Free In FED We Trust by David Wessel Page A

people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”
    Several Fed officials saw the financial debacle unfolding around them much as Mellon did: as an avenging angel sent to purge a slack system and fallen people. George Norris — a lawyer and early overseer of a federal farm-mortgage agency who was president of the Federal Reserve Bank of Philadelphia from 1920 to 1936 — attacked the Fed for interfering “with the operation of the natural law of supply and demand in the money market,” an argument not far from that made by some dissenting Federal bank presidents during the Great Panic.
    History has cast Hoover as the do-nothing president who stood firm on conservative principles as the economy crashed and burned, as opposed to his hyperactive successor, Franklin Roosevelt. Hoover wasn’t as callous or delusional as his modern caricature suggests, and he believed in the power of government to do good. Some of the seeds of the New Deal were planted in his presidency as he realized that “volunteerism” wouldn’t suffice, just as some parts of Obama’s recession-fighting policies of 2009 had their beginnings in the Bush years. Hoover created the Federal Home Loan Bank System to rescue savings banks and savings and loans, and to offer sustenance to the beleaguered mortgage market, but Congress watered down his proposals to his bitter regret. He created the Reconstruction Finance Corporation to provide emergency loans to banks, railroads, and other companies. But he was hung up on balancing the budget. He disagreed with, but didn’t fire, Mellon as Treasury secretary. And he did not — despite some of the claims in his 1952 autobiography — see how big a government response it would take to conquer the Great Depression.
    But in contrast to the Great Panic, Hoover did not have anyone with Bernanke’s stature at the Fed pushing him to be bolder. Only a minority of Fed officials, Hoover wrote, “believed with me that we should use the powers of government to cushion the situation.”
    Bernanke knew this history well. He faulted Hoover for overoptimism and for listening too much to Mellon, among other things, but thought Hoover — a smart, well-intentioned man who was hardly opposed to using the power of government — had been given a “bum rap.” The bigger culprit, he said, was Woodrow Wilson, the father of the Fed, because he had so badly botched the Treaty of Versailles after World War I, which produced the global economic and political conditions that led to the Great Depression.
    “After Strong’s death …,” Bernanke said, “the Federal Reserve no longer had an effective leader or even a well-established chain of command. Members of the Board in Washington, jealous of the traditional powers of the Federal Reserve Bank of New York, strove for greater influence; and Strong’s successor, George Harrison, did not have the experience or personality to stop them. Regional banks also began to assert themselves more. Thus, power became diffused; worse, what power there was accrued to men who did not understand central banking from a national and international point of view, as Strong had. The leadership vacuum and the generally low level of central banking expertise in the Federal Reserve System was a major problem that led to excessive passivity and many poor decisions by the Fed in the years after Strong’s death.”
    Or as Herbert Hoover put it, the Fed became “a weak reed for a nation to lean on in a time of trouble.” Ben Bernanke was determined that
his
Fed would not be a weak reed. “I optimistically think that, while we could still