The Sound of a Bubble Bursting
On the morning of October 24, 1929—Black Thursday—a low, gathering rumble echoed through the canyon-like streets of Lower Manhattan. It was not thunder, but the sound of thousands of stock tickers clattering in unison, printing losses. On the ninth floor of the New York Federal Reserve Bank, a tall, austere man named George Harrison listened. As the acting governor, his mandate was simple: be the lender of last resort, the calm hand that steadied the financial system. Over the next week, he would try. And his efforts, constrained by orthodox thinking and a fundamental misdiagnosis of the crisis, would help turn a market crash into the Great Depression.
Harrison was a lawyer by training, not an economist. He had risen through the Fed on administrative skill and a deep understanding of its legal statutes. Facing a panic of unprecedented scale, he wielded the tools his rulebook prescribed. They were the wrong tools. His story is not one of malice or neglect, but of a competent institutionalist trying to fix a new machine with an old manual, while the machine melted down around him.
The Peril of Fighting the Last War
George Harrison’s leadership during the 1929 crash illustrates a central paradox of crisis management: the protocols designed for stability can become engines of catastrophe when the crisis violates their core assumptions. Harrison failed because he viewed the panic through the lens of the 1907 crisis—a liquidity shortfall—when it was, in fact, a solvency crisis magnified by structural leverage and international gold flows. His adherence to orthodox central banking doctrine, particularly the real bills doctrine and the gold standard imperative, led him to prescribe remedies that worsened the patient’s condition.
The Orthodox Playbook
The Federal Reserve System, born in 1913, was designed to prevent banking panics like 1907. Its core tools were the discount window (lending to banks against solid collateral) and open market operations (buying securities to inject cash). Harrison’s playbook had two primary objectives: provide liquidity to sound banks, and protect the U.S. gold reserve to maintain the dollar’s convertibility.
As brokerages failed and margin calls exploded, Harrison authorized the New York Fed to lend freely to its member banks. He believed the problem was a temporary shortage of cash in the system. However, the crisis was deeper. The stock market crash had obliterated collateral values. Banks weren’t just illiquid; they were insolvent, their assets—heavily weighted in call loans to brokers—now worthless. The Fed’s loans were pouring money into institutions that were fundamentally broken, a lifeboat made of lead.
The Golden Straitjacket
Harrison’s most fateful decision was his continued adherence to the gold standard. The real bills doctrine dictated that the Fed should only issue currency backed by short-term, self-liquidating commercial loans (like invoices), not speculative assets. More critically, the gold standard required the Fed to raise interest rates to attract gold flows and defend the dollar’s value.
In late 1929 and into 1930, as the economy contracted, Harrison kept rates relatively high. The logic was defensive: protect the gold reserve. The effect was catastrophic. High rates strangled business investment just when the economy needed stimulus. They made it more expensive for banks to borrow, tightening credit further. He was trying to save the international monetary system while the domestic economy suffocated. He was solving for gold, not for employment, production, or confidence.
The Cascade of Contagion
The consequences of this orthodox response unfolded in waves. The initial liquidity provision in 1929 did little to stop the slide. Bank failures, which had averaged about 70 per year in the 1920s, soared to over 1,300 in 1930 and more than 2,000 in 1931. Each failure triggered a domino effect, wiping out depositor savings and forcing further asset fire sales.
Bank failures in 1930 alone, up from 70 per year in the 1920s
Harrison’s Fed failed to perform its most basic function: acting as a true lender of last resort without penalty during a systemic panic. Its loans were too little, too late, and too conditional. The money supply contracted by over a third between 1929 and 1933. Deflation set in, crushing debtors. Harrison, the careful lawyer, had followed the rules. But the rules were written for a different world—one where panics were local and gold was king, not for a modern, credit-saturated economy in freefall.
Contraction in the money supply between 1929 and 1933
Conclusion: The High Cost of Playing by the Book
George Harrison’s tenure at the New York Fed is a masterclass in the dangers of institutional literalism. He was the ultimate credentialed insider, a man who knew the Federal Reserve Act better than anyone. Yet, that very knowledge bound him. He could not see that the act’s spirit—to stabilize the financial system—sometimes required violating its letter.
His failure was one of imagination and priority. He could not imagine a central bank acting aggressively to support asset prices or directly stimulate the economy. He prioritized an abstract international standard (gold) over the concrete reality of domestic collapse. The lesson of 1929 is not that Harrison was incompetent, but that his competence was of a kind ill-suited for a paradigm-shifting crisis. He was a brilliant mechanic trying to fix a jet engine with a wrench, convinced the problem was a loose bolt. The resulting Great Depression would force a total rewriting of the central banking manual, creating a new doctrine where leaders like Harrison would be studied not as exemplars, but as cautionary tales in the lethal cost of orthodox thinking.