11. Summary

The bleak record of accelerating inflation and recession since the inception of the Federal Reserve in 1913 may be seen in a different light if we reevaluate the purpose that this central bank was intended to serve. For the Federal Reserve was designed not to curb the allegedly inflationary tendencies of freely competing banks but to do precisely the opposite: to enable the banks to inflate uniformly without worrying about calls for redemption by noninflating competitors. In short, the Federal Reserve was designed to act as a government-sponsored and -enforced cartel promoting the income of banks by preventing free competition from doing its constructive work on behalf of the consumer. The Federal Reserve emerged in an era when federal and state governments were embarked on precisely this kind of program in many sectors of industry, and it was designed to do for the banks what the ICC had done for the railroads, the Agriculture Department for the farmers, and the FTC for general industry. These actions of the Progressive era came after widespread attempts, in the late 1890s and earlier, to cartelize or create monopolies voluntarily, attempts that almost all came to swift and resounding failure. Various large business groupings, therefore, came to the conclusion that government would have to play an active and enforcing role if cartelization was to succeed.

This chapter demonstrates the unhappiness of particularly the large Wall Street banks with the “inelasticity” of the pre-Federal Reserve banking system, that is, its inability to create more money and credit. They were unhappy also with the growing decentralization of the nation’s banking by the early part of the 20th century. After the failure of attempts by McKinley and Roosevelt’s secretaries of the treasury to engage in central banking, and particularly after the Panic of 1907, large banking and financial groups, in particular those of Morgan, Rockefeller, and Kuhn-Loeb, began a drive to establish a central bank in the United States. Despite minor political disagreements, the numerous variants of Federal Reserve proposals, from the Aldrich plan to the final bill in 1913, were essentially the same.

The structure of the Federal Reserve Act was cartelizing and inflationary, and the personnel of the Federal Reserve Board reflected the dominance of the large banking groups, particularly the Morgans, in the drive for a central bank. The ruling force in the Federal Reserve System from its inception until his death in 1928 was Benjamin Strong, Governor of the Federal Reserve Bank of New York, who all his life had been firmly in the Morgan ambit.

Strong’s policies were what one might expect. His willingness to inflate money and credit to purchase government deficits was critical to financing America’s entry into World War I. He also moved quickly to internationalize the banking cartel by forming a close tie with the Bank of England, of which the Morgan Bank was fiscal agent. The Morgans were also closely connected with munitions and other war-related exports to Britain and France, and enjoyed the sole privilege of underwriting British and French war bonds in the United States.

Benjamin Strong was obliged to inflate money and credit during the 1920s in order to help Britain return to an inflationary form of the gold standard at a highly overvalued pound. Only by Strong’s increasing the supply of dollars could his close collaborator, Montagu Norman, head of the Bank of England, hope to stem the flow of gold from Britain to the United States. Strong performed this inflationary role not only by keeping rediscount rates below the market and buying treasury securities on the open market but also by subsidizing—indeed, virtually creating—a market in bankers’ acceptances, which the Fed stood ready to buy in any amount offered at artificially cheap rates. This acceptance policy, designed to promote foreign trade (especially in London), was adopted under the influence of one of the founders of the Federal Reserve, Paul M. Warburg of Kuhn-Loeb & Co. who also became the nation’s largest acceptance banker.

When the stock market crash hit, the Federal Reserve and the Hoover administration were scarcely ready to allow free-market processes to bring about recovery. Instead, the Fed, backed strongly by Hoover, inflated reserves wildly, and interest rates fell sharply—all, of course, to no avail.

---

Originally published in Money in Crisis: The Federal Reserve, the Economy, and Monetary Reform, Barry N. Siegel, ed. (San Francisco, CA: Pacific Institute for Public Policy Research, 1984), pp. 89–136.

