How Important Was Benjamin Strong?

Megan McArdle asked recently whether the rape charges against IMF head Dominique Strauss-Kahn could have a negative impact on attempts to deal with the current economic crisis within the Eurozone.  In the process, she notes that an argument could be made that the absence of Benjamin Strong in the 1930’s contributed to the inability of authorities to prevent the Depression:
Having a power-vacuum at the major multi-lateral institution charged with assisting its resolution will make things much more difficult. There’s a plausible argument to be made that the untimely death of 1920s fed chief Benjamin Strong left a weakness at the center of the Federal Reserve that considerably frustrated both domestic and international attempts to cope with the monetary collapse of the early 1930s. Could this be a similar incident?
This argument echoes the views of economic greats Irving Fisher and Milton Friedman (in his classic with Anna Schwartz, A Monetary History of the United States)  For example, Fisher told Congress in 1935 that “Governor Strong had died and his policies died with him. . . . I have always believed, if he had lived we would have had a different situation (quoted in Wheelock 1992).  Likewise, Friedman and Schwartz claim that:

If Strong had still been alive and head of the New York Bank in the fall of 1930, he would likely have recognized the oncoming liquidity crisis for what it was, would have been prepared by experience and conviction to take strenuous and appropriate measures to head it off, and would have had the standing to carry the System with him (412-413).

But are individual actors really that important in this type of realm, especially macroeconomics?  And how important was Strong’s absence in this particular case?

Well, I’m not sure I’m all that qualified to answer either that meta question or the particular one.  However, it is important to note that Friedman ultimately concluded that individuals were not all that important in this area (indeed, he seems on the verge of walking back his argument about Strong in A Monetary History though he doesn’t go that far)In his 1984 piece “Monetary Policy for the 1980’s,” Friedman argued that “The experience of the past two decades has led me to alter my views in one respect only – about the importance of personalities.  They have on occasion made a great deal of difference, but additional experience and study has impressed me with the continuity of Fed policy, despite the wide differences in the personalities and backgrounds of the persons supposedly in charge.”  
This follows what a number of other economists have found regarding Strong’s particular impact.  As economist David Wheelock explains, Peter Temin, Gerald Epstein and Thomas Ferguson, and Karl Brunner and Allan Meltzer (among others) did not think Strong’s absence was that important (see page 13).
Therefore, it seems as if we probably should not get too worked up about the policy impact of the demise of DSK’s career at the IMF.  Bigger forces are at play and will ultimately constrain policymakers and shift policy in certain directions (even if individuals are able to steer within the bounds of that course).       
Note: one bit on individuals tweaked slightly.

One thought on “How Important Was Benjamin Strong?

  1. The problem here, of course, is that Friedman, like most economists, clings (clung, God rest his soul) to the erroneous theory that printing money to increase liquidity will help a banking system “survive” a panic and survive until stability is restored. This belief rests on a poor understanding of the banking system. Banks experience runs when they have issued too much credit. The extraneous credit on the market skews prices from their equilibrium (especially prices of future or production goods as opposed to present or consumption goods, aka the interest rate). A banking contraction resulting from a bank run helps reestablish prices at the appropriate level. Printing money to stave off a bank run does not solve this problem by allowing prices to adjust as they must in order for economic activity to resume: it merely postpones the true date of economic reckoning.

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