As to those on whom the words “Central Bank” still act as a red rag on a bull, I ask them to study this bill carefully and without prejudice—if they can—and they will find that even Andrew Jackson, were he alive, would not be likely to oppose it.
—PAUL M. WARBURG
©Bettmann/CORBIS
The instructions that Senator Nelson Aldrich gave his guests were painstakingly specific. They were to arrive, one at a time, on the evening of November 22, 1910, at the train station in Hoboken, New Jersey. There they would board, as unobtrusively as possible, Aldrich’s private car attached to a regularly scheduled southbound train. Once on the train and until they boarded the island ferry at Brunswick, Georgia, they were instructed to leave their last names behind. So Senator Aldrich would be just Nelson, and Benjamin Strong, president of Bankers Trust Company, just Ben. Abram Piatt Andrew customarily used only his middle name, but the Harvard professor and soon-to-be assistant secretary of the Treasury would go by Abe for the next few days. Frank Vanderlip, vice president of National City Bank, the largest commercial bank of its day, and Henry Davison, a senior partner from the House of Morgan, went even further. They became, respectively, Orville and Wilbur, claiming that at the upcoming meeting they would always be “right.” And Paul Warburg, partner of the investment banking house of Kuhn, Loeb & Company, would be Paul.
The directions on travel attire must have been particularly awkward for Paul. Even though it would be dark at the appointed hour, Aldrich instructed his guests to take precautions against being identified as the prosperous financiers they were. In opera buffa fashion, they were to wear hunting outfits and assume the guise of happy-go-lucky sportsmen on holiday. But Warburg’s personality was the opposite of happy-go-lucky and, unlike his fellow guests, he had never been duck hunting and didn’t even own a shotgun. He was shy and bookish and, as a recent emigrant from Hamburg, Germany, still spoke with a heavily accented and awkward brand of English. He was just forty-two but had already turned bald, and that, coupled with a thick and drooping mustache, gave him a serious, somewhat sour demeanor. Purportedly, he was the inspiration for the bald-pated Daddy Warbucks character of the Little Orphan Annie comic strip that originated during this era.
Yet among these financially sophisticated travelers to Jekyll Island, he was by far the most knowledgeable about the subject at hand: central banking. Senator Aldrich, the Republican whip and chairman of the Senate Finance Committee, had finally decided that the time had come to gather the best minds in finance to design a central bank for the United States—and that Paul Warburg would be its chief architect.
The meetings were held in seclusion over the next two weeks at the stately and sprawling Jekyll Island Club just off the barrier reefs of Georgia. The club had been constructed for the private use of a limited roster of members, including J. P. Morgan, Cornelius Vanderbilt, and other prominent businessmen of turn-of-the-century America. Senator Aldrich was himself a wealthy man, and with his daughter’s recent marriage to John Rockefeller Jr., he had little difficulty gaining access to what local Georgians called the “millionaires’ club.”
The club was already closed for the season, but Aldrich was able to hire a specially screened skeleton crew to take care of his Wall Street guests. Though the identities of the participants and the location of the November 1910 meetings would not be known until decades later, the deliberations during those two weeks produced the rough blueprint for the Federal Reserve Act of 1913 and the establishment of the country’s first viable central banking system.
A Third Rail Issue
At the time of the Jekyll Island meeting, Senator Aldrich had served in Congress for thirty years, with all but two of those years served in the Senate. He had risen through the ranks and, when the Republicans were in the majority, he kept a firm hand on the operations of the Finance Committee. With his long tenure in politics, he had a firsthand appreciation of the difficulties in establishing an American central bank along the lines of the Bank of England or other European central banks, and for most of that tenure he and his party were on record as opposing any such financial institution. He was sophisticated in banking matters and appreciated the potential value of a central bank, but he felt that the Old World central banking model—a privately owned, monolithic institution based in a capital city—would be unacceptable in the United States, with its disparate regional economies and a midsection deeply suspicious of concentrations of power on its East Coast.