[Editor’s footnote] It is important to keep in mind that a “bank cartel” is different than a traditional cartel. A traditional cartel restricts output and raises prices. The goal of a bank cartel, on the other hand, is not to restrict credit expansion and raise interest rates, but for banks to engage in credit expansion in unison and lower interest rates, and to maintain this by not calling on other banks’ notes and deposits. Just like traditional cartels on the free market fail, bank cartels also fail because of internal and external pressure as banks inside the cartel are faced with the irresistible temptation to call on others’ notes and deposits, and the notes and deposits eventually wind up in other banks outside of the cartel (including foreign banks). See Mises, Human Action, pp. 441–45; Murray Rothbard, The Mystery of Banking (Auburn, AL: Mises Institute, 2008 [1983]), pp. 111–24.

On the other hand, government can stabilize bank cartels either by restricting entry to stifle the redemption mechanism, or by providing new sources of reserves. The Federal Reserve promoted general monetary expansion, and also empowered New York City banks by increasing their interbank deposits relative to other central reserve cities through the Federal Reserve Bank of New York’s liberal discount window policies, and by injecting new reserves there first as they led the monetary expansion in the 1920s. Moreover, the Fed personnel was heavily dominated by banking interests. In addition to this chapter, see George Selgin, “New York’s Bank: The National Monetary Commission and the Founding of the Fed,” Cato Institute Policy Analysis (June, 2016): 1–38.

[1] Kolko, The Triumph of Conservatism, p. 274.

[2] In contrast, notes of more solid banks circulated at par, even at great distances.

[3] See Milton Friedman and Anna Jacob Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: National Bureau of Economic Research, 1963), pp. 168–70. Friedman and Schwartz grant validity to the complaints of inelasticity in at least one sense: that deposits and notes were not easily interconvertible without causing grave problems. If bank clients wished to redeem bank deposits for bank notes, the fractional reserve requirements for deposits but not for notes meant that such simple redemption had a multiple contractionist effect on the supply of money and vice versa, since the exchange of notes for deposits had an expansionist effect. Friedman and Schwartz conclude that this defect justified various centralizing remedies. They fail to point out another alternative: a return to the decentralized banking of pre-Civil War days, which did not suffer from such problems of interconvertibility.

One curiosity of the national banking system is that the notes issued by the national banks were rigidly linked by law to the total holdings of federal government bonds by each bank. This provision, a holdover from various state bank systems imposed by the Whigs before the Civil War, was designed to tie the banks to state deficits and the public debt. See Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Washington, D.C.: Cato Institute, 1982), p. 67. The source of “inelasticity,” however, could easily have been remedied by abolishing this link without imposing a central bank. Many of the early bank reforms proposed during the 1890s aimed to do just that. See Robert Craig West, Banking Reform and the Federal Reserve, 1863–1923 (Ithaca, NY: Cornell University Press, 1977), pp. 42ff.

[4] U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1957, pp. 626–29.

[5] Quoted in Kolko, Triumph of Conservatism, p. 141.

[6] See Kolko, Triumph of Conservatism, p. 141; and Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), pp. 25–26.

[7] The major pressure group calling for “progressive” cartelization was the National Civic Federation (NCF), founded in 1900, an organized coalition of big business and intellectual-technocrat groups as well as a few corporatist labor union leaders. On the importance of the NCF, see Weinstein, The Corporate Ideal in the Liberal State. See also Eakins, “The Development of Corporate Liberal Policy Research in the United States,” pp. 53–82.

In the past two decades, a massive literature has developed on the Progressive Era from both a cartelizing and a technocratic power-seeking perspective. The best treatments are in Kolko, Triumph of Conservatism; Weinstein, Corporate Ideal in the Liberal State; and Gilbert, Designing the Industrial State. On the railroads and the ICC, see Kolko, Railroads and Regulation.

[8] [Editor’s footnote] For more on the background of the Federal Reserve, see Rothbard, “The Origins of the Federal Reserve,” pp. 188–208, 234–59. Here Rothbard describes in much more depth the earlier measures and events, including the 1897 and 1898 Indianapolis Monetary Conventions and the Gold Standard Act of 1900. He also elaborates on the role of bankers, economists, technocrats, and their respective organizations in agitating for a central bank.

[9] On Gage’s and Shaw’s proposals and actions in office, see Friedman and Schwartz, Monetary History of the United States, pp. 148–56; and Kolko, Triumph of Conservatism, pp. 149–50.

