Benjamin Strong, the Federal Reserve, and the Limits to Interwar American Nationalism: Part I: Intellectual Profile of a Central Banker

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Part I: Intellectual Profile of a Central Banker

This essay on Benjamin Strong, the first governor of the Federal Reserve Bank of New York (1914-1928), evolved from the author's research on the development of an American internationalist tradition during and largely in consequence of the First World War. Viewing Strong's activities in the broader context of the world view and diplomatic preferences of the educated East Coast establishment, a foreign policy elite to which Strong belonged and most of whose norms he accepted, greatly illuminates his broader motivations and the interwar relationship between finance and overall international diplomacy. Strong's work for international stabilization also provides revealing insight into the limits of American internationalism during the 1920s and the degree to which, in both finance and diplomacy, the interwar years represented a transitional period between the restricted pre-1914 American world role and the far more sophisticated assumptions which would guide United States policies in the aftermath of the Second World War.

Strong's career as governor encompassed 15 years of rapid domestic and international change. The outbreak of the First World War just a few weeks after he became governor in 1914 greatly enhanced the economic position of the United States. American manufacturers, financed by American bankers, provided much of the materiel essential to the Allied war effort, causing a flood of gold into the United States and tipping the international balance of trade and payments heavily in favor of the United States. When the war ended in 1918, European nations' ability to undertake postwar reconstruction depended upon the extent to which they could tap into the accumulated American capital reserves. During the war the U.S. economy boomed but American prices soared. Once fighting ended in late 1918, a short but intense recession occurred in 1920-1921, the product of a combination of the cessation of wartime orders and the Federal Reserve Board's efforts to end inflation by raising interest rates. After 1922, for most of the decade the American economy boomed, enjoying both real growth and price stability and generating the surplus funds necessary to enable Americans to invest heavily overseas. In the mid-1920s, private American loans financed both the return of most European countries to the gold standard and a wide array of European government and business enterprises. The American stock market slump of October 1929 marked the end of this prosperity. It precipitated a range of interlocking domestic and international economic difficulties whose constantly intensifying destructive synergy led to the worldwide Great Depression, the impact of which persisted until the late 1930s. The Federal Reserve System's inability to cope with the crisis led directly to the Banking Act of 1935, which greatly enhanced the powers of the Washington-based central Federal Reserve Board while diminishing those of the constituent regional Federal Reserve Banks.

1. THE CONTEXT OF STRONG'S IMPERIALISM

It is worth remembering that Strong was merely one individual in a group of prominent interwar American figures who were committed to what they termed "internationalist" policies and who often worked closely together to this end. This foreign policy elite generally favored expanding their country's international diplomatic and economic role. Its members usually supported American intervention against Germany in the First World War and U.S. participation in an international organization to maintain peace and in efforts to facilitate Europe's postwar economic recovery. Many also endorsed international arms limitation and some an American guarantee of France's security against a potential future German attack. There was a strong Anglophile element to their thinking: Most believed that an Anglo-American alliance, formal or informal, and Anglo-American diplomatic and economic cooperation would be fundamental to any acceptable postwar settlement. …