What’s more, a European-styled central bank had already been tried twice in the United States and had failed both times. Alexander Hamilton’s short-lived (1791–1811) First Bank of the United States, modeled after the Bank of England, eventually ran afoul of southern agricultural interests represented forcefully by Virginians Thomas Jefferson and James Madison, who saw the country’s first attempt at a central bank as being too closely aligned to northern and mercantile interests. That bank was followed five years later by the Second Bank of the United States, and it too lasted only two decades (1816–1836). The Second Bank, controlled by the prominent Philadelphia financier Nicholas Biddle, faced political firestorms when Biddle’s conservative monetary policies ran counter to the interests of the westward-expanding country. In 1836 President Andrew Jackson, representing rural and populist interests, quashed the Second Bank.
But during the latter half of the nineteenth century the need for financial stability and a lender of last resort grew even more apparent after a crescendo of financial panics hit the country in 1857, 1873, and 1893. Yet paradoxically, political divisions in the United States had only deepened the antagonism toward central banking in the wake of those panics. Even Pierpont Morgan’s successful, and arguably valiant, efforts to stanch the 1893 “gold panic” became controversial, as antibanking forces pointed to profits the House of Morgan reaped during the rescue. It was the widely held view that Morgan and coconspirators on Wall Street created the 1893 panic as a means to enrich themselves through an ensuing rescue. The central bank issue remained a political hot potato.
The political conflicts about banking were in part cultural but fundamentally sprang from differing economic interests. There were some twenty thousand banks in the country serving small-town and agricultural interests. Farmers needed an ample supply of money to finance their activities and, with the long lag time between planting and harvest, they viewed rising prices favorably. Bankers held just the opposite view of price inflation, since it resulted in their loans being paid back in dollars with diminished value. It has always been the fact in banking that inflation benefits the debtor to the detriment of the lender.
A central bank, with its mission of preserving the value of the dollar for international trade, was perceived to be inclined toward tight-money policies and the prevention of inflation. And that perception had the reality of the gold standard behind it. Central banks at that time strictly adhered to a system in which the dollar and other world currencies were pegged to a specific weight in gold. With that system in place, expansion of the money supply and inflation were kept in close check, much to the dismay of agrarian interests.
The most vocal political opponent of central banking and its tight-money, gold-dictated policies was William Jennings Bryan, one of Aldrich’s fellow senators and always a power to be reckoned with. He proposed a doctrine of “bimetallism” under which the money supply would expand according to both gold and silver supplies. At the 1896 Democratic convention, where he received his party’s nomination for president, he punctuated his easy-money proposal with two of the most memorable lines in the history of American speeches: “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.” In the face of Bryan’s great political appeal—he was the Democratic presidential nominee in 1896, 1900, and 1908—Aldrich knew the times were not right to propose the creation of a central bank, even though he personally favored a central bank and tight-money discipline. The Democrats were steadfast in their opposition, as were most of Aldrich’s fellow Republicans, although not as vociferously. Even the American Bankers Association, with its membership weighted toward the interests of the smaller, rural banks, objected to it.
But though the odds weighed heavily against him, Aldrich, more than seventy years following the demise of the Second Bank of the United States, revived what had long been considered a dead cause and eventually took the lead in the third attempt to create a new central bank for the country. There were two events that steeled his resolve: the panic of 1907 and a chance meeting with Paul Moritz Warburg.
A Wake-Up Call: The Panic of 1907
The collapse of banks in a panic is often described as a row of falling dominoes. However, as the 1907 panic demonstrated, it involves not just the toppling of banks of similar size, but rather the failure of those of ever-increasing size. The 1907 panic was set off by the failure of the State Savings Bank, a small bank in Butte, Montana, that became insolvent through ill-advised lending in connection with an unsuccessful attempt to corner the market in the shares of the United Copper Company. State Savings Bank’s problems then spread to its New York correspondent bank, Mercantile National Bank, as that bank’s depositors began making wholesale withdrawals based on rumors about its weakened financial condition resulting from its connection with State Savings. The resulting collapse of Mercantile National in turn set off additional and larger failures among New York banks, including the Knickerbocker Trust Company, the third-largest trust operation in the city.
When the even larger Trust Company of America became threatened with failure following an escalation of withdrawals by panicky depositors, Pierpont Morgan stepped in and calmly announced, “This is the place to stop the trouble, then.”1 Operating from the library of his midtown brownstone home, he acted as the de facto central bank for the nation. He assembled emergency funds and, with the help of his partners, engineered a series of confidence-inducing measures, including a fresh investment by John D. Rockefeller in National City Bank, a commitment of assistance from the U.S. Treasury Department, and an order to keep the New York Stock Exchange open. Those steps quelled the panic.