[10] John D. Rockefeller was the largest stockholder of National City Bank; its president until 1905 was James Stillman, two of whose daughters married sons of Rockefeller’s brother William. See Carl P. Parrini, Heir to Empire: United States Economic Diplomacy, 1916–1923 (Pittsburgh: University of Pittsburgh Press, 1969), pp. 55–65.

[11] On Gage’s connections, see Burch, The Civil War to the New Deal, vol. 2, pp. 137, 185, 390.

[12] On Shaw’s connections, see Burch, Civil War to the New Deal, pp. 148, 402. On Allison and Perkins, see ibid., pp. 65, 121, 122, 128, 151.

[13] See Kolko, Triumph of Conservatism, p. 152.

[14] On Aldrich-Vreeland, see Friedman and Schwartz, Monetary History of the United States, pp. 170–72. On the jockeying for power among various banking and business groups over different provisions of Aldrich-Vreeland, see Kolko, Triumph of Conservatism, pp. 156–58.

[15] When the Rockefeller forces gained control of the Chase National Bank from the Morgans in 1930, one of their first actions was to oust Morgan man Albert H. Wiggins and replace him with Nelson Aldrich’s son Winthrop W. as chairman of the board.

[16] See West, Banking Reform and the Federal Reserve, p. 70. Investment banking houses were—and still are—partnerships rather than corporations, and Morgan activities in politics as well as industrial mergers were conducted by Morgan partners. Particularly conspicuous Morgan partners in both fields were George W. Perkins, Thomas W. Lamont, Henry P. Davison, Dwight Morrow, and Willard Straight.

[17] Or at least partially emigrated. Warburg spent half of each year in Germany, serving as a financial liaison between the two great banks, if not between the two countries themselves. Warburg was related to Jacob H. Schiff by marriage. Schiff was a son-in-law of Solomon Loeb, a co-founder of Kuhn, Loeb & Co., and Warburg, husband of Nina Loeb, was another son-in-law of Solomon’s by a second wife. The incestuous circle was completed when Schiff’s daughter Frieda married another partner, Warburg’s brother Felix, which in a sense made Paul his brother’s uncle. See Birmingham, “Our Crowd,” pp. 21, 209–10, 383, appendix.

[18] On Warburg’s plan, see West, Banking Reform and the Federal Reserve, pp. 54–59. Warburg’s plan and essays, as well as his other activities on behalf of central banking in the United States, are collected in his The Federal Reserve System, 2 vols. (New York: Macmillan, 1930). See also Warburg, “Essays on Banking Reform in the United States,” Proceedings of the Academy of Political Science 4 (July, 1914): 387–612.

[19] Professor Seligman’s brother Isaac N. was marred to Guta Loeb, sister of Paul Warburg’s wife Nina. This made Seligman the brother of Warburg’s brother-in-law; see Birmingham, “Our Crowd,” appendix.

[20] On Morawetz, see West, Banking Reform and the Federal Reserve, pp. 59–62; and Kolko, Triumph of Conservatism, pp. 134, 183–84, 272.

[21] So shrouded in secrecy did the meeting remain that details did not leak out until the publication of the authorized biography of Aldrich 20 years later. It is not even clear which club member arranged the facilities for the meeting, since none of the participants was a member. The best guess on the identity of the helpful Jekyll Island member is J.P. Morgan. See West, Banking Reform and the Federal Reserve, p. 71; see also Nathaniel W. Stephenson, Nelson W. Aldrich (New York: Scribner’s, 1930).

[22] Aldrich was in the audience when Warburg delivered his famous “United Reserve Bank Plan” speech to the Academy of Political Science in 1910. The enthusiastic Aldrich who had been greatly impressed by German central banking views during the Monetary Commission’s trip to Europe the previous year, promptly invited Warburg to attend the upcoming Jekyll Island gathering; see Kolko, Triumph of Conservatism, p. 184.

[23] Henry Parker Willis, The Theory and Practice of Central Banking (New York: Harper & Bros., 1936), p. 77.

[24] Kolko, Triumph of Conservatism, p. 186.

