Central Banking with Federalist Characteristics: The Coming of the Productive-Republican Fed

This Chapter turns to the Fed’s founding era and, for heuristic purposes, in only broadbrush form, its early ‘operating system’—the Real Bills Doctrine The emphasis is on how we at last came to find central banking unavoidable in a modern, industrial economy on the one hand, while having to satisfy that need via what I call ‘central banking with federalist characteristics’ on the other hand. The characteristics I emphasize are a ‘distributed,’ federated structure—‘decentralization’—on the one hand, and a favoring of ‘Main Street’ production over ‘Wall Street’ speculation on the other. Happily, two Americans whose values coincided with these attitudinal and ideational tendencies were ready to step up to the proverbial plate just as America decided, in the wake of the Wall Street Panics of 1873, 1893, and especially 1907, that some form of central banking had become no longer avoidable. Carter Glass and Paul Warburg. Glass, who hailed from the American South where Jacksonian Antifederalist attitudes long had held sway, was insistent on a design that avoided concentrating financial power in New York or Washington as British central banking had done in London. Warburg, in turn, was a seasoned German industrial banker who had immigrated to America, hence a banker well versed in the exclusively productive, as distinguished from speculative modes of banking practiced through commercial paper ‘discounting’ in highly productive, industrially rapidly growing, non-financialized late nineteenth century Germany. Between them, Glass and Warburg designed a near-perfect Fed, predicated on an early twentieth-century rendition of the highly Productivist Real Bills Doctrine (‘RBD’). The only fly in the proverbial ointment was the one blind-spot to which that rendition of the RBD, as discussed more fully in this Book’s subsequent Chapters, was vulnerable.