Those who found themselves nearly consumed in the vortex of the 1907 financial hurricane fully realized the consequences of operating without a central bank. But even the virulence of the panic could not overcome an inveterate national fear of central banks. In 1907, the country was still in thrall to populist sentiment and reflexive antipathy toward the Eastern banking establishment and its hard-money ways. Central banking was closely associated with the despised “money trusts” that had been the focus of suspicion at the turn of the twentieth century. A European-style uberbank with the power to create money and regulate the nation’s banks remained a “third rail” issue in national politics.
Yet the United States remained the lone major economy operating without a national bank regulator and lender of last resort when the economy was operating in extremis. After the harrowing but ultimately successful resolution to the panic of 1907, and with Morgan then seventy years old, Aldrich stated what was increasingly obvious: “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.”2 As a first step toward reform, Aldrich pushed the passage of the Aldrich-Vreeland Act through Congress in May 1908, with one of its key provisions being the establishment of the National Monetary Commission to study central banking practices in other countries. In an attempt to demonstrate his commitment and objectivity toward the commission’s work, the sixty-seven-year-old Aldrich announced he would retire from the Senate when his term expired two years later and devote the bulk of his last years to the issue. But well before the creation of the National Monetary Commission, Aldrich had begun his own research into European central banking policies, and that research led him to Kuhn, Loeb & Company and Paul Warburg.
A Scholarly Investment Banker
The undercurrent of anti-Semitism that pervaded the United States at the time was mirrored structurally on Wall Street, where investment banking, from top to bottom, was divided into the “Yankee” firms, with J. P. Morgan & Company clearly at the top, and Jewish firms, with Kuhn, Loeb & Company just as clearly at the top of a list that included Goldman Sachs, J. W. Seligman & Company, and Lehman Brothers. Kuhn, Loeb had risen to prominence during the late nineteenth century through its ability to organize and finance the early railroads, and its clients included the Union Pacific Railroad and the Pennsylvania Railroad, competing with J. P. Morgan’s Northern Pacific and New York Central. Using their considerable brainpower and links to European capital sources, the two firms continued to compete for industrial preeminence in the next century. If J. P. Morgan claimed General Electric and Standard Oil of New Jersey as exclusive clients, Kuhn, Loeb held Westinghouse and Royal Dutch Petroleum just as securely.
In December 1907, Aldrich had called on Kuhn, Loeb’s eminent managing partner, Jacob Schiff, to inquire about practices of the Reichsbank, Germany’s central bank. During the visit, Schiff summoned junior partner Warburg to provide Aldrich with more informed answers. Warburg was born in Hamburg into a prominent banking family that controlled M. M. Warburg & Company, an important European banking firm that traced its lineage back to the Renaissance. As a young man, Warburg worked in banking and foreign trade in London and Paris and traveled widely in the Far East before returning to Hamburg and a partnership in M. M. Warburg. During his travels and apprenticeships he had gained firsthand knowledge of European-style central banking, and long before he had any thought of immigrating to America, he had already become an outspoken advocate for a U.S. central bank.
Warburg’s eventual move to the United States, and the important role he would play in the cause of its monetary reform, came about as a result of a “dynastic” marriage between him and Nina Loeb, a daughter of Kuhn, Loeb founder Solomon Loeb. Though not observant Jews, Warburg and his family mixed and married primarily—and carefully—with the best of New York’s Jewish society.
At the time, Kuhn, Loeb was the only investment banking firm that rivaled the power and influence of the House of Morgan, and the marriage served to further Kuhn, Loeb’s financial prominence by strengthening the bonds between two great banking families. M. M. Warburg and Kuhn, Loeb worked jointly in a multitude of cross-Atlantic financings, with Paul maintaining a partnership in each firm, and he and Nina dividing their time about equally between New York and Hamburg.
But that arrangement proved unsatisfactory to Nina, an accomplished musician who missed a yearlong continuity with New York’s cultural venues. So in 1902 the couple moved permanently to New York. Their permanent residence there led to a more settled family life and a greater focus in Paul’s professional life. Though he was a shy intellectual who hardly conformed to the image of the robber barons and rapacious financiers of the era, he quickly became a prominent U.S. banker by virtue of his keen intellect and served on the boards of a diverse roster of major companies, including Wells Fargo & Company, Western Union, and the Baltimore & Ohio Railroad.