[25] West, Banking Reform and the Federal Reserve, p. 73. The full text of the Aldrich speech is reprinted in Herman E. Krooss and Paul Samuelson, eds., Documentary History of Banking and Currency in the United States (New York: Chelsea House, 1969), vol. 3, p. 1202. See also Kolko, Triumph of Conservatism, p. 189.

[26] Henry Parker Willis, The Federal Reserve System (New York: Ronald Press, 1923), pp. 149–50. At the same time, Willis’s account conveniently ignores the dominant operating role that both he and his mentor played in the work of the Citizens’ League; see West, Banking Reform and the Federal Reserve, p. 82.

[27] See Friedman and Schwartz, Monetary History of the United States, p. 171n. For similar judgments, see West, Banking Reform and the Federal Reserve, pp. 106–07; Kolko, Triumph of Conservatism, p. 222. Two decades after the establishment of the Federal Reserve, Paul Warburg demonstrated in detailed parallel columns the near identity of the Aldrich bill and the Federal Reserve Act; see Paul M. Warburg, The Federal Reserve System: Its Origins and Growth (New York: Macmillan, 1930), vol. 1, chaps. 8 and 9. There are many sources for examining the minutiae of the various drafts and bills; good places to start are West, Banking Reform and the Federal Reserve, pp. 79–135; and Kolko, Triumph of Conservatism, pp. 186–89, 217–47.

[28] Quoted in Kolko, Triumph of Conservatism, p. 235.

[29] Ibid., p. 22.

[30] The terms “inflation” and “inflationary” are used throughout this article according to their original definition—an expansion of the money supply—rather than in the current popular sense of a rise in price. The former meaning is precise and illuminating; the latter is confusing because prices are complex phenomena with various causes, operating from the sides of both demand and supply. It only muddles the issue to call every supply-side price rise (say, due to a coffee blight or an OPEC cartel) “inflationary.”

[31] A banker’s institution of far less importance is the Federal Advisory Council, composed of bankers selected by the board of directors of their district Bank. The council’s recommendations garner considerable publicity, but it has no power within the system.

[32] C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: Macmillan, 1937), pp. 25–26.

[33] The Committee on War Finance of the American Economic Association hailed this development in early 1919: “Recent improvements in our banking system, growing out of the establishment of the Federal Reserve System and its subsequent development, have made our reserve money ... more efficient than it formerly was; in other words, have enabled a dollar in reserve to do more money work than before. This in effect is equivalent to increasing the supply of reserve money.” It is indeed, provided that money’s “work” is to be as inflationary as possible and “efficiency” means producing as much inflation as rapidly as possible. See “Report of the Committee on War Finance of the American Economic Association,” American Economic Review 9, Supplement no. 2 (March, 1919): 96–97; quoted in Phillips, McManus, and Nelson, Banking and the Business Cycle, p. 24n (see also pp. 21–24).

[34] Phillips, McManus, and Nelson, Banking and the Business Cycle, p. 29.

[35] See the reference to the proceedings of the conventions of the Kansas and California bankers associations in May 1914, in Kolko, Triumph of Conservatism, pp. 247–328. Senator Aldrich wrote to a friend in February: “Whether the bill will work all right or not depends entirely ... upon the character and wisdom of the men who will control the various organizations, especially the Federal Reserve Board” (p. 248).

[36] See Burch, Civil War to the New Deal, pp. 207–09, 214–15, 232–33. On McAdoo, see also John J. Broesamle, William Gibbs McAdoo: A Passion for Change, 1863–1917 (Port Washington, NY: Kennikat Press, 1973).

[37] See Burch, Civil War to the New Deal, pp. 214–15, 236–37. Wilson also tried to appoint to the board his old friend Thomas D. Jones, a Chicago lawyer and director of the Morgans’ International Harvester Company, but the Senate turned down the appointment.

[38] See Chandler, Benjamin Strong, pp. 23–41. On the details of the first organization of the Federal Reserve Bank of New York, see Lawrence E. Clark, Central Banking under the Federal Reserve System (New York: Macmillan, 1935), pp. 64–82.

