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Monetary Policy and the Onset of the Great Depression: The Myth of Benjamin Strong as Decisive Leader

Author(s):Toma, Mark
Reviewer(s):Smith, Daniel J.

Published by EH.Net (May 2015)

Mark Toma, Monetary Policy and the Onset of the Great Depression: The Myth of Benjamin Strong as Decisive Leader. New York: Palgrave Macmillan, 2013. xix + 214 pp. $115 (hardcover), ISBN: 978-1-137-37254-3.

Reviewed for EH.Net by Daniel J. Smith, Department of Economics, Troy University.

Mark Toma’s short, but dense Monetary Policy and the Onset of the Great Depression: The Myth of Benjamin Strong as a Decisive Leader provides a revisionist history of the Benjamin Strong leadership years at the Fed leading up the Great Depression. Despite the title, the book focuses entirely on this period and doesn’t delve into the actual causes of the Great Depression. Rather than provide a casual explanation of the Great Depression per se, Toma’s project is to convince monetarist and Austrian economists that both of their accepted histories of the Great Depression are empirically unfounded. Thus, Toma argues that mismanaged monetary policy — tightening per the monetarist narrative or loosening per the Austrian narrative — can be ruled out as a causal factor of the Great Depression.

In questioning the Strong decisive leader theory — the theory that Benjamin Strong played a decisive role in the monetary policies of the 1920’s as the President of the influential New York Federal Reserve Bank and that his untimely death ultimately led to the wrong-headed policies that brought on the Great Depression — Toma does not stand alone. Temin (1989, 35), Wheelock (1992), and Brunner and Meltzer (1968) all question the strong leader hypothesis. However, Toma discredits each of their theories and forges a completely new explanation for why Strong’s leadership was not a decisive factor. Toma makes the case that the Fed operated as a self-regulating, decentralized system. According to Toma, this system operated effectively as intended, so the credit for Friedman and Schwartz’s (1963, Ch. 6) description of the 1921-1929 Fed era as the “high tide” of the Fed system should go to the founders of the Fed, not Benjamin Strong.

Overall, the book would have benefitted from a more thorough engagement with the modern literature. Instead of addressing modern developments and more nuanced and refined arguments in the monetarist and Austrian tradition, Toma sets up the book against the narratives of Rothbard (1975) and Friedman and Schwartz (1963).

Modern accounts have certainly built upon and improved upon Rothbard’s America’s Great Depression (e.g., Garrison 1999; White 2012; Eichengreen and Mitchener 2003; Laidler 2003). In addition, modern Austrians have also made sure to note that the monetarist and Austrian narrative aren’t mutually exclusive or contradictory (Horwitz 2012; Selgin 2013). As Eichengreen and Mitchener (2003, 53) put it, “a horse-race is not the appropriate context in which to assess theories of the Great Depression. The Depression was a complex and multifaceted event.” While Toma addresses the distinctive Austrian and monetarist explanation, he does not address this modern synthetic narrative.
On a similar note, monetarists and new Keynesians have also built upon and improved the monetarist account beyond Friedman and Schwartz (1963) (e.g., Romer 1993; Bordo, Erceg, and Evans 2000; Hall and Ferguson 1998). A third explanation, real factor productivity, is left unexamined by Toma (Kehoe and Prescott 2007; Cole and Ohanian 2001; Temin 1976; Gordon and Wilcox 1981). Finally, Toma also leaves out important new developments in the literature on the Great Depression from a comparative institutions framework examining the experiences of other countries during the Great Depression (Bernanke 1995). Toma certainly levies some convincing challenges to the above literature, but by not specifically addressing it in this book he leaves a lot of territory uncovered.

While the book provides a thorough theoretical and empirical case for Toma’s contention, it lacks convincing anecdotal evidence, especially in regard to the Fed’s independence, which does not seem to support Toma’s narrative of Fed self-regulation. Given the difficulties of empirically measuring these types of influences on monetary policy, supplemental anecdotal evidence is necessary (Smith and Boettke, forthcoming).

