Warburg was the acceptance market in America. But he was not without friends who also swam in the river of money. Men who controlled America's largest financial institutions became directors or officers of the various acceptance banks. The list of companies that became part of the interlocking directorate included Kuhn, Loeb and Co.; New York Trust Co.; Bank of Manhattan Trust Co.; American Trust Co.; New York Title and Mortgage Co.; Chase National Bank; Metropolitan Life Insurance Co.; American Express Co.; the Carnegie Corp.; Guaranty Trust Co.; Mutual Life Insurance Co.; the Equitable Life Assurance Society of New York; and the First National Banks of Boston, St. Louis, and Los Angeles, to name just a few. The world of acceptance banking was the private domain of the financial elite of Wall Street.
Behind the American image, however, was a full partnership with investors from Europe. Total capital of the IAB's American shareholders was $276 million compared with $271 million from foreign investors. A significant portion of that was divided between the Warburgs in Germany and the Rothschilds in England.
Just how large and free-flowing was that river of acceptance money? In 1929, it was 1.7 trillion-dollars wide. Throughout the 1920s, it was over half of all the new money created by the Federal Reserve—greater than all the other purchases on the open market 1. For a detailed account of this episode, see Part Two of the author's book,
2. Larry Schweikart, ed.
THE GREAT DUCK DINNER
483
plus all the loans to all the banks standing in line at the discount window.1
The monetary scientists who created the Federal Reserve, and their close business associates, were well-rewarded for their efforts.
Profit-taking by insiders, however, is not the issue. Far more important is the fact that the consequence of this self-serving mechanism was the massive expansion of the money supply that made the Great Depression inevitable. And that is the topic which impelled us to look at acceptances in the first place.
CONGRESS SUSPICIOUS BUT AFRAID TO TINKER
By 1920, suspicions and resentment were growing in the halls of Congress. Politicians were not getting their share. It is possible that many of them failed to realize that, as partners in the scheme, they were entitled to a share. Nevertheless, they were dazzled by banker language and accounting tricks and were afraid to tinker with the System lest they accidentally push the wrong button.
Watching with amusement from London was Fabian Socialist
John Maynard Keynes. Speaking of the Federal Reserve's manipulation of the value of the dollar, he wrote:
That is the way by which a rich country is able to combine new wisdom with old prejudice. It can enjoy the latest scientific improvements, devised in the economic laboratory of Harvard, whilst leaving Congress to believe that no rash departure will be permitted.... But there is in all such fictions a certain instability.... The suspicions of Congressmen may be aroused. One cannot be quite certain that some Senator might not read and understand this book.2
There was not much danger of that! By then, American politicians had acquired a taste for the heady wine of war funding and stopped asking questions. World War I had created enormous demands for money, and the Fed provided it. By the end of the war, Congressional hostility to the Federal Reserve became history.
PAYING FOR WORLD WAR I
Much of the war debt was absorbed by the public which
responded to patriotic instincts and purchased war bonds. The Treasury launched a massive publicity campaign for "Liberty Loans" to reinforce that sentiment. These small-denomination 1-Ibid., p. 448; also Murray N. Rothbard,
2- Keynes,
484
THE CREATURE FROM JEKYLL ISLAND
bonds did not expand the money supply and did not cause
inflation, because the money came from savings. It already existed.
However, many people who thought it was their patriotic duty to support the war effort went to their banks and borrowed money so they could buy bonds. The bank created most of that money out of nothing, drawing upon credits and bookkeeping entries from the Federal Reserve, so those purchases did inflate the money supply.
