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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. 9.95 (cloth), ISBN:
0-313-30978-7.
Reviewed for EH.NET by Mark Toma, Department of Economics, University
of Kentucky. <[log in to unmask]>
_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.
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