Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927

Published by EH.NET (October 2000)

Silvano A. Wueschner, Charting Twentieth-Century Monetary Policy: Herbert

Hoover and Benjamin Strong, 1917-1927. Westport, CT: Greenword Press,

1999. xi + 178 pp. $59.95 (cloth), ISBN: 0-313-30978-7.

Reviewed for EH.NET by Mark Toma, Department of Economics, University of

Kentucky.

Charting Twentieth-Century Monetary Policy by Silvano Wueschner,

Assistant Professor of History at William Penn College, is a history of the

political forces that shaped United States monetary policy during the 1920s.

What is intriguing about this account is the injection of Herbert Hoover into

the picture. While a big-time player in the Great Depression, Hoover was

seemingly only a bit-player earlier in the 1920s as head of the Commerce

Department. By documenting the birth and growth of Hoover’s monetary policy

agenda in the 1920s, Wueschner’s analysis sets the stage for a deeper

understanding of the politics of the Great Depression.

Wueschner’s account of monetary policy during the 1920s unfolds as a struggle

between Hoover who covertly exercised influence through kindred spirits on the

Federal Reserve Board and Benjamin Strong who overtly exercised influence as

Governor of the Federal Reserve Bank of New York. Simply put, Strong was a

monetary internationalist who favored cooperation between the Fed and the Bank

of England while Hoover was a monetary nationalist who favored rivalry among

national central banks. On the domestic front, the tables were turned. Hoover

was all in favor of cooperation — as long as the Federal Reserve Board led

the way with strong central powers over discount and open market operation

powers. In contrast, Strong opposed the Board as monetary czar. He sought to

increase the powers of the individual Reserve banks, particularly the New York

Fed.

In the 1920s, the divisive issue between the two sides was whether the Fed’s

monetary policy would be “easy,” as favored by Strong, to smooth the way for

the international gold standard, or “tight,” as favored by Hoover, to combat

stock market speculation. The basic structure of the Federal Reserve seemed to

favor Hoover since the original Reserve Act provided the Board with relatively

strong powers to influence the discount rates established by the individual

Reserve banks. The Act contained a loophole in the Board’s control, however.

Individual Reserve banks were authorized to conduct open market operations on

their own. With the New York Fed playing a leading role, Reserve banks tended

to purchase government securities for their own accounts when discount policy

was tight. The overall result, as summarized in the title of the penultimate

chapter “Easy Money,” was that the easy money policy won by default. Strong’s

internationalism beat Hoover’s nationalism in the 1920s.

Although beyond the scope of book, it is interesting to consider how the

policy tension between Hoover and Strong in the 1920s set the stage for policy

during the Great Depression. As is well known, the Hoover Administration won

an isolationist victory on trade policy with passage of the Smoot-Hawley

Tariff Act. Less purposefully, Hoover also attained the type of monetary

policy that he had earlier sought as the Board effectively exercised its

muscle in shutting down open market operations during the Great Depression.

Hoover’s fiscal and monetary nationalism carried the day.

Wueschner’s history has much to offer two groups of academic researchers —

those with a general interest in the politics of US democracy and those with a

special interest in the monetary policy of the early Federal Reserve. I, for

one, was surprised to learn that the head of the Commerce Department in the

1920s played such an important role in shaping the course of monetary policy

for decades to come.

Mark Toma is an Associate Professor of Economics at the University of

Kentucky. His recent research (“Open Market Operations and the Great

Depression,” working paper) is on Federal Reserve policy during the 1920s and

1930s.