The Warburgs

by Ron Chernow

  Picking up the smallest psychic rumblings, Aby’s agitation increased with the war’s approach. In earlier photos, he looked downcast and melancholy. By 1912, he angrily confronted the camera, his look restless and agitated. In late 1912, he gave a speech in Göttingen that left him exhausted and despondent. He complained of loneliness to Charlotte and told brother Fritz how depressed he was at the thought of returning to Hamburg, which he described as a “tavern of Philistine barflies.”47 His visits to the Waldpark Sanatorium in Baden-Baden became more frequent. The “cure” was then a fashionable ritual for the well-to-do, who drank the waters, dieted, and walked in beautiful natural settings. But given Aby’s later history, it is hard not to see in these recurring visits to Baden-Baden an ominous preview of things to come. With the coming of the war, all of the demons that danced in the basement of Aby’s psyche would come rushing to the surface.

  ——

  Paul Warburg and daughter Bettina.

  (Courtesy of Katharine Weber)

  CHAPTER 10

  ––

  Shy Warrior

  Of the brothers, Paul seemed the least equipped to survive a long, turbulent crusade in the crucible of American politics. Washington struck him as even more wicked and faithless a place than Wall Street. He was gentle, unassuming, and reserved, with an old-fashioned, almost prudish faith in morality. The glad-handing camaraderie that smooths a political career didn’t suit his quiet, scholarly demeanor. A self-conscious man who smiled but seldom laughed, he displayed his wit and revealed his emotions only to a small circle of intimates. His son described him as “Beloved of all, yet truly known by few.”1

  Yet other qualities did fit him for combat. A man of quiet intensity, he doggedly defended his beliefs, and when he spoke his words carried great authority. As journalist George F. Redmond noted, “He is the product of generations of gentle breeding, but if Paul Warburg is right, it is about as easy to move him as it would be for a gnat to push over the Wool worth Building.”2

  Paul was eager to escape from Wall Street. Making money held no charm for him, and the fortune he made at Kuhn, Loeb retired money as an issue anyway. Bearing an Atlas-like burden for the public weal—that appealed to his stoic nature no less than supporting a lovely, crippled wife. Of all of Charlotte Warburg’s children, Paul had most internalized the message of duty and sacrifice, taking as his personal motto: In serviendo consumor.3

  This bashful man’s crusade for an American central bank would be no less a personal than a political triumph. As The Century magazine said, “Paul M. Warburg is probably the mildest-mannered man that ever personally conducted a revolution.… He stepped forth armed simply with an idea. And he conquered. That is the amazing thing. A shy, sensitive man, he imposed his idea on a nation of a hundred million people.”4

  Intimately acquainted with European central banks, especially the Reichsbank, Paul didn’t claim to originate new banking principles so much as import European practices.5 As with Max in Hamburg, Paul meshed spectacularly with his historical moment. Once again, a Warburg succeeded because of his contradictory status. As a Jew in a gentile world, a German immigrant confronting a new country, Paul was able to spot flaws in American finance to which native bankers had been blinded by familiarity.

  However technical in application, Paul’s banking reforms were simple in principle. He wanted a central bank that issued a uniform national currency. Instead of bank notes based on government bonds, he favored an elastic currency, backed by gold and commercial paper as well, that would ebb and flow in quantity with the business cycle. During panics, the nation’s twenty-two thousand banks adopted a sauve qui peut attitude. By selfishly hoarding reserves to protect themselves, they aggravated the general instability of the banking system. A central bank, Paul knew, could mobilize scattered reserves during crises, much as a fire department could pool water.

  America also lacked what bankers term a discount policy. When banks took corporate IOUs, they were frozen in their portfolios and couldn’t be resold as liquid assets. Paul wanted a central bank to rediscount commercial paper—that is, take it from local banks in emergencies and furnish them with liquid assets with which they could pay off depositors. He also wanted to dismantle a dangerous system whereby banks backed deposits with call loans and stock exchange collateral. During panics, they would sell stock abruptly to retrieve their collateral, leading to bloody crashes on Wall Street.

  Such ideas may sound more common-sensical than controversial today. In the early twentieth century, however, debt-ridden farmers and populists dreaded that a Wall Street-dominated central bank would strangle them with high interest rates. Paul Warburg may have been a taciturn man, but in the tabloid press he formed part of a fearsome, glowering gallery of Robber Barons that included Jacob Schiff and Edward H. Harriman. After the 1907 panic, bankers were regarded as rogues, swindlers, and incompetents, and the age couldn’t quite conceive of a scrupulous banker. Paul never functioned as a Wall Street stooge—he was too fiercely independent—but he was inevitably found guilty by association and denounced as respectable cover for grasping financiers.

  Like Aby, Paul had a gift for prophecy, a special radar that detected social and political fragility. He spied hairline cracks in the facade of economic life that portended later collapse. Again like Aby, he viewed the world through a filter darkened by his own depression and saw problems perhaps hidden to happier souls. In 1906 he warned the Chamber of Commerce, “I do not like to play the role of Cassandra, but mark what I say. If this condition of affairs is not changed, and changed soon, we will get a panic in this country compared with which those which have preceded it will look like child’s play.”6

  One night in 1907, Professor Edwin R. A. Seligman of Columbia University gathered distinguished economists and bankers in his home to debate reform. There, Paul made a stirring presentation. “You ought to write,” Seligman told him. “You ought to publish.” “Impossible,” said Paul. “I can’t write English yet—not well enough for publication.” “The English can be arranged,” Seligman said. “It’s your duty to get your ideas before the country.”7

  This reluctant warrior was soon swept into battle. In 1907 panic swept New York’s highly speculative trust banks, and a stampede of depositors emptied one bank after another. The stock exchange was temporarily shut as Pierpont Morgan orchestrated a rescue by government and bankers. The unfolding drama confirmed Paul’s uneasy sense that American bankers didn’t band together to combat trouble. He suggested that state clearing houses join in a national clearing house, but the major financial centers mistrusted each other too much for common action. Suddenly, James Stillman, president of National City Bank—who four years before had sneered at his central bank plan—now materialized at Paul’s desk. “Well, where is your paper?” he asked. “Too late now, Mr. Stillman,” Paul replied. “What has to be done cannot be done in a hurry. If reform is to be secured, it will take years of educational work to bring it about.”8

  Soon The New York Times asked Paul to write about bank reform. Digging into his desk, he dusted off the essay he had written soon after arriving in America. Entitled “Defects and Needs of Our Banking System” and published in the newspaper on November 12, 1907, it argued that the country needed to centralize reserves in emergencies. Obscure technical issues had taken on sudden urgency. “The appalling panic which we have experienced during the last few weeks will do more, I suppose, to bring home to the public the absolute necessity of a change in our present banking and currency system than all the efforts that have hitherto been made to warn the nation of the imminent danger,” Paul said.9 Reflecting the rampant paranoia about central banks in the heartland, nativist critics branded Paul’s ideas “un-American,” attacks that carried an ugly tinge when directed against a German-born, Jewish banker.

  As he took his first tentative steps into politics, Paul remained a German citizen, spoke imperfect English, couldn’t write idiomatically, and was still an M. M. Warburg partner. For this retiri
ng man, public speaking was pure torture, yet he never relented. Soon he acquired a powerful ally: Senator Nelson W. Aldrich of Rhode Island, the czar of the Republican party and maestro of the smoke-filled rooms. Paul seemed a choirboy beside him, but they would form an effective, if unlikely, duo. Fearing his partisanship, Paul first encountered Aldrich with “a good deal of prejudice and suspicion.” In time, he came to believe that Aldrich sincerely wanted banking reform to be his enduring political legacy.10 At the same time, Aldrich was only slowly converted to the idea of an American central bank.

  In December 1907, Paul first met Aldrich when the latter visited Kuhn, Loeb to ask how the Reichsbank issued treasury bills. Schiff didn’t know and summoned Paul. By the time Aldrich left, an enthusiastic Paul mused, “There marches national bank currency and there goes currency reform.”11 Paul asked Schiff if he should write to Aldrich, explaining the dangers of allowing national banks to issue currency against government bonds. Afraid Aldrich might resent the pressure, Schiff said, “if you do, he will never look at you again.”12 Paul proceeded to ignore his brother-in-law’s advice. On the last day of the year, while merrier souls got ready for New Year’s Eve, Paul sent Aldrich a proposal for a uniform currency, showing how competitive hoarding of reserves produced calamity in banking crises.

