Centralization Crusader: Paul Warburg

            The measure of a man throughout history has been his ability to create something that would exceed his mortal life. Men such as Carnegie, Rockefeller, and Vanderbilt, were the titans of the Postbellum period in the United States, with empires and legacies that cause most to marvel today. Yet, these men would fade to the background as the second Industrial Revolution came to a crawl during the turn of the century. With the election of Teddy Roosevelt and his trust-busting mentality, the age of familial legacies and titans would come to an end. The Progressive Era of the early twentieth century, instead seemed to focus on the politics of women’s suffrage, debates over interventionism versus isolationism, and the spread of democratic ideals. However, the economics of the period can be explored through the lens of a singular individual, Paul Warburg.

            Warburg was a German immigrant who was fortunate to enter into an elite banking family in the United States. His outsider experience enabled him to examine the U.S. banking system at the time and foresee future calamity. The previous century saw difficult times in the realm of banking. The fundamental argument over the federal government’s ability to create a centralized bank for the United States was as old as Hamilton and Jefferson. This disagreement continued through several presidencies, each doing their part to either create or suspend a centralized bank. However, Warburg saw a flaw in the preferred system. He makes note of this in his work “Defects and Needs of Our Banking System.” Warburg expresses the current banking practices of Europe during the period, in which they use the credit of the nation and its ability to pay its debts which issuing credit to individuals. The idea being that the banks are funded by national revenue and therefore can offer credit to private individuals with the safety that the bank can recover the money should the individual default. However, Warburg points out that in the United States, banks and bankers are unable to use the national revenue generated through tariffs and taxes, instead they must seek a line of credit from European banks and then lend to private individuals based on that fact.[1]

            The banking system of the United States relied on foreign investment and lines of credit in order to function domestically. Warburg, understanding the future calamities, begins his process to develop a centralized banking system for the United States. Warburg wrote several works promoting the idea of a centralized banking system for the United States. However, the key moment in Warburg realizing his dream came with a meeting in 1910 on Jekyll Island. Warburg and Senator Nelson Aldrich meet with several prominent bankers and investors on the island to discuss the future of American banking. Aldrich, having returned from Europe and explored their centralized banking system, believed in Warburg’s vision of a national banking system for the United States. During their meeting Aldrich and Warburg develop the Aldrich Plan, which was a structured layout of a federal reserve for the United States. Aldrich, being a member of the senate finance committee, would push the bill through the committee and to the congressional floor for approval.[2] However, the opposing party to the bill would come to power before the bill could be passed. Warburg remained a proponent of the Aldrich Plan, though the bill would not be passed it would become the outline for the Federal Reserve Act. Warburg would become a prominent figure on the first Federal Reserve Board in his later years of life.

Bibliography

Erickson, David. “Before the Fed: The Historical Precedents of the Federal Reserve System.” 2015. https://www.federalreservehistory.org/essays/before-the-fed.

Warburg, Paul M. “A Plan for a Modified Central Bank.” Banking Reform in United States. New York. Academy of Political Science. 1914. 407-413.

Warburg, Paul M. “Defects and Needs of Our Banking System.” Proceedings of the Academy of Political Science in the City of New York 4, no. 4. 1914. 7–22. http://www.jstor.org/stable/1171781.

Whitehouse, Michael. “Paul Warburg’s Crusade to Establish a Central Bank in the United States.” Federal Reserve Bank of Minneapolis. 1989. https://www.minneapolisfed.org/article/1989/paul-warburgs-crusade-to-establish-a-central-bank-in-the-united-states.

[1] Warburg, Paul M. “Defects and Needs of Our Banking System.” Proceedings of the Academy of Political Science in the City of New York 4, no. 4. 1914. 7–22. Also; Warburg, Paul M. “A Plan for a Modified Central Bank.” Banking Reform in United States. New York. Academy of Political Science. 1914. 407-413., Erickson, David. “Before the Fed: The Historical Precedents of the Federal Reserve System | Federal Reserve History.” 2015.

[2] Whitehouse, Michael. “Paul Warburg’s Crusade to Establish a Central Bank in the United States.” Federal Reserve Bank of Minneapolis. 1989.