Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Benjamin Strong, the Federal Reserve, and the Limits to Interwar American Nationalism: Part II: Strong and the Federal Reserve System in the 1920s

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Benjamin Strong, the Federal Reserve, and the Limits to Interwar American Nationalism: Part II: Strong and the Federal Reserve System in the 1920s

Article excerpt

1. BENJAMIN STRONG: CONTEMPORARY VIEWS

Controversial in life, the dominating figure of Benjamin Strong, first governor of the Federal Reserve Bank of New York, continues to precipitate debate long after his death in 1928. "There are," intoned former President Herbert Hoover, "crimes far worse than murder for which men should be reviled and punished."1 Perhaps slightly biased by the fact that the Great Depression had ruined his presidency, he was referring to what he perceived as deficiencies in Federal Reserve policy during the 1920s. In particular, Hoover believed that the United States Federal Reserve System, most of whose members he unkindly characterized as "mediocrities," had been overly influenced by the priorities of its dominant figure, Benjamin Strong. Describing Strong as "a mental annex to Europe," Hoover laid much of the blame for the stock market crash of 1929 and the subsequent Great Depression on the governor's deep commitment to facilitating Europe's economic recovery from the damage done by the First World War. During the 1920s, the majority of Europe's governments, led by Great Britain, returned to the gold standard. Britain's insistence on doing so at what Hoover termed a "fictitious rate" of $4.86 to the pound sterling, in his opinion far too high, and Strong's acquiescence in these policies, in turn led Strong to expand American credit by keeping American discount rates relatively low and manipulating the Reserve System's open market operations. The rationale for this was that keeping interest rates lower in the United States than in Britain eased pressures on sterling and enabled the Bank of England, whose governor, Montagu Norman, was Strong's closest friend, to maintain an overvalued pound. Hoover ascribed Strong's policies to what he viewed as the malign persuasions of Norman and other central bankers, especially Hjalmar Schacht of the Reichsbank and Charles Rist of the Bank of France. He believed that due to Strong's unwise predilections, from the mid-1920s onward the United States experienced credit inflation, which fuelled the stock market bubble that collapsed in the Great Crash of 1929. Although Hoover suggested that other economic weaknesses, including a "weak banking system" and the low purchasing power of farmers and white-collar employees, contributed to this, he argued that imprudent Federal Reserve policies bore the primary responsibility for the crash and the Depression.2

Hoover was not alone among Strong's contemporaries in expressing the view that Strong's efforts to aid Britain's return to the gold standard laid the foundation for the Depression by triggering stock market speculation. At the onset of the Great Depression, Russell C. Leffingwell, a leading partner in the investment bank J. P. Morgan and Company, agreed with those who condemned Strong's policies and ascribed to them at least some responsibility for the boom and final crash of that decade's second half. Leffingwell did so even though Strong had close ties to the Morgan banking firm, which had provided much of the financing for European nations' stabilization efforts.3

Within the Federal Reserve System, Strong's rate policies of the mid-1920s also provoked substantial regional opposition, particularly from midwestern and agricultural elements, who generally endorsed Hoover's subsequent analysis.4 It is generally accepted that in 1924 Strong engineered low interest rates in the United States, which by making the dollar and sterling respectively less and more attractive to investors drove up the foreign exchange value of the British currency and facilitated Britain's return to the gold standard.5 The records not only of Strong's correspondence with Montagu Norman, but also the Bank of England's files on relations with the Federal Reserve Bank of New York, reveal how closely British and American bankers kept in touch on their respective discount rates.6 Throughout the 1920s, two of the Federal Reserve Board's directors, Adolph C. …

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