Loading ...EDITOR’S NOTE
THE essays collected in this volume originally appeared as follows: Defects and Needs of our Banking System, in the New York Times Annual Financial Review, January 6, 1907 ; A Plan for a Modified Central Bank, privately printed, November 12, 1907 ; American and European Banking Methods and Bank Legislation Compared, an address delivered at Columbia University and printed in The Currency Problem and the Present Financial Situation : Columbia University Press, 1908 ; A Central Bank System and the United States of America, an address delivered before the American Economic Association on December 30, 1908, and published in American Economic Association Quarterly , 3d series, vol. x, no. i ; A United Reserve Bank of the United States, an address delivered before the Finance Forum of the Young Men’s Christian Association of New York, March 23, 1910, and published in the Proceedings of the Academy of Political Science, vol. I, no. 2 ; Principles that must Underlie Monetary Reform in the United States, an address delivered before the Academy of Political Science, November 12, 1910, and published in the Proceedings, vol. I, no. 2 ; The Discount System in Europe, prepared for the National Monetary Commission, and published as Senate doc.no. 402, 6ist Cong., 2d sess., 1910; Circulating Credits and Bank Acceptances, an address delivered before the convention of the American Bankers’ Association, November, 191 1, and printed in the Commercial and Financial Chronicle, December 2, 1911 ; The Owen-Glass Bill as Submitted to the Democratic Caucus, in the North American Review, October, 191 3; Should there be Four or Eight Federal Reserve Banks? privately printed, December 5, 19 13.
INTRODUCTION
THE essays which are here collected and published in book form not only are valuable in themselves but form a landmark in the history of American contributions to the banking problem. It is in a general way known to the public that Mr. Warburg was in some way connected with the passage of the Federal Reserve Act, and his appointment to his present responsible position on the Federal Reserve Board was acclaimed on all sides with a rare degree of approval and congratulation ; but I fancy that it is known only to a very few exactly how great is the indebtedness of the United States to Mr. Warburg. For 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.
Up to a very few years ago, virtually all the efforts of the banking reformers in this country were directed to securing what was called elasticity of the currency, through the abolition of the bond reserve for bank-note circulation. Neither the report of the Indianapolis Monetary Conference nor the schemes of the committee of the New York Chamber of Commerce a decade later attempted to do anything more than that ; and no single plan seemed to approve itself to the country. The two new ideas which were injected into the discussion by Mr. Warburg were, first, the shifting of the emphasis from the currency problem to the reserve problem, and second, the advocacy of the principle of rediscounting a new kind of commercial paper.
The first point is fully explained in the essay on the United Reserve Bank of the United States. Mr. Warburg recalled to our mind what had been forgotten by most of us, that the real pith of modern banking is the question of the reserve, and that the essential weakness of the American system was the extreme decentralization of resources, resulting in the time of stress or trouble in every individual bank attempting to secure its own solvency in disregard either of the welfare of other banks or of the needs of the business community. In essay after essay Mr. Warburg hammered on this one idea until he got it firmly fixed in the opinion, first of the experts and then of the general public. Without some method of combining the scattered resources of the individual banks it was clear that no essential progress could be made.
The second point was equally new to the American public, although, like the first, it was a familiar achievement of modern banking reform abroad. Mr. Warburg pointed out that the absence of proper two-name commercial paper and the non-existence of any central bank or banks at which such paper could be instantly rediscounted for cash, compelled the banks either to invest their money in illiquid securities or to loan the funds on the stock exchange, thus producing the remarkable variations in the money rate and bringing about the periodical stringency in the money market. After his lucid exposition of what might be accomplished by a rediscounting and thus introducing into the United States the so-called discount policy of European countries, it was gradually realized that this was the second essential feature of banking reform.
Mr. Warburg also called attention to the advantages of a new currency not based upon the deposit of government bonds, but he made it clear that this reform, which was the sole objective of all previous schemes, was of only minor importance and that it would follow as a necessary consequence from the adoption of the two fundamental points mentioned above. These two principles form the real backbone of the new Federal Reserve Law. When the Aldrich commission was appointed it was not long before Senator Aldrich — to his credit be it said — was won over by Mr. Warburg to the adoption of these two fundamental features. The Aldrich bill differed in some important particulars from the present law. It went further in the direction of centralization and it involved less control by the government of banking operations. The new act is in some details superior to the Aldrich bill ; in others inferior. The concession in the shape of the twelve regional reserve banks that had to be made for political reasons is, in the opinion of Mr. Warburg as well as of the writer of this introduction, a mistake; for it will probably, to some extent at least, weaken the good results which would otherwise have followed. On the other hand, the existence of the Federal Reserve Board creates, in everything but in name, a real central bank; and it depends largely upon the wisdom with which the board exercises its great powers as to whether we shall be able to secure most of the advantages of a
central bank without any of its dangers.
In many minor respects also the Federal Reserve Act differs from the Aldrich bill ; but in the two fundamentals of combined reserves and of a discount policy, the Federal Reserve Act has frankly accepted the principles of the Aldrich bill ; and these principles, as has been stated, were the creation of Mr. Warburg and of Mr. Warburg alone.
It is this fact which gives especial interest to the present collection of essays which are printed just as they were originally published and which show the gradual development, in unimportant points, of Mr. Warburg’s thought. In weighing the merits of these essays it must not be forgotten that Mr. Warburg had a practical object in view. In formulating his plans and in advancing slightly varying suggestions from time to time, it was incumbent on him continually to remember that the education of the country must be gradual, and that a large part of the task was to break down prejudices and remove suspicions. His plans therefore contain all sorts of elaborate suggestions designed to guard the public against fancied dangers and to persuade the country that the general scheme was at all practicable. It was the hope of Mr. Warburg that with the lapse of time it may be possible to eliminate from the law not a few clauses which were inserted, largely at his suggestion, for educational purposes.
As it was my privilege to say to President Wilson when originally urging the appointment of Mr. Warburg on the Federal Reserve Board, at a time when the political prejudice against New York bankers ran very high, England also, three-quarters of a century ago, had a practical banker who was virtually responsible for the ideas contained in Peel’s bank act of 1840. Mr. Samuel Jones Lloyd was honored as a consequence by the British government and was made Lord Overstone. The United States was equally fortunate in having with it a Lord Overstone. And while it is not the custom for America to confer peerages upon its distinguished citizens, it is fortunately beginning to become the practise to induce them to accept positions of great public responsibility in which they can at once serve the community and honor themselves.
It is my especial pleasure to be able to write these few words of introduction, because it was in my study that Mr. Warburg first conceived the idea of presenting his views to the public. When he began to chat familiarly on the subject he at once impressed his listeners by the importance and novelty of his views. His modesty and his shrinking from public controversy were so pronounced that it was only with the greatest difficulty that he was persuaded to put his ideas on paper. But having once set out on the task, there was no stopping, and from year to year essay upon essay flowed from his facile pen, giving more precision and point to his fundamental principles, until he was recognized as the real leader in the new movement. The Federal Reserve Act will be associated in history with the name of Paul M. Warburg, and the Academy of Political Science deem it a rare privilege to be able to present to the public this volume of his collected essays.
Edwin R. A. Seligman.
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