America's Money Machine

98 PART II / THE GREAT REVERSAL
in more detail further on, the idea of paper money substantially backed
by commercial paper never got off the ground. This was partly the result
of the war, and the availability of the Federal Reserve mechanism to
finance its costs, but it was also due to the second arm of the Warburg
theory of central banking.
This was his idea that the system should be under the firm and absolute
control of the government.
In this aspect, Warburg was not alone. An influential political element
of the country that stood, paradoxically, for the people and the people's
rights, was most vociferous in demanding that the institution be under
government control. William Jennings Bryan-the "Great Commoner"
-was the peerless leader ofthis wing, but, as we have noted, he was ably
assisted by leading bankers like Frank A. Vanderlip and Paul Warburg.
Vanderlip's defection from the body of Wall Street opinion is a bit of a
mystery, but Warburg was, of course, only reflecting the Prussian theories
ofstate absolutism in which he had been reared. As Warburg testifies
in his book, The Federal Reserve System, 5 he opposed Carter Glass on this
Issue.
Glass had drafted a bill that avoided a central bank with branches, and
provided for twenty Federal Reserve district banks under control of a
Federal Reserve Board with forty of the forty-three members chosen by
the member banks. Warburg had finally persuaded Glass to reduce the
governing body ofthe proposed system to seven, ofwhom four members
would be appointed by the government, but that still was not enough to
suit Warburg.*
Wilson received Glass and Warburg one night in the CabinetRoom of
the White House. After a two-hour discussion, the President, Warburg
reported, "coincided with my contention that the government should
control every member ofthe Board on the ground that it was the function
of government to supervise the system and no individual, however respectable,
should be on the board representing private interests."6
The Glass draft had also provided, following the Monetary Commission
proposals, that all moneys of the general fund of the Treasury
should, after six months, be deposited in the national reserve banks and
disbursed through such banks. Warburg, true to his authoritarian convictions,
opposed this, "believing that the government should retain com-
*Warburg had been called into administrative councils on the bill as early as April, 1913,
when Col. House (Wilson's intimate adviser) sent him a digest of a bill which had been
drafted by H. Parker Willis.