America's Money Machine

50 PART I / THE ROOTS OF REFORM
merchant who makes the notes, and which are kept until maturity by the
bank or corporation that discounts them. If discounted· at all they are
generally passed on without endorsement, and the possibility of selling
any note depends on the chance of finding another bank which may be
willing to give the credit. The consequence is that while in Europe the
liquid assets ofthe banks consist chiefly ofbills receivable, long and short,
which thus constitute their quickest assets, the American bank capital
invested in commercial notes is virtually immobilized."
Warburg's idea was that this commercial paper, if doubly or triply
secured by the endorsement of banks, could be made an acceptable
medium of payment and could circulate like money. Actually, the veritable
documents themselves would not circulate but they would be depositedwith
a central institution which would issue its own promissory notes
secured by its holdings of endorsed commercial paper..The promissory
notes would be issued in standard denominations and in pieces of uniform
size, and would be declared by law to be legal tender in payment
of debts and taxes.
This is the essence of the idea that eventually became the foundation
of the Federal Reserve System.
The theory now advanced differed from that of the assignats of the
French Revolution and the rentenmark of the Great German Inflation in
that the security ofthe proposed circulation was not land but the produce
of the land in trade. In this respect it differed only in degree from the
system proposed byJohn Law to the Regent ofFrance, by which he would
restore the credit of France, ruined by the excesses of Louis XIV, and
which became the basis of the charter of the Banque Generale in 1716.
The conditioning view of Paul Warburg, which in turn was ultimately
to govern the procedure and direction of the Federal Reserve System,
was admirably stated in his article written after the Panic, in which,he
proposed his new currency system.
"We need some centralized power," he wrote, "to protect us against
others and to protect us from ourselves---some power, able to provide for
the legitimate needs ofthe country and able at the same time to apply the
brakes when the car is moving too fast. Whatever causes may have
precipitated the· present crisis, it is certain that they never could have
brought about the outrageous conditions, which fill us with horror and
shame, if we had had a modern bank and currency system."'*
*A Plan for a Modified Central Bank. Mr. Warburg did not live long enough to see his
assurances confounded by the Crash of 1929, the Debacle of 1933, and the Break Of1962.