[39] On the Strong seizure of power, see Clark, Central Banking under the Federal Reserve, pp. 102–5, 161; Chandler, Benjamin Strong, pp. 68–78.

[40] Quoted in Kolko, Triumph of Conservatism, p. 254. Carter Class was a small-town Virginia newspaper editor and banker.

[41] Chandler, Benjamin Strong, p. 81; see also Clark, Central Banking under the Federal Reserve System, pp. 143–48.

[42] Willis, Theory and Practice of Central Banking, pp. 90–91.

[43] Chandler, Benjamin Strong, p. 105.

[44] Ibid., p. 107.

[45] Sir Henry Clay, Lord Norman (London: Macmillan, 1957), p. 87; Parrini, Heir to Empire, pp. 55–56.

[46] On the interconnections among the Morgans, the Allies, foreign loans, and the Federal Reserve, see Tansill, America Goes to War, pp. 32–134. [Editor’s remarks] Rothbard elsewhere described the motivations of the Morgan ambit in the drive for U.S. involvement in World War I, citing the aforementioned work of Charles Tansill. It is worth quoting his analysis in full:

The House of Morgan was hip-deep in the Allied cause from 1914 on ... Morgan’s railroads were in increasingly grave financial trouble, and 1914 saw the collapse of Morgan’s $400 million New Haven Railroad. Concentrating on railroads and a bit laggard in moving into industrial finance, Morgan had seen its dominance in investment banking slip since the turn of the century. Now, World War I had come as a godsend to Morgan’s fortunes, and Morgan prosperity was intimately wrapped up in the Allied cause.

It is no wonder that Morgan partners took the lead in whipping up pro-British and French propaganda in the United States; and to clamor for the U.S. to enter the war on the Allied side. Henry P. Davison set up the Aerial Coast Patrol in 1915, and Willard D. Straight and Robert Bacon, both Morgan partners, took the lead in organizing the Businessman’s Training Camp at Plattsburgh, New York, to urge universal conscription. Elihu Root and Morgan [Jr.] himself were particularly active in pressing for entering the war on the Allied side. Furthermore, President Wilson was surrounded by Morgan people. His son-in-law, Secretary of the Treasury, William G. McAdoo, had been rescued from financial bankruptcy by Morgan. Colonel Edward M. House, Wilson’s mysterious and powerful foreign policy adviser, was connected with Morgan railroads in Texas. McAdoo wrote to Wilson that war exports to the Allies would bring “great prosperity” to the United States, so that loans to the Allies to finance such exports had become necessary.

See Rothbard, The Mystery of Banking, p. 243. See also Rothbard, Wall Street, Banks, and American Foreign Policy, pp. 17–23. The war purchases for Britain and France totaled $3 billion, and the House of Morgan earned a commission of $30 million. Moreover, the Morgans were able to steer British and French war contracts to Morgan affiliated firms, including General Electric and U.S. Steel. See Murray Rothbard, “The Gold Exchange Standard in the Interwar Years,” in A History of Money and Banking in the United States, Joseph Salerno, ed. (Auburn, AL: Ludwig von Mises Institute, 2005), pp. 370–71.

[47] With the exception of the two pro-German members of the Federal Reserve Board. Warburg and Miller, both of German descent, who fought unsuccessfully against bank financing of munitions exports to the Allies. See Tansill, America Goes to War, pp. 105–08.

[48] Chandler, Benjamin Strong, pp. 93–98.

[49] [Editor’s footnote] The Morgans were also involved in the Strong-Norman connection. Norman’s close friends were directors of the aforementioned Morgan, Grenfell & Co. They were also prominent in the Coolidge administration. One of Calvin Coolidge’s political mentors was Morgan partner Dwight Morrow. Coolidge first offered the Secretary of State position to Morgan attorney Elihu Root, but after he declined, settled for Frank B. Kellogg, who had Morgan connections, along with his assistant secretary Joseph C. Grew. Dwight Morrow and Henry L. Stimson, a disciple of Root, were also involved in international relations with Mexico and Nicaragua. Secretary of the Treasury was Andrew C. Mellon, who was generally allied to the Morgan interests. Morgan influence continued in the Hoover administration, and Dwight Morrow served as an important unofficial advisor to Herbert Hoover. See Rothbard, “The Gold Exchange Standard,” pp. 368–81, 422.