For instance, the independence of the Fed was undermined immediately during World War I (Hanna 1936; Mehrling 2011, Ch. 2; Eichengreen 1992; Meltzer 2003, Ch. 3). As Friedman and Schwartz (1963, 216) argue, “The Federal Reserve became to all intents and purposes the bond-selling window of the Treasury, using its monetary powers almost exclusively to that end.”  Many early Fed Board members actually held the opinion that the Fed was just “an adjunct of the Treasury Department rather than an independent body” after this encroachment of their independence (Kettl 1986, 25). In fact, the Board meetings were actually held in the Treasury Department and the Secretary of Treasury was the Chairperson of the Board ex officio until the Banking Act of 1935 (Havrilesky 1995, 44; Kettl 1986, 24). According Benjamin Strong, if the Fed did not deliver the desired Treasury support, it would have been “an invitation to Congress to have their power modified — a perfectly unthinkable and most dangerous possibility” (as quoted in Kettl 1986, 26-7).

Pressures from the executive branch, legislative branch, and the Treasury were all exerted on the Fed to provide easy monetary policy even following World War I. The Treasury used its positions on the Fed Board to ensure that the price of government bonds didn’t fall (Eichengreen 1992, 114; Friedman and Schwartz 1963, 223-4, 228; Havrilesky 1995, 44).  For instance, the Secretary of the Treasury, Carter Glass, threatened to have Benjamin Strong removed from office by the President when Strong threatened to raise rates without the approval of the Board (Clifford 1965, 114-6). From the legislative branch, strong pressure from agricultural interests to keep interest rates low resulted in the introduction of an agricultural member on the Board and the inclusion of nine month’s agriculture paper in the rediscounting facilities of the Reserve Banks (Hanna 1936, 623; Meltzer 2003, 114). As Meltzer (2003, 132) summarizes, “Congressmen from agricultural areas, particularly in the South and West, were highly critical of the higher discount rates in those regions. Bills were introduced limiting the System’s [Fed’s] ability to increase rates. The Federal Reserve yielded to this political pressure by lowering discount rates.”
The same pressures that were exerted following World War I remained in place leading into the Great Depression (Meltzer 2003, Ch. 4). The Fed caved into these pressures, expanding the money supply by 34 percent in between June 1922 and June 1927, and another 10 percent in between June 1927 and December 1928 (White 2012, 69).

Toma’s book levies a serious challenge against two strong economic traditions and their interpretations of arguably one of the most important economic events in American economic history. It offers yet another theoretical and empirical factor that scholars of the Great Depression will have to wrestle with in order to advance our understanding of this “Holy Grail of macroeconomics” (Bernanke 1995, 1).

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Brunner, Karl and Allan H. Meltzer (1968). “What Did We Learn from the Monetary Experience of the United States in the Great Depression?” Canadian Journal of Economics 1(2): 334-348.

Clifford, A. Jerome (1965). The Independence of the Federal Reserve System. Philadelphia: University of Pennsylvania Press.

Cole, Hal, and Lee Ohanian (2001). “Reexamining the Contribution of Money and Banking Shocks to the Great Depression.” In Benjamin Bernanke and Kenneth Rogoff (Eds.), NBER Macroeconomics Annual 2000, pp. 183-227. Cambridge, MA: MIT Press.

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Selgin, George (2013). “Booms, Bubbles, Busts, and Bogus Dichotomies,” Alt-M, August 30. Available online:

Smith, Daniel J. and Peter J. Boettke (forthcoming). “An Episodic History of Federal Reserve Independence,” The Independent Review.

Temin, Peter (1976). Did Monetary Forces Cause the Great Depression? New York: W. W. Norton.

Temin, Peter (1989). Lessons from the Great Depression. Cambridge, MA: MIT Press.

Wheelock, David C. (1992). “Monetary Policy in the Great Depression: What the Fed Did, and Why,” Federal Reserve Bank of St. Louis Review 74(2): 3-28.

White, Lawrence H. (2012). The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years. New York: Cambridge University Press.

Daniel J. Smith is an Associate Professor of Economics in the Jonson Center at Troy University.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII