Benjamin Strong and International Financial Cooperation during the 1920s

Abstract

Benjamin Strong (1872-1928) was an elite banker, who first engaged in founding of the Federal Reserve System in 1913. Later he served as governor of the Federal Reserve Bank of New York (1914-1928). Already in 1916 Strong found that he had tuberculosis. After struggling for years, the disease would finally take his life. In their A Monetary History of the United States, Friedman and Schwartz wrote: If Strong had still alive and head of the New York Bank in the fall of 1930, he would very likely have recognized the oncoming liquidity crisis for what it was, would have been prepared by experience and conviction to take strenuous and appropriate measures to head it off, and would have had the standing to carry the System with him.

When Strong was governor of the FRB of New York, the system itself was in its infancy, and the New York bank was more powerful than the Federal Reserve Board itself. Strong played a similar role of Ben Bernanke, the current Chairman of the Board of Governors of the United States Federal Reserve, although organizationally the New York Bank was just nly one of twelve regional banks under the FRB. Strongs most important task was to recover and stabilize world economy through the restoration of world gold standard and he needed cooperation of Montague Norman of the Bank of England among others, and also of Emile Moreau of the Bank of France, and Hjalmar Schacht of the Reichsbank of Germany in these efforts. He succeeded in rebuilding the gold standard beginning with Britain. The reconstructed monetary system was different from the prewar system governed by Britain, mainly because of the heavy concentration of gold to the U.S. and France. Strong took great pains to control the rates of interest to avoid deflation on the one hand, and to sterilize gold coming into the U.S. to keep off inflation on the other. The international financial cooperation led by Strong had been disintegrating towards the end of 1920s, because the alienation of economic interests between the U.S. and European countries inevitably widened during this period.