But if banking was his occupation, central banking was his preoccupation. Upon taking up residence in the United States—he would not get around to trading his German citizenship and becoming a naturalized American until 1911—he grew ever more mystified as to why the United States had no central bank. America would soon be the largest economy in the world, but it still had no institution in place to provide liquidity and orderliness to the financial markets to avoid the increasingly frequent and increasingly damaging panics. With his working familiarity with the Reichsbank, the Bank of England, and the Banque de France, it was incomprehensible to him that the task of preventing future crises would be left to the House of Morgan or, in its absence, to some other unknown and unchartered private-sector financial institution. It was as if the city of New York, at the beginning of the twentieth century, had rejected a professional fire department in favor of volunteer firefighters.
A Voice in the Wilderness Is Finally Heard
Prior to his 1907 introduction to Aldrich at the Kuhn, Loeb offices, Warburg had sounded warnings about the rising danger of letting an economy move forward without ongoing adjustment mechanisms or, more perilously, without any reliable contingency measures in the event of serious, panic-inducing disruptions to the financial system. In 1906, in a speech before the New York Chamber of Commerce, he was particularly forceful (and prescient) about the danger of a coming financial catastrophe: “I do not like to play the role of Cassandra, but mark what I say. If this condition of affairs is not changed, and changed soon, we will get a panic in this country compared to which those which have preceded it will look like child’s play.”3 And in early 1907, before the panic in the fall of that year would bear out his concern, he wrote an article for the New York Times, “Defects and Needs of Our Banking System,” that crystallized his seminal thoughts on an American version of a central bank.4 Although he was steeped in the ways of privately owned European central banks located in capital cities, he did not believe that a U.S. central bank necessarily had to conform to their structures and policies. But still, “some sort of organization” was necessary to provide liquidity and emergency lending. In the article he wrote:
Nearly every country of the world claiming a modern financial organization has some kind of central bank, ready at all times to rediscount the legitimate paper of the general banks. Not only have England, France and Germany adopted such a system, but all minor European States as well—and even reactionary Russia—have gradually accepted it. In fact, Japan without such an organization could not have weathered the storm through which she has recently passed, and could not have achieved the commercial success which she now enjoys.5
The Times article, however, stirred little interest, even among the big city, Republican-leaning bankers. The tepid response was probably no surprise to Warburg, since the Times article was actually an expanded version of a proposal that went nowhere on Wall Street. He had drafted a confidential memorandum on a central bank for his Kuhn, Loeb partners shortly after his arrival in the United States, and they in turn circulated it to other New York bankers for review. The memorandum found its way to James Stillman, president of the National City Bank of New York, who made a special trip to Kuhn, Loeb to confront the firm’s young partner about his controversial proposal. “Warburg,” he asked, “don’t you think the City Bank has done pretty well?”
“Yes, Mr. Stillman, extraordinarily well,” the ever-polite Warburg replied.
“Then why not leave things alone?”
With uncharacteristic brashness, Warburg responded, “Your bank is so big and so powerful, Mr. Stillman, that, when the next panic comes, you will wish your responsibilities were smaller.”6
A few years later, in the midst of the panic of 1907, a more open-minded Stillman once again visited Warburg at Kuhn, Loeb, asking to review the memorandum he had earlier dismissed. “Warburg,” he said, “where is your paper?”
“Too late now, Mr. Stillman. What has to be done cannot be done in a hurry. If reform is to be secured, it will take years of education work to bring it about.”7
The panic of 1907 did not take down Stillman’s National City Bank, in part because John D. Rockefeller made an emergency $10 million injection into the institution in a highly publicized demonstration of confidence. But many other banks and trust companies fell, and scores of New York Stock Exchange investment firms were on the brink of failure. This panic served to finally awaken a broader public interest in the financial reform long championed by Warburg. The New York Times, at the height of the panic, asked him to write a follow-up piece to expand on his financial blueprint, and on November 12, 1907, he published “A Plan for a Modified Central Bank.”8 Warburg’s prior writings and his occasional speeches drew only mild interest before the panic, but now, after his ideas about the fragility of the financial infrastructure had become painfully confirmed, they attracted widespread interest. In particular, Warburg’s article caught the attention of Senator Aldrich, the person most able to act on his recommendations.
