Had Strong been strong the economy might have been, too.
Despite barriers of all kinds—ill health, a tragic family life, political rigamarole and volatile economic times—Benjamin Strong became one of America’s greatest modern-day central bankers before his untimely death in 1928. He headed the Federal Reserve System’s New York branch when the Fed was still an unproven concept, and with it, created an influential force in world economic policy-making during the 1920s.
Strong was a man of many achievements. Born in upstate New York to a modest family, central banking was in his blood. His great grandfather had clerked for Alexander Hamilton at the beginnings of central banking in America. Strong started out working his way up Wall Street’s rungs managing bank trusts. Then, seven years before reaching his Federal Reserve post at just 42 in 1914, Strong assisted JP Morgan in reviving the American economy during the fierce 1907 Panic. Because of his ties with influential Morgan partner Henry P. Davidson and his position at Bankers Trust Company, he was chosen to head a small committee deciding which banking institutions were worthy of Morgan money. Typically, Morgan ignored details and instead relied on Strong’s bottom line in making decisions.
The Panic of 1907 boosted Strong’s reputation among Wall Street’s banking community, and he was well on his way to a Morgan partnership. He was perfect for the job, and he had Morgan’s blessing. Strong was also good friends with Davison, so when the Fed was created and Davison was called to help pick its head, Strong’s Morgan partnership was permanently put on hold in favor of the Federal Reserve post.
But Strong, like much of Wall Street, objected to the Fed’s structure and refused the appointment at first. The system was structured so that the regional banks answered to directors sitting in the heart of bureaucrat-land, Washington! Strong, a central banking history buff, knew this would inevitably lead to political influence, which in turn would lead to the system’s demise. But eventually, because of Davison, he relented, accepted the position and dedicated the remainder of his life to central banking.
Strong had little else going for him; his home life was literally a tragedy. It started out wonderfully. He married in 1895, had a girl and two boys, moved to Englewood, New Jersey, where he made his Morgan connection and did the suburban social circuit with his wife. It was a wonderful 10 years—until his wife killed herself (while weakened by childbirth, one source said). Davison took the Strong children into his own home, and two years later, Strong married a woman 15 years his junior. They had two daughters, but this time, his wife left him in 1916 with the girls, and they divorced in 1920.
Even more heartbreaking, the same year his second wife abandoned him, Strong contracted tuberculosis. It attacked first his lungs, then his larynx and kept him away from his desk for more than a third of the 12 years remaining to him. He offered to resign at least twice because of his health, but his directors refused to hear of it, for Strong “was” the Fed—even while in his sickbed.
When Strong wasn’t bedridden, he was hard at work building a powerful Fed. He often visited European central bankers, soliciting their combined cooperation to give the central banks a stronghold on international monetary matters. He devoutly believed such matters were up to the central banks—not the governments. While that is a commonly accepted concept today, it was a ground-breaking notion then, at a time when most classical economists believed that each country was its own economic island. Yet it survived in the common mind until fairly recently. Strong saw through the economic island notion long before almost anyone else. Had the world understood then what Strong knew, much of the 1930s Great Depression could have been avoided simply by worldwide monetary cooperation among central banks in providing liquidity.
At the time, however, Strong’s ultimate goal in working for cooperation was to lift Europe from its post-war financial doldrums—he knew the Fed couldn’t do it alone. Sometimes working with his best friend, Bank of England Governor Montagu Norman, or a pool of central banks, Strong helped stabilize Belgium, Italy, Rumania, Poland and France. Often, Wall Street financiers participating in stabilization loans would wait for Strong’s approval before even thinking of floating a loan. He surprised everyone, particularly Wall Street, in making the Fed internationally influential during the post-war period.
As instrumental as Strong was in furthering central banking in international economics, he became more famous for restoring England to its former $4.86 parity in 1925—and the events which followed this feat. The Fed and the House of Morgan, both at Strong’s prompting, fed England $200 million and $100 million, respectively. Meanwhile, back in America, Strong sponsored an easy-money policy, reducing the discount rate from 4% to 3.5%. Low discount rates in America, Strong figured, would stop the continuing outflow of England’s gold, thereby defending the pound’s new position.
His actions helped restore international liquidity, but by 1927, skeptics blamed his easy-money policy for increased stock market speculation. Strong’s easy-money policy had lowered interest rates, and in turn, the price of call money, which then triggered increased securities purchases. In one year, from 1927 to 1928, brokers’ loans soared a record amount from $3.29 billion to $4.43 billion! The market boomed in 1928, and by the time the Federal Reserve Board raised the discount rate up to 5% (Strong was too ill at this point to make decisions), it was too late. Interest rates zoomed from 8% to 12%, but people didn’t care how much they shelled out for the borrowed money—the profits they anticipated would more than make up for interest charges.
From this point on, Strong’s health prevented him from contributing to the Fed’s policies. Pneumonia, influenza, shingles and a damaged nervous system continuously knocked him to his knees. Shortly before he died, he wrote a friend, “Facing the past, honestly, I wonder that I am alive. When I review or catalogue what I have had to cover—the inside of the Bank, the Board, Congress, Governors’ Committees and meetings, Treasury, Foreign banks, complicated plans, all the personal equations, our unruly members, hostility, illness—it’s a mental high-speed cinema which staggers me—and in its experience has or had nearly finished me.”
By October 1928, he was dead at 56. He had been operated on for an abscess due to diverticulitis and seemed to recover, but a week later he suffered a relapse and died from a severe secondary hemorrhage. Shortly before he died, he had said with prescient insight, “I do not think the problem is necessarily one of security prices or of available volume of credit, or even of discount rates. It is really a problem of psychology. The country’s state of mind has been highly speculative, advancing prices have been based upon a realization of the wealth and prosperity of the country, and consequently speculative tendencies are all the more difficult to deal with.”
For a fighter like Ben Strong, death must have been much more agreeable than it would have been had he lived to face the stock market crash incapacitated and unable to do anything about it. What Strong would have done in the face of the booming market of 1927 and 1928 will never be known—the luck of the draw drew him from power and placed it in the hands of George Harrison. Had Strong been given the chance, he might have been able to lessen the fall, especially when you consider his psychological insight. As the market crashed, a healthy Strong likely would have loosened the monetary coffers to cushion the blow, and as the event was worldwide, he would have Strong-armed his foreign central bank buddies to do the same. The worldwide depression could have been much lighter.