[50] On the portentous consequences of the British decision to return to gold at $4.86, see Lionel Robbins, The Great Depression (New York: Macmillan, 1934), pp. 77–87.

[51] See Clay, Lord Norman, p. 135; Chandler, Benjamin Strong, p. 293; and especially Benjamin M. Anderson, Economics and the Public Welfare: Financial and Economic History of the United States, 1914–1946, 2nd ed. (Indianapolis: Liberty Press, 1979), pp. 63–64.

[52] See Murray N. Rothbard, “The New Deal and the International Monetary System,” in Leonard P. Liggio and James J. Martin, eds., Watershed of Empire: Essays on New Deal Foreign Policy (Colorado Springs: Ralph Myles, 1976), pp. 20–27. See also Rothbard, America’s Great Depression, pp. 131–32; Chandler, Benjamin Strong, pp. 293–94; Unemployment, a Problem of Industry, chap. 16; and Frederic Benham, British Monetary Policy (London: P. S. King, 1932).

[53] Chandler, Benjamin Strong, p. 379. Norman did indeed dominate the Financial Committee of the League, particularly through three close associates, Sir Otto Niemeyer of the treasury, Sir Arthur Salter, and Sir Henry Strakosch. The major theoretician of Norman’s imposed gold exchange standard was Ralph Hawtrey, director of financial studies at the treasury. As early as 1913, Hawtrey was advocating international collaboration by central banks to achieve a stable price level, and in 1919, he was one of the first to call for international central bank cooperation in the context of a European gold exchange standard. See Clay, Lord Norman, pp. 137–38; Rothbard, America’s Great Depression, pp. 159–61; Paul Einzig, Montagu Norman (London: Kegan Paul, 1932), pp. 67, 78; Palyi, The Twilight of Gold, pp. 134, 155–59.

On the gold exchange standard and Britain’s inducement of European countries to overvalue their currencies, see H. Parker Willis, “The Breakdown of the Gold Exchange Standard and Its Financial Imperialism,” The Annalist 33 (16 October 1931): 626 ff.; and William Adams Brown, Jr., The International Gold Standard Reinterpreted, 1914–1934 (New York: National Bureau of Economic Research, 1940), vol. 2, p. 732–49.

[54] Palyi, Twilight of Gold, pp. 134–35.

[55] On the Genoa Conference, see ibid., pp. 133–40, 148–49 (the latter for a text of the relevant resolutions); Michael J. Hogan, Informal Entente: The Private Structure of Cooperation in Anglo-American Economic Diplomacy, 1918–1928 (Columbia: University of Missouri Press, 1977), pp. 42–48 (on the administration’s position); Stephen V.O. Clarke, Central Bank Cooperation: 1924–31 (New York: Federal Reserve Bank of New York, 1967), pp. 34–36; and Rothbard, America’s Great Depression, pp. 161–62.

[56] What would now be considered M-2, all bank deposits and savings and loan shares increased by 6.8% per annum from June 1921 to June 1929, whereas M-2 plus net life insurance policy reserves increased by an average of 7.7% during the same period. The rationale for including the latter is that this completes the figure for all claims redeemable in dollars at par on demand. See Rothbard, America’s Great Depression, pp. 88–96, 100–01; Board of Governors of the Federal Reserve System, Banking and Monetary Statistics (Washington, D.C.: Federal Reserve Board, 1943), p. 34. On time deposits as actually redeemable on demand in the 1920s, see Anderson, Economics and the Public Welfare, pp. 139–42; Phillips, McManus, and Nelson, Banking and the Business Cycle, pp. 98–101.

[57] See Rothbard, America’s Great Depression, p. 125; H. Parker Willis, “What Caused the Panic of 1929,” North American Review 229 (February, 1930): 178; Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, DC: Brookings Institution, 1932), p. 287. See also Esther Rogoff Taus, Central Banking Functions of the United States Treasury, 1789–1941 (New York: Columbia University Press, 1943), pp. 182–83.

