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Paul Van Zeeland and the First Decade of the US Federal Reserve System

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Paul Van Zeeland and the First Decade of the US Federal Reserve System A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Maes, Ivo; Gómez, Rebeca Working Paper Paul van Zeeland and the first decade of the US Federal Reserve System: The analysis from a European central banker who was a student of Kemmerer NBB Working Paper, No. 339 Provided in Cooperation with: National Bank of Belgium, Brussels Suggested Citation: Maes, Ivo; Gómez, Rebeca (2018) : Paul van Zeeland and the first decade of the US Federal Reserve System: The analysis from a European central banker who was a student of Kemmerer, NBB Working Paper, No. 339, National Bank of Belgium, Brussels This Version is available at: http://hdl.handle.net/10419/182216 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Paul van Zeeland and the first decade of the US Federal Reserve System : The analysis from a European central banker who was a student of Kemmerer Working Paper Research by Ivo Maes and Rebeca Gomez Betancourt March 2018 No 339 Editor Jan Smets, Governor of the National Bank of Belgium Statement of purpose: The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. Orders For orders and information on subscriptions and reductions: National Bank of Belgium, Documentation - Publications service, boulevard de Berlaimont 14, 1000 Brussels Tel +32 2 221 20 33 - Fax +32 2 21 30 42 The Working Papers are available on the website of the Bank: http://www.nbb.be © National Bank of Belgium, Brussels All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. ISSN: 1375-680X (print) ISSN: 1784-2476 (online) NBB WORKING PAPER No. 339 – MARCH 2018 Abstract The establishment of a central bank occurred at very different moments in the process of economic integration in the United States and the European Union. In this paper, we go into the first years of the Federal Reserve System through the lens of Paul van Zeeland’s PhD dissertation. Paul van Zeeland (1893-1973) became the first Head of the Economics Service of the National Bank of Belgium in 1921, after his studies in Princeton with Edwin Walter Kemmerer. There are clear similarities in their analyses of the Federal Reserve System, for instance in their adherence to the gold standard and the real bills doctrine as well as in their emphasis on the elasticity of the money supply. Moreover, they shared a view - with hindsight a rather naïve view - that with the Fed in place, financial crises would be a distant memory. However, there were also important differences. So, van Zeeland, like several other economists as Warburg, accorded greater significance to the discount market (a key factor for the international role of the dollar) and to a stronger centralization of the Fed (which would be taken up in the 1935 Banking Act). Moreover, very specific for van Zeeland is the importance given to the Fed's independence from the State (an element related to his continental European background and Belgium's experience of monetary financing during the war). JEL codes: A11, B1, E58, F02, N23. Keys words: van Zeeland, Kemmerer, Federal Reserve System, financial crisis, banking reform. Authors: Ivo Maes, National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School, Boulevard de Berlaimont 14, 1000 Brussels, Belgium, e-mail: [email protected]. Rebeca Gomez Betancourt, University of Lyon 2. Triangle-ISH, e-mail: [email protected]. The authors would like to thank the participants at the APHES (Lisbon), ESHET (Kingston), HES (Montréal) and SIE (Trento) conferences for the useful comments that greatly contributed to improving the final version of the paper. They would also like to thank K. Dyson, A. Ellerton, P. Paesani and D. Schiffman for their generous comments. The usual caveats apply. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the National Bank of Belgium or any other institution to which the authors are affiliated. NBB WORKING PAPER No. 339 – MARCH 2018 NBB WORKING PAPER No. 339 – MARCH 2018 TABLE OF CONTENTS 1. Introduction ............................................................................................................... 1 2. Kemmerer and US Banking reform before the creation of the Fed ....................... 3 3. The formation and central banking background of van Zeeland........................... 8 3.1. van Zeeland's formation ........................................................................................... 9 3.2. Central banking in Belgium ..................................................................................... 11 4. Kemmerer and van Zeeland on the Federal Reserve System .............................. 14 5. Epilogue: van Zeeland, the Federal Reserve System and European (Monetary) Union ....................................................................................................................... 22 6. Conclusion .............................................................................................................. 25 Archival sources .............................................................................................................. 27 References ...................................................................................................................... 27 National Bank of Belgium - Working papers series .......................................................... 31 NBB WORKING PAPER – No. 339 – MARCH 2018 NBB WORKING PAPER No. 339 – MARCH 2018 “Is there any country in the world on which it is harder to come to a reasoned, comprehensive opinion than the United States? I very much doubt it. So many disparate elements, sometimes merged, sometimes simply juxtaposed; many races, radically different climates, vast distances, accumulated wealth, endless resources and barely controlled energy: in short, a turbulent new world. How can we reach a judgment in the face of all that?" (Paul van Zeeland, Quelques impressions des Etats-Unis [Some impressions of the United States], La Revue Générale, 1922b:194). 1. INTRODUCTION As is well known, the establishment of a central bank occurred at very different moments in the process of economic and political integration in the United States and the European Union. One might argue that the United States, already from its origins, from the Declaration of Independence in July 1776, constituted in many ways a federal state. The civil war, from 1861 to 1865, confirmed the federal nature of the United States, as against the southern confederate view. Still the establishment of a federal central bank only occurred in 1913 and the early functioning of the Federal Reserve System was not always easy. Moreover, notwithstanding the political union, there were important cleavages in the American economy and society, whereby one might note certain similarities with the Euro Area. As observed by one of America’s foremost economists of the time, the Harvard professor Allyn Young: "So far as finance is concerned the most important cleavage has been the one between 'creditor regions', supporters of 'sound money' and of an effective centralized control of banking operations, and 'debtor regions', partisans of 'cheap money' and advocates of the largest practicable degree of freedom in the establishing and operating of banks. The recurrent 'cheap money' movements that have characterized the political history of the United States have sprung from the fact that the opening up and developing of new lands have called for expenditures of capital in amounts far beyond the resources of the actual settlers. New regions have generally been debtor regions, and there is more than mere coincidence in the fact that demands for cheap money have always been voiced most loudly on the frontier." (Young 1926) 1 In this paper we analyse the establishment and the first years of the Federal Reserve System through the lens of Paul van Zeeland’s Ph.D dissertation as well as the analyses of his American mentor, Edwin Walter Kemmerer. Paul
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