America's Money Machine

13.
Collapse of a Theory
THE SPLENDID THEORY of central banking championed by Paul
Warburg and adopted into the Federal Reserve System did not
survive the first strain to which the System was put. This came from the
entry of the United States into the European conflict in April, 1917, and
the immediate need for large sums not only to meet the U. S. war costs
but to finance our European allies. While the war appears as the overt
cause of the profound change that now came about in Federal Reserve
policy and operations, a deeper cause was the fissures within the System
itself, the cleavages of principle and theory that were merely compromised
and never fused.
In addition, there were two other weaknesses· that would inevitably
cause collapse or transformation. Both of these are traceable to Paul
Warburg, the leading exponent of central banking theory and practice,
an original member of the Board and its vice governor after Delano's
resignation on August 9, 1916. Some further notice of Warburg's background
and outlook is therefore in order.
Paul Moritz Warburg was born at Hamburg, Germany, August 10,
1868. He was graduated from the University of Hamburg in 1886, and
spent the following two years in business apprenticeship with a Hamburg
commission firm. He then entered his father's banking firm for a further
period of seasoning. This was M. M. Warburg & Co., which had been
founded in 1798 by Paul's great-grandfather. Subsequently Warburg
studied English banking methods while working with a prominent London
discount and brokerage house. In 1891 he extended his 'studies to
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