Warburg, a prolific writer who many years later would produce a two-volume history of the creation of the Federal Reserve System, was energized by Aldrich’s December 1907 visit. He followed up with a flurry of letters to the senator on bank reform modeled on the practices of the European central banks, especially the Reichsbank. Warburg did not elect to accompany Aldrich and the other members of the National Monetary Commission on their fact-finding visits to the central banks of Europe—presumably he knew enough about the banks from his earlier direct experience at M. M. Warburg—but while they were abroad he crystallized his thoughts in a monograph titled “The Discount System in Europe.” In what would be called today a “white paper,” Warburg laid out the problems of the current inflexible U.S. monetary structure and suggested an alternate, European-like mechanism that would allow the money supply to expand and contract according to the needs of the economy.9
His paper identified a major contributing cause of instability in the U.S. banking system: the requirement under the provisions of the National Banking Acts of 1863 and 1864 that U.S. banks with a national charter issue banknotes backed by U.S. government bonds. That requirement reduced the threat of inflation, since it tied money creation to a fixed and measurable base. But it also carried with it the new problems associated with a fixed, or “inelastic,” currency. Because the reserves backing banknotes were required to be invested in U.S. government bonds, the money supply was unintentionally fixed and could not be increased or decreased in a way that would accommodate the needs of the economy. Because there was no apparent connection between the level of economic activity and the supply of bonds, banks were often forced to retrench at exactly the wrong time in the business cycle. During periods of heavy lending—before the harvest or holiday seasons, for instance, or during robust business expansion—there was limited monetary flexibility to handle the swelling need for lendable funds, and tying money supply to government bonds outstanding inevitably retarded economic growth, because government bonds tend to be retired in an expanding economy, thus reducing the currency supply just when an increase would be required to support business expansion.
Warburg’s paper suggested a European solution, under which a central bank is charged with establishing a “window” to which commercial banks may go to sell—“rediscount”—the loans they had earlier made but which now remained frozen on their balance sheets for lack of a resale alternative. By freeing up those illiquid bank assets, the European central banks created additional sources of funds for lending and adjusted the money supply to the level needed to sustain business activity. At the same time, they were able to prevent artificially high or low levels of interest rates.
The companion problem to the fixed money supply was the difficulty in the United States of summoning up a lender of last resort to quell budding financial panics. There was no effective means of marshaling the reserves that banks were required to hold under the provisions of the National Banking Acts toward a common cause of providing emergency liquidity to stem financial panics. In fact, as evident from the experience of the prior panics, rather than sharing, the banks held on even more tightly to their reserves. That practice served the purposes of the reserve bank doing the hoarding but worsened the overall state of liquidity. Eventually this caused the entire financial system to seize up.
It was just that kind of seizure that propelled the panic of 1907. Absent a central bank during that crisis, Pierpont Morgan cobbled together a virtual central bank by gathering funds from the major New York banks and prevailing upon the U.S. Treasury to make an offsetting emergency deposit in those banks. The Treasury funds were authorized by then president Teddy Roosevelt, who did so, no doubt, based largely on the long-standing reputation of the seventy-year-old Morgan. But the spectacle of the federal government providing public funds to privately owned banks to prevent a financial disaster made the need for central control vivid. Rather than facing financial crises on an ad hoc basis, there clearly needed to be a system for centralizing the reserve funds that the individual member commercial banks had on hand to make additional funds available from a common pool. Without a central bank to play that role, the U.S. economy would continue to careen from one financial crisis to another, relieved only by patchwork and improvised relief efforts.
Aldrich’s Road to Damascus
But Aldrich’s recognition of the need for a central bank did not mean he was sold on Warburg’s proposal, which argued that commercial loans, rather than Treasury bonds, should back the currency. And after his travels to Europe in 1908, he was not sure about the wisdom of a single powerful bank in the mode of the Bank of England, the Reichsbank, or the Banque de France in a country with the geographical expanse of the United States. That concern was heightened by the serious reservation about a single bank held by George Reynolds, who was president of the American Bankers Association and a key member of the National Monetary Commission. And then there was the overweening concern: the European central banks were privately owned and independently operated, a feature that proved to be the undoing of both the First and Second Banks of the United States. At a time of growing distrust of corporate trusts and robber barons, a central bank with little or no government oversight seemed politically doomed.
