the patient had begun to freeze to death.

These mistakes, of course, are easier to see in hindsight. A balanced federal budget was an article of faith in those days, and in fact, Franklin Roosevelt berated Hoover during the campaign of 1932 for his free-spending ways. Meanwhile, Congress, hardly for the first or last time, allowed political pressure to outweigh long-term considerations.

The Federal Reserve had no such excuses. It should have done better, and had a man named Benjamin Strong still been alive, it would have.

Benjamin Strong came from old New England roots and was born in 1872. At eighteen he went to work for Jesup, Paton & Company, private bankers in New York, and rose swiftly in New York’s burgeoning financial market.

He married in 1895 and fathered four children, but he was not to know domestic happiness. His wife committed suicide in 1905, and Strong’s neighbor Henry Davison, a partner of J. P. Morgan & Company, took Strong’s children into his own household. Strong’s second marriage was a failure, his wife leaving him in 1916, the same year he contracted tuberculosis.

Lonely and often sick, Strong threw himself into his work, rising ever higher until he became president of the Bankers’ Trust Company, then dominated by the Morgan interests. He would quite probably have soon achieved the pinnacle of American banking at that time, a Morgan partnership, had he not been persuaded to become governor of the newly created New York Federal Reserve.

Strong had at first refused the job because he did not approve of how the system was structured. The Panic of 1907 had finally convinced the federal government that a central bank was indispensable to a modern industrial economy. But fear of the “money trust” (to use the turn-of-the-century term), so strong a feature of the Democratic party since Jefferson’s day, severely affected its design.

The great New York banks wanted a single central bank, modeled on the Bank of England and located in New York. After all, that was where the money was. Instead, the Federal Reserve as finally approved by Congress consisted of twelve independent banks, one in New York, the rest in cities all over the country. They were supposed to be coordinated by a board that sat in Washington, D.C., but Strong believed that the board would have political thumbs all over it and wanted nothing to do with the Federal Reserve.

His mentor, Henry Davison, insisted, however, and Strong relented. He immediately set out to make the New York Federal Reserve in fact, if not in theory, the central bank of the United States. In large measure he succeeded. He did so first of all because New York at that time utterly dominated American finance, while the outbreak of the First World War made it indispensable to world finance as well.

Even more important were Benjamin Strong’s expertise and personality. He had been quite right that the Federal Reserve Board in Washington would consist largely of political

appointees, many of them ignorant of the basics of commercial banking, let alone the arcane world of central banking. But that meant they had to rely on Strong, who had a profound understanding of it. By the 1920s, despite the ever worsening tuberculosis that was to kill him, Strong was the unquestioned boss of the Federal Reserve.

The age-old crosswinds of banking apply just as much to central banks as to ordinary ones, with the added problem of politics. The dislocations of the war still affected Europe, and Strong was eager to help. To do this, he had to keep American interest rates low so that European capital would stop flowing across the Atlantic. But low interest rates fueled the already booming speculation on Wall Street.

In 1927 Strong lowered the New York Federal Reserve discount rate to 3.5 percent, from 4 percent. The other Federal Reserve banks followed suit. Hoover, then the Secretary of Commerce, was opposed to this move. Hoover considered Strong “a mental annex to Europe” and would go to his grave insisting that the Great Depression had its origin there.

Certainly the lower interest rates stimulated Wall Street still further, but when speculation threatened to get out of hand, Strong acted to stop it. He raised the discount rate three times in 1928, up to 5 percent, a very high rate in those days, while he began a policy of increasingly restricting the money supply. “The problem now,” Strong wrote, “is to shape our policy as to avoid a calamitous break in the stock market … and at the same time accomplish if possible” the recovery of Europe.

The new Fed policy had its effect on the real economy—the one beyond Wall Street—which slowed down noticeably in early 1929. This should have cooled down Wall Street as well. But there, however, what had been a traditional bull rally turned into a classic bubble when the market lost contact with the underlying economy. Immediate action by the Fed was needed, but in a tragedy that reached far beyond the personal, Ben Strong had died the previous October, after one last, desperate operation.

The now leaderless Federal Reserve did nothing. It kept the discount rate at 5 percent, where Strong had left it the summer before. Far worse, it allowed bankers to use the Fed itself to bankroll the increasingly reckless speculation.

In the spring of 1929 the interest rate for call money, used to finance margin accounts, soared. Bankers could borrow at the Fed discount window, at 5 percent, and then lend the money to speculators at 12 percent. Billions moved to Wall Street this way. The Federal Reserve tried “moral suasion,” asking the bankers to stop the practice.

Moral suasion is one thing, human nature quite another. If, in effect, it is legal to earn 7

percent by using someone else’s money, people are going to do it. The bubble expanded until the “calamitous break” Strong had feared became inevitable.

And once the Crash was over and the Depression deepened, the Federal Reserve still did nothing. Strong had known what to do under the new circumstances, and there can be little doubt that he would have done it.

At the end of his life he wrote that “the very existence of the Federal Reserve System is a safeguard against anything like a calamity growing out of money rates. … We have the power to deal with such an emergency instantly by flooding the Street with money.” Instead, the Fed stood by and watched the nation’s money supply shrink by fully one-third over the next three years while ninety-eight hundred banks failed, taking the hopes of millions with them.

We can never know if Ben Strong could have prevented the Crash or stopped the Depression. But we can be quite confident he would have tried.

His successors at the Fed did not even do that.