  By early 1908, Paul was giving speeches about how the Panic could have been averted. At the time, the Bank of England, the Reichsbank, and the Banque de France operated independently of government and their quasi-private character aroused alarm in America. Although a proponent of a strong central bank, Paul realized that any American counterpart would need popular constraints on its power.

  On May 30, 1908, Congress enacted the Aldrich-Vreeland Currency Bill, which instantly thrust Paul into the hurly-burly of American politics, for the law mandated a National Monetary Commission to investigate foreign banking systems and file a report with Congress. The chairman would be Senator Nelson Aldrich. Lacking the requisite technical knowledge, the senator came to lean heavily upon Paul’s expertise.

  When Aldrich and other commission members sailed for Europe that summer, Schiff provided introductory letters to open doors in Berlin and later in Tokyo. In New York that fall, Aldrich held hearings at the Metropolitan Club and asked Paul to testify. Afterward, he drew him aside for an intimate tête-à-tête at a little table. Paul was thunderstruck to find that Aldrich had not only read his essays but now categorically endorsed a central bank. “Mr. Warburg,” said Aldrich, “I like your ideas. I have only one fault to find with them.” What was that? Paul asked. “You are too timid about it.” Paul was flabbergasted: He said he thought he had been bold where weaker souls cowered. “Yes,” said Aldrich, “but you say we cannot have a central bank, and I say we can.” Bewildered and overjoyed, Paul left the club “elated.”13 One wonders whether Aldrich mentioned Paul’s citizenship as a possible political handicap, for a month later he suddenly filed papers to become a citizen. Henceforth, Paul would closely advise the senator.

  For political reasons, Paul vetoed the idea of a strong, centralized bank and tried to come up with a more palatable alternative, such as a central bank with branch offices. Responding to these same concerns, another reformer, Victor Morawetz, developed a plan for regional reserve banks. Paul supported this alternative so long as it provided a central mechanism for coordinating action in emergencies.

  In November 1910, Aldrich, Paul, and four other experts sneaked off to discuss bank reform at a secret hideaway on Jekyll Island off the Georgia coast. With Democrats now in control of Congress and Progressives railing against Wall Street, the bankers had to travel incognito, lest they be accused of hatching a cabal. A favorite haunt of Wall Street tycoons, Jekyll Island was deserted in November and thus was a natural choice for a clandestine rendezvous.

  In Jersey City, Paul and his coconspirators, outfitted as duck hunters, boarded a private railroad car. Never having shot a bird, Paul had to borrow a rifle to participate in the masquerade. The men traveled by night, with the blinds tightly drawn, and they called each other by their first names. (Hence, they were christened The First Name Club.) When they got off the train in Brunswick, Georgia, they spoke loudly and ostentatiously about sport. Apparently, they were rather amateurish actors, for the Stationmaster knew at once who they were and said suspicious reporters had been snooping about. For a long time, the conspirators wouldn’t admit the meeting had even occurred. Writing in 1928, Paul still abided by the oath of secrecy. “Though eighteen years have since gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy.”14

  During ten days at Jekyll Island, Paul’s low-key but forceful personality stood out as the six men debated at a round table. When a cause engaged him, Paul was tenacious and he semihumorously dubbed himself a “fanatic” about bank reform. Aldrich wanted a central bank controlled by bankers. Bowing to political realities, however, Paul wanted to make concessions toward more public control. At one point, after a particularly testy exchange with Aldrich, Henry Davison of the Morgan Bank ushered Paul from the room to calm him down. Paul was eager to launch a national education campaign and Aldrich had to damp his excessive ardor.

