Benjamin Strong, Jr. - Economic Policies and Advocacy

Economic Policies and Advocacy

His policy of maintaining price levels during the 1920s through open market operations, or purchases and sales of government securities, and his willingness to maintain the liquidity of banks during panics, have been praised by monetarists and harshly criticized by Austrian economists

Strong was also involved in the establishment of the Federal Reserve System. After the Panic of 1907, leading bankers believed a private central bank should be created to issue money. The public was adamantly opposed to the establishment of a central bank. Strong, who was Vice President of Banker’s Trust of New York, was JP Morgan's emissary to the secret Jekyll Island (Georgia) expedition in 1910—one of the selected members who stayed at the luxurious Jekyll Island Hunt Club retreat in November for a private ten-day conference. Also in attendance were Paul Warburg, a recent immigrant from a prominent German banking family who was a partner in the New York banking house of Kuhn, Loeb & Co.; Senator Nelson Aldrich (Nelson Rockefeller was named after Aldrich, his maternal grandfather); A. Piatt Andrew, Assistant Secretary of the Treasury and Special Assistant to the National Monetary Commission (the only other NMC member besides Aldrich); and other bankers including Frank A. Vanderlip, president of the National City Bank of New York; Henry P. Davison, senior partner of J.P. Morgan & Co.; and Charles D. Norton, president of the Morgan-dominated First National Bank of New York.

What came to be known as the Aldrich Plan was drafted by these men during their conference at Jekyll Island. The plan was written in secrecy, as the public would never approve of a banking reform bill written by bankers; much less of a plan for a central bank. The Aldrich Plan was introduced in the U.S. Congress, and followed by much debate, but never came to a vote, because the party in favor of it was voted out, and the Glass-Owens Bill was introduced instead.

The general outline of the Aldrich Plan did eventually serve as the model upon which the Federal Reserve System was created with, however, significant changes that placed control into political hands (via the Board of Governors, selected by the President of the United States), and limited the role of professional bankers in its operation to that of the 12 branches. It met with Warburg's satisfaction, as he said that minor changes could be adjusted administratively later. The term Central Bank purposely was kept out of its name, as Warburg and others warned it would not be passed otherwise.

Three years later, after months of hearings, drafts, and debates, a bill creating the Federal Reserve System was approved by Congress as the Federal Reserve Act and signed into law by President Wilson on December 23, 1913. The Federal Reserve System has many similarities to the National Reserve Association proposed by the Aldrich Plan, but with vastly differing management and control.

Strong became President of Banker’s Trust in 1914, and shortly thereafter was appointed Governor of the Federal Reserve Bank of New York the same year, which position he maintained until his death in 1928.

Economic historian Charles P. Kindleberger states that Strong was one of the few American policymakers interested in the troubled financial affairs of Europe in the 1920s, and that had he not died in 1928, just a year before the Great Depression, he might have been able to maintain stability in the international financial system; though economist Murray Rothbard claimed that it was Strong's manipulations that caused the Depression in the first place.