Network Advantages

Network Advantages: Or Why American Capitalism Needed a Central Bank 

The early central banks (like the Bank of England) stimulated private markets, as the consortium of merchants who ran the central bank worked out ways of financing each others’ activities, and not merely the state.  The financial operations of the world in the early 1900s were concentrated in Britain, and specifically in the City of London.  Since exporters could not have financial agents in every city that imported from them, the trading finance of the world was run through London merchant banks.  But, the vulnerability of the world was displayed very abruptly with the outbreak of a financial crisis. The panic of October 1907 showed the fast growing industrial powers the desirability of mobilizing financial power. 

How would the US (and Germany) respond to the unique advantages of the Bank of England?  The 1907 experience convinced some American financiers that New York needed to develop its own commercial trading system that could handle bills in the same way as the London market.  The central figure on the technical side in pushing for the development of an American acceptance market was Paul Warburg, the immigrant younger brother of a great (and fourth generation) Hamburg banker Max Warburg who was the personal adviser of the German autocrat Kaiser Wilhelm II.  Paul Warburg was a key player in the bankers’ discussions on Jekyll Island and then in drawing up the institutional design of the Federal Reserve System.  The two banking brothers Warburg were in fact on both sides of the Atlantic energetically pushing for German-American institutions that would offer an alternative to the British industrial and financial monopoly.  They were convinced that Germany and the United States were growing stronger year by year while British power would erode.