The “untimely death”[1] of Benjamin Strong Jr. caused the Great Depression. Bad monetary policy by the Federal Reserve was ultimately responsible, however, this would never have been allowed had Strong still been the head of the Federal Reserve Bank of New York.[2] The Federal Reserve’s centrist impulses, poor stewardship, and bad administration in the face of crisis doomed the nation, and the world, to a period of human misery that was wholly unnecessary. One need only look to the recession following the close of the Great War, or what could be referred to as the “depression you have never heard of,”[3] to recognize how very different and how much less wretched the 1930s could have been globally.
The approach to undertaking this topic will be a qualitative one. The speeches and writings of respected economists and historians will be reviewed and highlighted. As noted by Ben Bernanke, economist and former Governor and later Chairman of the Federal Reserve, “not only did the Depression give birth to macroeconomics as a distinct field of study, but also—to an extent that is not always fully appreciated—the experience of the 1930s continues to influence macroeconomists’ beliefs, policy recommendations, and research agendas.”[4]Finally, consideration will be given to whether the concern over “what caused the Great Depression” might actually be the wrong question to be asking entirely.
The Great War’s end resulted in the financial preeminence of the United States in the world in replacement of the former dominant steward, Great Britain.[5] This dramatically changed its role from that of simple preventer of national harvest banking panics to that of global financial leader.[6] At that time, it kept pumping money into the economy even though there was no longer the need to finance war deficits, providing a profound stimulus for private business and to the wartime inflation.[7] The surging inflation rates for consumer prices topped 20 percent.[8] The resulting tightening of the money supply to correct these symptoms led to the brief but severe depression in 1920 to 1921.[9] The resulting price deflation was worse than that in the Great Depression[10]and unemployment surged to 11.7%. Following the correction, however, the economy was allowed to improve.[11]
The required decentralization of the Federal Reserve at the time played a significant if, perhaps, unintended role. The façade of decentralization necessary to win the passage of a central banking authority[12] allowed for the rise of a most gifted regional administrator, Benjamin Strong, to guide the catastrophically flawed Federal Reserve system[13] with the artistry of Otto Von Bismark or Prince Metternich before him in the Concert of Europe through crises as needed. In Strong’s case, leading the Federal Reserve to appropriately treat inflation and the overheating of the economy with a short, curative, market correcting recession in 1920-1921, while generally providing sufficient liquidity to offset market struggles allowed, despite some difficulties, one of the most prosperous periods in human history.[14] Due to his contributions, the Depression of 1920-1921 never became the Great Depression of the 1920s dooming a decade to despair and deprivation.
Unfortunately, he died in 1928.[15] The resulting petty power struggle, now far enough removed from the hue and cry for decentralization demanded by the nation at the time of its passage and incorporation, allowed the centrists in Washington to consolidate their control. Strong’s worst failings were his mortality and, like Bismark, the inability of his successors to show any measure of his skill, nuance, ability, and leadership.[16]
The system needed a great economic leader to effectively operate it, and Strong’s death resulted in a “great contraction”[17] of that caliber of leadership. Therein lay the Achilles Heel for the Federal Reserve, the Central Board were political appointees without a requirement for being accomplished leaders in banking.[18] When a similar crisis arose in 1929, he was unavailable to lead the Federal Reserve, the nation, and the global economy, through it. Unlike the response to other recessionary pulls in the 1920s in which the Federal Reserve ensured adequate liquidity the new leadership instead chose to treat the wrong disease, speculation,[19] and contracted the monetary supply.[20] The ensuing waves of banking failures were the exact circumstances the Federal Reserve was created to prevent, and it failed.[21] Attempts by some, such as Ben Bernanke, to suggest that the causes were more worldwide in origin appear either naïve or willingly enabling more globalist reinventions of history.[22] As previously noted, the United States was now the center of the world’s financial center, and, when it faltered, so did the world.
On November 8, 2002, Ben Bernanke himself put it better when, at a conference at the University of Chicago to celebrate Milton Friedman’s ninetieth birthday he said,[23] “I would like to say to Milton and Anna: [24] Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”[25]
Benjamin Strong Jr. helped ensure that the Federal Reserve was able to meet the challenges of the 1920s after helping to guide the nation out of the post-war downturn. This had heightened significance as the United States assumed the role as the financial center of the world. Had Benjamin Strong Jr. continued on in his de facto role as the leader of the Federal Reserve the nation likely would have avoided the stock market bubble and the Great Depression.
However, he certainly could not have lived forever. Any system that is effective only when it is fortunate enough to be in the reigns of a great leader is not destined to enjoy continuous success. Indeed, it is engineered for failure by design. While a functional regulator of economic growth and the monetary supply under Benjamin Strong Jr., in his absence the Federal Reserve became a glaring example of institutional ineffectiveness and bureaucratic incompetence.
The question should not be, “What Caused the Great Depression,” but rather, what better model could prove to be more resilient in providing direction and leadership during inevitable financial crises? What system could better withstand the predictable, even expected, loss of inspired leadership? Dynasties are not recognized as having lasted during a single ruler’s reign. The performance of this governmental organ in the 1930s and, later, during the Stagflation of the 1970s, raises serious questions about its ongoing viability and whether a free-market alternative might be warranted, more capable, and even less tyrannical.
Bibliography
Bernanke, Ben. “On Milton Friedman’s Ninetieth Birthday.” Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, IL, November 8, 2002. https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/.
–“The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit, and Banking 27, no. 1 (February 1995): 1-28. https://doi-org.ezproxy.liberty.edu/10.2307/2077848.
Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States: 1867:1960. Princeton: Princeton University Press, 1963. Kindle.
—The Great Contraction. 1963. Reprint, Princeton, NJ: Princeton University Press, 1973.
Friedman, Milton, and Rose D. Friedman. Capitalism and Freedom. 40th Anniv. ed. Chicago: University of Chicago Press, 2002.
—Free to Choose: A Personal Statement. The Classic Inquiry into the Relationship between Freedom and Economics. 2nd ed. San Diego: Harvest Books, 1990.
Gordon, John Steele, “The Man Who Wasn’t There.” American Heritage 42, no. 7 (November 1991): 20-21. https://web-a-ebscohost-com.ezproxy.liberty.edu/ehost/detail/detail?vid=1&sid=90e26544-db7c-424b-84d8-3a1526a35c5b%40sessionmgr4006&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=9112161080&db=mth.
Hummel, Jeffrey Rogers. “Ben Bernanke Versus Milton Friedman: The Federal Reserve’s Emergence as the U. S. Economy’s Central Planner.” Independent Review 15, no. 4 (Spring 2011): 485-518. http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fscholarly-journals%2Fben-bernanke-versus-milton-friedman-federal%2Fdocview%2F859017507%2Fse-2%3Faccountid%3D12085.
Murphy, Robert P. “The Depression You’ve Never Heard of: 1920-1921.” Freeman 59, no. 10 (December 2009): 24-26. http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fmagazines%2Fdepression-youve-never-heard-1920-1921%2Fdocview%2F196591007%2Fse-2%3Faccountid%3D12085.
Rothbard, Murray N. “The Origins of the Federal Reserve.” Quarterly Journal of Austrian Economics 2, no. 3 (Fall 1999): 3-51. https://mises.org/library/origins-federal-reserve-2.
[1] Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement: The Classic Inquiry into the Relationship between Freedom and Economics, 2nd ed. (San Diego: Harvest Books, 1990), 78.
[2] Ibid.
[3] Robert P. Murphy, “The Depression You’ve Never Heard of: 1920-1921,” Freeman 59, no. 10 (December 2009): 24, http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fmagazines%2Fdepression-youve-never-heard-1920-1921%2Fdocview%2F196591007%2Fse-2%3Faccountid%3D12085.
