The Panic of 1907, 2nd Edition

Chapter 22A Central Bank

Really, we cannot go on in this way. Financial flurries and squeezes which are of such frequent occurrence at the great money centers of the country are the legitimate offspring of a bad financial system. These things do not occur in European countries where they have their banking system on a solid and enduring basis, under complete government control. Until we adopt a central bank of issue, or something like it, there can be no permanent relief.

—Senator Henry C. Hansbrough of North Dakota, November 23, 1907¹

Through the tortuous process of financial crisis and civic reaction, public sentiment built inexorably toward acceptance of the idea of a central bank in the United States. By late November 1907, newspapers were declaring that the crisis had ended.² Yet already it was apparent that the Panic of 1907 had crystallized a change in attitude: as had been true for a century or more, the problem in a panic was the insufficiency of money and credit; the novelty of 1907 was to shift attention to the structure of the financial system.

However, what kind of bank would it be? Paul Warburg, an investment banker with Kuhn, Loeb, advocated a truly centralized bank such as existed in Britain, France, and Germany—one institution that could command the financial muscle to serve a growing economy and respond decisively in the event of a crisis. Populists, such as William Jennings Bryan, recoiled from the powers exercised by J. P. Morgan and George B. Cortelyou ...