Financial History Issue 115 (Fall 2015) | Page 29
© Corbis
Library of Congress
THE FED’S PATERNITY
By Edward L. Morris
There is a good case for naming either
Paul Warburg or Carter Glass the “father”
of the Federal Reserve. Through their
independent efforts — Warburg’s largely
between 1906 and 1912 and Glass’s between
1912 and 1913 — each was key to the formation of America’s only enduring central
bank. But they were strange bedfellows
and didn’t care much for each other — and
each was loath to give the other credit for
the Fed’s creation.
Warburg was part of a prominent German banking family and immigrated to
America to join the powerful Wall Street
partnership of Kuhn, Loeb & Co. He
played an important role in raising money
from international investors to finance
American business, and was, purportedly,
the inspiration for the Daddy Warbucks
character in the Little Orphan Annie
comic strip.
Paul Warburg (left) and Carter Glass (right)
may be considered reluctant co-fathers
of the Federal Reserve.
By contrast, Glass was a combative,
self-educated Democratic congressman
who grew up in the South during the
hardscrabble years of Reconstruction. His
views were closely aligned with the antibanking populist William Jennings Bryan;
he referred to Wall Street bankers like
Warburg as “money devils.”
From the time he came to the United
States in 1902, Warburg was mystified
that the country, on its way to becoming
the largest economy in the world, had no
institution to provide liquidity and orderliness to its banking system, and, most
worrisome, there was no lender of last
resort to quell the crescendo of financial
panics that plagued the country during
the latter half of the 19th century. He used
his prominence on Wall Street to sound
warnings about the escalating dangers of
operating without a central bank, and, in
a prescient 1906 speech before the New
York Chamber of Commerce, he spoke
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.”
Later that year the financial catastrophe
Warburg warned of appeared in the form
of the Panic of 1907. That panic, like those
that preceded it, started small but grew in
virulence and quickly spread throughout
the banking system until it was finally
quelled by the 70-year-old J. Pierpont
Morgan. Operating from the library of
his midtown home, Morgan acted as a de
facto central bank for the nation, assembling emergency funding and commitments from other bankers and from the
US Treasury Department.
Morgan limited the panic’s damage and
halted its spread to Wall Street’s largest
banks, but finally the consequences of
operating without a central bank became
apparent to many lawmakers, including
Republican Nelson Aldrich, the chairman
of the Finance Committee of the US Senate. After the harrowing but ultimately
successful resolution to the Panic of 1907,
Aldrich stated what was increasingly obvious: “Something has got to be done. We
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