[4] Ben Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,” Journal of Money, Credit, and Banking 27, no. 1 (February 1995): 1, https://doi-org.ezproxy.liberty.edu/10.2307/2077848.
[5] Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement: The Classic Inquiry into the Relationship between Freedom and Economics, 76-77.
[6] Ibid.
[7] Ibid., 77.
[8] Robert P. Murphy, “The Depression You’ve Never Heard of: 1920-1921,” 25.
[9] Ibid., 78.
[10] Robert P. Murphy, “The Depression You’ve Never Heard of: 1920-1921,” 26.
[11] Ibid.
[12] Murray N. Rothbard, “The Origins of the Federal Reserve,” Quarterly Journal of Austrian Economics 2, no. 3 (Fall 1999): 47, https://mises.org/library/origins-federal-reserve-2.
[13] Milton Friedman and Rose D. Friedman, Capitalism and Freedom, 40th Anniv. Ed. (Chicago: University of Chicago Press, 2002): 45-47. Friedman observes that the very consolidation of economic responsibility in “a few men” leaves to great vulnerability from their errors, and thus, is a great flaw in central banks.
[14] Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement: The Classic Inquiry into the Relationship between Freedom and Economics, 78.
[15] Ibid.
[16] Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement: The Classic Inquiry into the Relationship between Freedom and Economics, 78.
[17] Milton Friedman and Anna Jacobson Schwartz, The Great Contraction: 1929-1933 (1963; repr., Princeton, NJ: Princeton University Press, 1973). With apologies to both authors for the playful usurpation of their title.
[18] John Steele Gordon, “The Man Who Wasn’t There,” American Heritage 42, no. 7 (November 1991): 20, https://web-a-ebscohost-com.ezproxy.liberty.edu/ehost/detail/detail?vid=1&sid=90e26544-db7c-424b-84d8-3a1526a35c5b%40sessionmgr4006&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=9112161080&db=mth.
[19] Milton Friedman and Rose D. Friedman, Capitalism and Freedom, 40th Anniv. Ed. (Chicago: University of Chicago Press, 2002), 45; John Steele Gordon, “The Man Who Wasn’t There,” American Heritage 42, no. 7 (November 1991): 20, https://web-a-ebscohost-com.ezproxy.liberty.edu/ehost/detail/detail?vid=1&sid=90e26544-db7c-424b-84d8-3a1526a35c5b%40sessionmgr4006&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=9112161080&db=mth.
[20] Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement: The Classic Inquiry into the Relationship between Freedom and Economics, 79.
[21] Milton Friedman and Rose D. Friedman, Capitalism and Freedom, 40th Anniv. Ed. (Chicago: University of Chicago Press, 2002), 45-47; Milton Friedman and Rose Friedman, Free to Choose: A Personal Statement: The Classic Inquiry into the Relationship between Freedom and Economics, 2nd ed. (San Diego: Harvest Books, 1990), 76.
[22] Ben Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,”1.
[23] Jeffrey Rogers Hummel, “Ben Bernanke Versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner,” Independent Review, 15, no. 4 (Spring 2011): 485, http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fscholarly-journals%2Fben-bernanke-versus-milton-friedman-federal%2Fdocview%2F859017507%2Fse-2%3Faccountid%3D12085.
[24] Anna Jacobson Schwartz, his co-author of the iconic work, Milton, Friedman and Anna Jacobson Schwartz, A Monetary History of the United States: 1867:1960 (Princeton: Princeton University Press, 1963), Kindle.
[25] Ben Bernanke, “On Milton Friedman’s Ninetieth Birthday,” (remarks at the Conference to Honor Milton Friedman, University of Chicago, Chicago, IL, November 8, 2002, https://www.federalreserve.gov/boarddocs/speeches/2002/20021108/.
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