  Frank Vanderlip of National City Bank described these strenuous days as the most stimulating intellectual experience of his life.15 As a result of these talks, Aldrich announced the so-called Aldrich Plan in January 1911. By affixing his name to the bill, Paul thought that Aldrich had succeeded in conjuring up a Republican-banker plot, and the populist press pounced upon Paul’s influence. A Philadelphia American headline blared, “Wall St. Banker, Not Aldrich, Drew Up Currency Plan.” The subhead said, “New York Man Real Author of Scheme to Control Money.”16

  The term “central bank” was so politically loaded that the Aldrich scheme called for a National Reserve Association that would issue notes based on gold and commercial paper—a clear victory for Paul—and its board of directors would be dominated by bankers. At the same time, the system would disperse power by having regional reserve banks under separate boards.

  For a political tyro, Paul was navigating in treacherous waters. For a foreigner and a Jew to play such an aggressive role—especially in matters of money—was daring and courageous. Jews were tolerated if they stayed in banking houses—that is, Jewish banking houses. Paul had now crossed an invisible line that exposed him to vituperative attack. That he acted as chief theoretician of the Aldrich Plan is somewhat less surprising than his vigorous public promotion of it. On March 21, 1911, he became a U.S. citizen just in time to chair a new National Citizens’ League for the Promotion of a Sound Banking System. To veil its Wall Street auspices, the group set up headquarters in Chicago and promoted the general idea of monetary reform, not the Aldrich Plan per se.

  Popular mistrust of the banking fraternity was at a high. A swelling chorus condemned the Wall Street Money Trust, which supposedly manipulated American finance. J. Pierpont Morgan was the archvillain, but Schiff and Kuhn, Loeb made the short list of enemies—the only important Jewish bankers included. Politicians were skittish about supporting any reform associated with these certified ogres of the populist press.

  In January 1912, Paul joined twenty bankers and economists to win Teddy Roosevelt’s support. Paul was impressed that Roosevelt was such a quick study. “It was fascinating to see him interrupt the speakers and drive straight for the important points,” he said. “After a comparatively short, quick fire of searching questions, it seemed that he had obtained a perfectly clear picture of the problem involved.”17 When one economist doubted that America had men experienced enough to run a central bank, TR sat back and laughed: “Why not give Mr. Warburg the job? He would be the financial boss, and I would be the political boss, and we could run the country together.”18 The room burst into laughter. This friendly exchange proved misleading. TR’s Progressive party opposed the Aldrich Plan and Paul keenly felt the betrayal, so much so that later, as his son
said, Paul “loathed Teddy Roosevelt … my father thought he was dreadful—didn’t trust him, thought he was a phony.”19 As his campaign went on, Paul would develop an air of chronic indignation. In many ways naïvely idealistic, he didn’t have the thick rind or innate cynicism that would toughen him for the bruising business of politics.

  When it was presented to the Democratic Congress in 1912, the Aldrich Plan fizzled, yet many of Paul’s ideas would survive in the Federal Reserve Act. During the 1912 campaign, Woodrow Wilson largely dodged the issue. After his election, Paul was asked to develop a central bank blueprint compatible with the Democratic platform. On December 7, 1912, Paul gave Henry Morgenthau a plan specifically crafted to appeal to Democrats. It proposed twenty reserve banks, capped by a central board in Washington under government control. In late December, Wilson met with Congressman Carter Glass and endorsed a plan for a Federal Reserve Board that would supervise a system of regional reserve banks. It looked suspiciously familiar to Paul, who said sardonically, “President Wilson could not possibly have escaped a conclusion which so many other students of the problem had been forced to reach.”20

  In January 1913, Paul testified before the House Banking Committee, an occasion that brought him into direct conflict with his Washington nemesis, Carter Glass, a fiery former newspaper editor from Virginia. Paul was modest and reticent while Glass craved the limelight. Paul knew that Glass faced a delicate task. In fighting for a central bank, he had to champion a Republican plan yet clothe it in egalitarian Democratic rhetoric. From political necessity, Glass had to deny the large overlap of his ideas with Paul’s. In testimony, Paul argued that the government should appoint a majority of the Washington board and the banking community the remainder. Glass and Wilson favored having all political appointees. Thus, they differed, not over the machinery, but over who would pull the levers. Glass wanted twelve to fifteen autonomous regional banks and faulted Paul’s more centralized scheme as one of “central banks of the banks, by the banks and for the banks.”21 The two men weren’t really that far apart and Glass used Paul as a foil to dramatize his own populist purity.