[58] Chandler, Benjamin Strong, p. 211. See also Harold L. Reed, Federal Reserve Policy, 1921–1930 (New York: McGraw-Hill, 1930), pp. 14–41. Gilbert, who had come to the Treasury Department from the leading Wall Street law firm of Cravath and Henderson (now Cravath, Swaine & Moore), later became a partner of J.P. Morgan & Co. (Burch, Civil War to the New Deal, pp. 298–99).

[59] The full name of the committee was highly descriptive: The Committee of Governors on Centralized Execution of Purchases and Sales of Government Securities by Federal Reserve Banks (Chandler, Benjamin Strong, p. 215).

[60] Ibid., pp. 232–33. On Strong’s resumption of power, see ibid., pp. 222–34; Clark, Central Banking under the Federal Reserve, pp. 162–74.

[61] Chandler, Benjamin Strong, pp. 282–84.

[62] See Rothbard, America’s Great Depression, pp. 133–34; Robbins, Great Depression, p. 80; Chandler, Benjamin Strong, pp. 301–21.

[63] Rothbard, America’s Great Depression, pp. 102–03, 107. On the significance of the acceptance market, see “Creating the Acceptance Market,” below.

[64] See Anderson, Economics and the Public Welfare, p. 189. Gates McGarrah was a close business associate of Albert H. Wiggin, chairman of the board of Morgan’s Chase National Bank (Clark, Central Banking under the Federal Reserve, p. 267). See also ibid., pp. 313–14; Chandler, Benjamin Strong, pp. 440–54.

[65] Charles Rist, “Notice biographique,” Revue d’economie politique 65 (November-December, 1955): 1006–008. See also Rothbard, America’s Great Depression, pp. 141–42.

[66] Anderson, Economics and the Public Welfare, pp. 189–91. See also Benjamin H. Beckhart, “Federal Reserve Policy and the Money Market, 1923–1931,” in The New York Money Market, B.H. Beckhart, J.G. Smith, and W.A. Brown, eds. (New York: Columbia University Press, 1931), vol. 4, p. 45.

[67] Chandler, Benjamin Strong, pp. 280–81. In the autumn of 1926, a leading banker admitted that bad consequences would follow the cheap money policy but added: “That cannot be helped. It is the price we pay for helping Europe”; see H. Parker Willis, “The Failure of the Federal Reserve,” North American Review 227 (May, 1929): 553. For lavish praise of Strong by English bankers and politicians, see Clark, Central Banking under the Federal Reserve, pp. 315–16.

[68] Federal Reserve Annual Report 1923, p. 10; cited in Seymour E. Harris, Twenty Years of Federal Reserve Policy (Cambridge, MA: Harvard University Press, 1933), vol. 1, p. 109. See also ibid., pp. 3–10, 39–48, 108–09.

[69] Rothbard, America’s Great Depression, pp. 102–3; see also pp. 110–17.

[70] Ibid., p. 117. See also Anderson, Economics and the Public Welfare, p. 190; Oliver M.W. Sprague, “Immediate Advances in the Discount Rate Unlikely,” The Annalist (1926): 493.

[71] See H. Parker Willis, “Politics and the Federal Reserve System,” Bankers’ Magazine (January, 1925): 13–20; idem, “Will the Racing Stock Market Become a Juggernaut?” The Annalist (24 November 1924): 541–42; and The Annalist (10 November 1924): 477.

[72] For a lucid explanation of acceptance and the Federal Reserve’s role in the market, see Caroline Whitney, “The Bankers’ Acceptance Market,” in The Banking Situation, H. Parker Willis and John M. Chapman, eds. (New York: Columbia University Press, 1934), pp. 725–36. See also H. Parker Willis, Theory and Practice of Central Banking, pp. 201ff.; Rothbard, America’s Great Depression, pp. 117–23.

[73] The Fed held the same proportion in June 1929; see Hardy, Credit Policies of the Federal Reserve, p. 258.