The point at which Aldrich came around to Warburg’s way of thinking—his conversion on the road to Damascus, as Aldrich himself would describe it—appeared to have come about after a talk Warburg gave at New York’s Metropolitan Club. That talk, in the fall of 1908, was arranged by Aldrich and was in the form of an address to the members of the National Monetary Commission after their recent fact-finding trip to Europe. By this time, the usually reserved and publicity-shy Warburg had become a high-profile proponent of European-style currency management. He did not hold a rigid view that a new U.S. central bank should operate entirely free of government involvement, only that it should have a mechanism similar to that found in the European central banks—one that would allow for sensible adjustments of the money supply to promote the economy and, most crucially, to halt the worsening financial crises that had plagued the country since the mid-nineteenth century. That was the message he delivered at the Metropolitan Club.
At the conclusion of the Metropolitan Club address, Aldrich took Warburg aside and commented, “Mr. Warburg, I like your ideas. I have only one fault to find with them. You are too timid about them.”10 That the once-recalcitrant Aldrich was won over by his ideas “came like a thunder bolt from a clear sky” to Warburg, and from that point on he became the leading, if unofficial, advisor to Aldrich and the commission.
Warburg soon realized, to his surprise, that one of his roles would be to cool down the recently converted Aldrich. “Whereas before I had doubted whether the Senator could ever be persuaded to consider any central reserve plan,” he said, “I now found it my part to dissuade him from going too far in that direction. Accordingly, I explained to the Senator why any attempt to establish a full-fledged central bank, in the European sense, appeared to me to be inadvisable.”11 Now, in a reversal of roles, Warburg found it necessary to caution Aldrich about much of the country’s “deep-seated prejudices and suspicions” about a central bank and, at least for cosmetic purposes, suggested calling it a reserve bank instead of a central bank. More substantively, he attempted to sow the seeds for the new organization being jointly managed by the government and private interests, as opposed to the purely private enterprise model that prevailed in Europe. To further appease regional interests, he suggested that any new central bank have a network of regional branches with which it would share operating control and policy making.
The Jekyll Island retreat followed the pivotal Metropolitan Club meeting, and members of the “hunting party” that Aldrich had assembled proved up to the task of distilling the broad findings of the National Monetary Commission and organizing them into a piece of legislation that would fit the peculiarities of the U.S. financial structure and political realities of the day. As a result of the consensus that had emerged from the Metropolitan Club, the Jekyll Island participants were in agreement about the big issues and, in a little over a week’s time, they produced a comprehensive document that would be called the Aldrich Plan and presented to Congress. As National City Bank vice president and Jekyll Island participant Frank Vanderlip stated:
Of course we knew that what we simply had to have was a more elastic currency through a bank that would hold the reserves of all banks. But there were many other questions that needed to be answered. If it was to be a central bank, how was it to be owned: by the banks, by the government, or jointly? Should there be a number of institutions or only one? Should the rate of interest be the same for the whole nation? In what open market operations should the bank be engaged?12
By the time the conferees had boarded Aldrich’s private car for the return trip from Georgia, they had confronted all of the issues—including those that were largely political. The final version of the Aldrich Plan conceived of a central bank innocuously named the National Reserve Association and, rather than operating out of a single New York headquarters, the association would consist of a string of fifteen banks throughout the United States. Moreover, the Jekyll Island meeting served to soften those who objected to any form of political control of the association, and a consensus emerged that the government should be represented in both governance and regulatory matters.
The association would, as Warburg had originally conceived, rediscount commercial paper offered to it by a bank member in order to produce increased elasticity of the money supply. And it would serve as a fiscal agent for the U.S. Treasury in gathering reserves of these member banks in the event a lender of last resort was needed. On January 19, 1912, a little more than a year following the Jekyll Island meeting, the National Monetary Commission presented its final report on its two-year-long study, with the Aldrich Plan as its spine.
