Sunday, January 19, 2014

"Daddy Warbucks," the Treaty of Versailles and Forming the Federal Reserve

On January 19, 1920, newspapers around the country were chronicling the US Senate's debate--for the second time--on whether to officially end war with Germany, ratify the Treaty of Versailles and join the League of Nations. In favor of ratification was a German emigre-turned-American-banker, Paul M. Warburg.

Echoing some of today's debates on Iraq, Warburg argued that by playing a part in the war, we had a moral responsibility in ensuring the peace. "There are many who, disgusted and disheartened, believe that we should wash our hands of Europe, and leave her to iron out her own affairs. It is too late for that. Europe relies on us," wrote Warburg in 1919.

And we relied on Europe, at least when it came to designing our modern banking system. Before advocating for world peace, Mr. Warburg was an advocate for centralized banking in the US. A descendant of a prominent German banking family, Mr. Warburg moved across the pond in 1895 after marrying into a prominent American banking family. Having an intimate view into both systems, he found the US uncharacteristically behind the times.

In a 1907 article printed in the New York Times, Warburg wrote that the American system was "in fact at about the same point that had been reached by Europe at the time of the Medicis, and by Asia, in all likelihood, at the time of Hammurabi." (Ouch!)

The European and Asian systems facilitated an elastic currency, Warburg said, "that follows the requirements of commerce." The United States' decentralized system, on the other hand, maintained an inelastic currency based on 6500 banks. "Under present conditions, instead of sending an army we send a soldier in to fight alone."

In passing the Federal Reserve Act of 1913, we heeded Warburg's advice and joined the league of centralized banking.  When it came to joining the League of Nations, however, we ignored the ex-German and soldiered it alone.

The purported inspiration for the "Daddy Warbucks" character in the Little Orphan Annie story, one could say Mr. Warburg was the father of our modern banking system. And in the hard-knocked world of finance, Warburg taught us that we shouldn't have to reinvent the wheel.

"I think that we are greatly mistaken if we believe that our country is so entirely different from all others that we should continue to do the opposite of what is done by them, while the system of all other important nations has proved to be excellent, and ours has proved to be defective."

I wonder what Mr. Warburg would think of today's healthcare system...

Banker's Notes cannot resist the convergence of banking and music, so let's enjoy Hard Knocked Life from the 1982 movie Annie, shall we?  At YouTube here >>

PS: In refusing to join the League of Nations, Senate Republicans used for the first time the "cloture," a procedural tool originally advocated by President Woodrow Wilson that allows Senators to place a time limit on the debate of a bill. Senate Republicans used the cloture against President Wilson to end debate on the Treaty, which eventually lead to its first rejection, on November 19, 1919.

In today's bipartisan bitterness, the cloture is still a favorite tool used by Republicans. Rachel Maddow found that the113th Congress is on track to be the most "do nothing" Congress in history in part because of Republican's frequent deployment of the tool. Of 2013's 64 roll call votes, the cloture was invoked more than the combined total of 1917 to 1978.
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Flannery O'Connor

You shall know the truth and the truth shall make you odd.