America's Money Machine

An Interlude for Debate 49
fluctuations in price, and the farmer and the basic producer took the loss.
The solution to this dilemma, the German banker-economist pointed out,
was a money supply that would fluctuate in accordance with the rise and
fall ofbusiness demand. The question was, how to achieve this desirable
result?
Warburg argued that the proposal to create an emergency currency
was dangerous for the reason that if a bank were involved in difficulties,
as happened in the case of the Trust Company of America and the
Knickerbocker Trust Co., if it had notes outstanding, the run of the
depositors would have been carried into the ranks of the note holders,
to the disaster of the entire money system.
The solution, he urged, was that discovered abroad and' most highly
developed in Germany, of issuing money (circulating notes) against the
security of good commercial paper (notes of hand) made in the course
of trade and business. Such notes would meet the urgent demand for
circulating money when crops were moving, and the amount would naturally
contract as the obligations behind·them were paid off.
As a provisional measure to meet the shortage created by panic Warburg
proposed a modified central bank, to be called for convenience the
Government Bank, endowed with a capital of from $50 to $100 million,
possibly to be paid up only in part; the shares to be owned, if possible,
half by the government, half by the national banks; the management to
be by a president, named by the board of directors and enjoying indefinite-and
unlimited-tenure. The Bank would act' as depository'for the
Treasury, and would in turn redeposit Treasury funds in the member
national banks. The Government Bank would be authorized to issue legal
tender notes, not to exceed a certain multiple of its capital and gold
reserves. These notes would find their way into the bloodstream ofcommerce
through the process of exchanging them for commercial papershort
term promises to pay given by merchants and others and held by
the ni'ember banks. To limit the privilege such notes would have to be
guaranteed by endorsement of the member bank.
Warburg hadcommented'inan article published nearly a year earlier 2
that it was a strange fact that, despite the commercialdevelopment ofthe
United States, it had progressed so little in the form of its commercial
paper. The United States, he declared, 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 Hammutabi."
"Most of the paper taken by the American banks," he explained, "still
consists of simple promissory notes, which rest only on the credit of the