The Mystery of Banking

America’s Great Depression
, 3rd
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Central Banking in the United States IV
241
That time or savings deposits were, for all practical purposes,
equivalent to demand deposits was noted by Governor George L.
Harrison, head of the Federal Reserve Bank of New York, who
testified in 1931 that any bank suffering a run must pay both its
demand and savings deposits on demand. Any attempt to enforce
the official 30-day notice for redemption would probably cause
the state or the federal Comptroller of the Currency to close the
bank immediately. In fact, the heavy bank runs of 1931–33 took
place in time as well as demand deposits. The head of the
National City Bank of New York at the time agreed that “no com-
mercial bank could afford to invoke the right to delay payment on
these time deposits.”
6
2. T
HE
I
NFLATIONARY
P
OLICIES OF THE
F
ED
A deeply inflationary structure understandably sets the stage
for inflationary policies. Policies are enacted and carried forward
by particular people, and so we must examine the controlling
groups, and the motivations and procedures for carrying out
monetary expansion after the launching of the Federal Reserve.
We know in general that the bankers, especially the large ones,
were using the federal government as a cartelizing and inflation-
ary device. But what of the specifics? 
Which
bankers? 
With the passage of the Federal Reserve Act, President Wilson
in 1914 appointed one Benjamin Strong to what was then the
most powerful post in the Federal Reserve System. Strong was
made Governor of the Federal Reserve Bank of New York, and he
quickly made this position dominant in the System, autocratically
ed. (Sheed and Ward, 1974), pp. 92–94; Benjamin M. Anderson, 
Econom-
ics and the Public Welfare: A Financial and Economic History of the United
States, 1914–46
, 2nd ed. (Indianapolis: Liberty Press, 1979), pp. 140–42.
6
Quoted in Rothbard,
America’s Great Depression
, p. 316n. See also
Lin Lin, “Are Time Deposits Money?” 
American Economic Review
(March
1937): 76–86. Lin points out that demand and time deposits were inter-
changeable at par and in cash, and were so regarded by the public.
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The Mystery of Banking
deciding on Fed policy without consulting or even against the
wishes of the Federal Reserve Board in Washington. Strong con-
tinued to be the dominant leader of the Fed from 1914 until his
death in 1928. 
Strong pursued an inflationary policy throughout his reign,
first during World War I, and then in spurts of expansion of bank
reserves in the early 1920s, 1924, and 1927. While it is true that
wholesale prices did not rise, they were prevented from falling
from increases of capital investment, productivity, and the supply
of goods during the 1920s. The expansion of money and credit
generated by the Fed during the 1920s kept prices artificially
high, and created an unhealthy boom and investments in capital
goods and construction, and in such capital title markets as stocks
and real estate. It was only the end of the monetary expansion
after Strong’s death that brought an end to the boom and ushered
in a recession—a recession that was made into chronic depression
by massive interference by Presidents Hoover and Roosevelt.
But who was Strong and why did he pursue these inflationary
and eventually disastrous policies? In the first place, it must be
understood that, like other bureaucrats and political leaders, he
did not emerge full-blown out of the thin air in 1914. At the time
of his appointment, Strong was head of the Morgan-created
Bankers’ Trust Company in New York—a bank set up by the Mor-
gans to concentrate on the new field of the trusts. Tempted at first
to refuse this high office, Strong was persuaded to take the job by
his two closest friends: Henry P. Davison, partner at J.P. Morgan
& Co., and Dwight Morrow, another Morgan partner. Yet a third
Morgan partner, and another close friend, Thomas W. Lamont,
also helped persuade Strong to take up this task. Strong was also
an old friend of Elihu Root, statesman and Wall Street corporate
lawyer, who had long been in the Morgan ambit, serving as per-
sonal attorney for J.P. Morgan himself. 
It is not too much to say, therefore, that Strong was a Morgan
man, and that his inflationary actions in office accorded with the
Morgan outlook. Without the inflationary activity of the Federal
Reserve, for example, the United States could not have entered
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