Road Show
The construction of the Aldrich Plan turned out to be largely a collaborative effort, though the other Jekyll Island participants were quick to label Warburg as a “first among equals” in the highly successful conference. But Warburg immediately realized that the next phase would require political skills far different from the financial acumen of the Jekyll Island conferees. So, given his reserved personality—to say nothing of the prospect of returning full-time to his lucrative partnership at Kuhn, Loeb—one would have expected him to let the politicians carry the plan to a legislative conclusion. But as a self-proclaimed “fanatic” on bank reform, he had a personal stake in legislative success and explained his rationale for his continuing role as an advocate: “From the conclusion of the Jekyll Island conference until the final passage of the Reserve Act, the generalship was in the hands of political leaders, while the role of bank reformers was to aid the movement by educational campaigns and, at the same time, to do their utmost to prevent fundamental parts of the nonpolitical plan from being disfigured by concessions of political expediency.”13
Rather than backing away from the sales side of the job after he had established the intellectual framework for reform, the cerebral Warburg moved right into the fray. Assuming an out-of-character role as a reformer and political activist, he headed a forty-five-state organization with the unwieldy name of the National Citizens’ League for the Promotion of a Sound Banking System. The league barnstormed across the country delivering the message of bank reform, with Warburg often giving lectures and distributing pamphlets to business leaders and any interested citizenry on the importance and urgency of reform. The name Paul Warburg and the concept of sound banking principles became joined—so much so that by 1912, Teddy Roosevelt, who ran unsuccessfully that year for president under the banner of the Bull Moose Party, proclaimed that Warburg would be the ideal person to run a new central bank. “Why not give Mr. Warburg the job? He would be the financial boss, and I would be the political boss, and we could run the country together.”14
But with Warburg’s heightened public profile came exposure to the rough-and-tumble politics of America in the early twentieth century. William Jennings Bryan, with his strident brand of populism, had rallied much of the nation against the powerful Eastern banking interests and vilified the sound money principles that Warburg had long stood for. At the same time, practitioners of an uglier variety of populism used ad hominem arguments to counter Warburg’s views on banking. In a country whose interior was heavily populated with fundamental Protestants, the views of an Eastern Jew were often suspect. Likewise, Warburg’s very recent change of citizenship from Germany to the United States was seen as too late and too politically motivated. Often, the criticism of Warburg was blatantly anti-Semitic and hostile. In a four-word summary of his objections to Warburg’s later nomination to the first Federal Reserve Board, Democratic Congressman Joe Eagle of Texas proclaimed simply that Warburg was “a Jew, a German, a banker and an alien.”15 At other times the attacks on Warburg were more subtle and humorous, such as the Daddy Warbucks attribution.
Apparent Defeat
It would be a stretch to blame the tough sledding the Aldrich Plan ultimately faced in Congress on Warburg’s prominence in its conception. After all, he was only one member of the lineup of Eastern bankers that angry populists of the age held in low esteem as an elite group of financial swindlers. As the 1912 presidential campaign took shape, the Aldrich Plan came under nearly universal disapproval. The Democratic candidate and ultimate victor, Woodrow Wilson, ran on a platform that could not have been clearer: “The Democratic Party is opposed to the Aldrich Plan or a central bank.”16 And Roosevelt, despite his earlier glowing opinion of Warburg’s work, withdrew the support of his Bull Moose Party; he cited a belated concern that the Aldrich Plan would place the country’s currency and credit system in private hands, not subject to effective public control. Even Republican candidate Howard Taft, in his unsuccessful run as the incumbent, failed to endorse the plan named after his fellow party member and longtime head of the Senate Finance Committee.
So despite additional changes made to the legislation proposed by Aldrich, including the major concession that would allow for the presidential appointment of the directors of the proposed National Reserve Association rather than their election by banking interests, the legislation was doomed to failure. It appeared to Warburg and other supporters of bank reform that their efforts had all been for naught. With Wilson’s convincing win in the 1912 election and the Democrats regaining control of Congress, the reformers feared that the United States, soon to become the world’s largest economy, would continue to operate for the indefinite future without a central bank—and, in the face of the inevitable next round of financial panics, without a lender of last resort.
But they were wrong. Even before Wilson had been inaugurated, a new and unlikely champion of a U.S. central bank would emerge in the form of Carter Glass, a Democratic congressman from Lynchburg, Virginia, and an apostle of William Jennings Bryan.
