightmare on
the brain of the living.”182 As Donald Worster remarked in “Historians and Nature,”
“adaptation, even in nature, has never been perfect or sufficient… Nature cobbles
together solutions from whatever material is available. When those solutions fail, the
costs of mal-adaptation can be severe.” 183 Likewise, societies adapt to changing contexts,
but within their cultural constraints. One of the animating ideas in American history is
American exceptionalism, which have informed the paths of economic, social, and
political reform throughout history. As this study has tried to elaborate, within the
international contexts of the changing place of the United States in the world in the early
twentieth century, the idea of American exceptionalism made its mark on the movement
that would culminate in one of the most influential economic and political reforms of the
twentieth century.
Karl Marx, “The Eighteenth Brumaire of Louis Bonaparte” The Marx-Engels Reader (New York:
Norton, 1978), 595.
183
Donald, Worster, The American Scholar, "Historians and Nature." Last modified 2010. Accessed March
10, 2014. http://theamericanscholar.org/historians-and-nature.
182
74
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