[74] One of the nine designated acceptance dealers, the Discount Corporation of New York, was itself organized by a group of accepting banks to deal in bankers’ acceptances; see Whitney, “Bankers’ Acceptance,” 727–28, 732–33. See also Beckhart, Money Market, 3:319, 333, 410; Clark, Central Banking, p. 168; H. Parker Willis, “The Banking Problem in the United States,” in H.P. Willis et al., eds., “Report on an Inquiry into Contemporary Banking in the United States,” 1925, vol. 1, pp. 31–37 (unpublished); Hardy, Credit Policies of the Federal Reserve, pp. 100–101, 256–57; A.S.J. Baster, “The International Acceptance Market,” American Economic Review 27 (June, 1937): 298.

[75] Chandler, Benjamin Strong, pp. 86–93.

[76] Quoted in Elgin Groseclose, America’s Money Machine: The Story of the Federal Reserve (Westport, CT: Arlington House, 1980), p. 49. See also ibid., pp. 48–51, 93–98; and Warburg, Federal Reserve System, vol. 2, pp. 9–25.

[77] See Rothbard, America’s Great Depression, pp. 119–20; Harris, Twenty Years, p. 324; The Commercial and Financial Chronicle, 9 March 1929, 1443–44, Warburg’s speech before the American Acceptance Council is in Warburg, Federal Reserve System, vol. 2, p. 822.

[78] Rothbard, America’s Great Depression, pp. 120–21; Groseclose, America’s Money Machine, p. 97. It is fitting that after Benjamin Strong’s death, Warburg paid him high tribute by hailing him for “welding the central banks together into an intimate group” and concluding that “members of the American Acceptance Council would cherish his memory” (Warburg, Federal Reserve System, vol. 2, p. 870).

[79] M-2, which had risen at an annual rate of 7.7% in the latter half of 1927 (8.1% if net life insurance policy reserves are included), increased by only 3.2% in the first half of 1928 (4.3% if life insurance is included), see Rothbard, America’s Great Depression, pp. 102–3.

[80] See Harris, Twenty Years, pp. 437–38.

[81] Chandler, Benjamin Strong, p. 458; see also pp. 459–63.

[82] See Burner, Herbert Hoover, pp. 246–47.

[83] The grave fallacy in the efforts of 1928 and 1929 to keep credit abundant in trade and industry while restricting the stock market was pointed out in an excellent epitaph on this policy by A. Wilfred May: “Once the credit system had become infected with cheap money, it was impossible to cut down particular outlets of this credit without cutting down all credit, because it is impossible to keep different kinds of money in water-tight apartments. It was impossible to make money scarce for stock-market purposes, while simultaneously keeping it cheap for commercial use. ... When Reserve credit was created, there was no possible way that its employment could be directed into specific uses, once it had flowed through the commercial banks into the general credit stream” (“Inflation in Securities,” in Willis and Chapman, eds., Economics of Inflation, pp. 292–93). See also Hardy, Credit Policies of the Federal Reserve, pp. 124–77; and Oskar Morgenstern, “Developments in the Federal Reserve System,” Harvard Business Review 9 (October, 1930): 2–3.

[84]The American Federationist 37 (March, 1930): 344. See also Rothbard, America’s Great Depression, pp. 191–93.

[85] Anderson, Economics and the Public Welfare, p. 227.

[86] Eugene Meyer, Jr., was the son of a partner in the great international banking firm of Lazard Frères. Like stock speculator and close friend Bernard Baruch, Meyer had made a fortune through financial association with the wealthy Guggenheim family and with the Morgans in mining investments. At the time of Meyer’s appointment, his brother-in-law George Blumenthal was a partner at J.P. Morgan and Co. [Editor’s remarks] For more on the origins of Eugene Meyer, Jr., see Rothbard, “From Hoover to Roosevelt,” pp. 278–86.

[87]Business Week, 22 October 1930. See also Rothbard, America’s Great Depression, pp. 212–13.

[88] William Starr Myers, ed., The State Papers and the Public Writings of Herbert Hoover (Garden City, NY: Doubleday, Doran & Co., 1934), p. 379.

[89] Ibid., p. 381.