America's Great Depression (50 page)

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America’s Great Depression

THE RFC

On all other aspects of the Hoover New Deal, the President blossomed rather than faltered. The most important plank in his program—the RFC—was passed hurriedly in January by the Congress.13 The RFC was provided with government capital totaling $500 million, and was empowered to issue further debentures up to $1.5 billion. Hoover asked none other than Bernard Baruch to head the RFC, but Baruch declined. At that point, Hoover turned to name as Chairman one of his most socialistic advisers, the one who originally suggested the RFC to Hoover, Eugene Meyer, Jr., an old friend of Baruch’s.14 For the first five months of its life, the lending activities of the RFC lay shrouded in secrecy, and only determined action by the Democratic Congress finally forced the agency to make periodic public reports, beginning at the end of August. The bureaucratic excuse was that RFC loans should, like bank loans or previous National Credit Corporation (NCC) loans, remain confidential, lest public confidence in the aided bank or business firm be weakened. But the point is that, since the RFC

was designed to lend money to unsound organizations about to fail, they
were
weak and the public
deserved
to lose confidence, and the sooner the better. Furthermore, since the taxpayers pay for government and are supposed to be its “owners,” there is no excuse for governmental representatives to keep secrets from their own principals. In a democracy, secrecy is particularly culpable: for how can the people possibly make intelligent decisions if the facts are withheld from them by the government?

During the first five months of operation, from February to June, the RFC made $1 billion worth of loans, of which 80 percent 13Dr. Anderson’s account of the 1932 measures is unaccountably weak, since he does an about-face to favor the Hoover program—including the NCC, the RFC, and the Glass–Steagall Act—after opposing similarly statist and inflationary measures of earlier Hoover years. See Anderson,
Economics and the Public
Welfare,
pp. 266–78.

14Senator Robinson had obtained Hoover’s promise to name Meyer as head of RFC in return for Democratic support in Congress. Gerald D. Nash, “Herbert Hoover and the Origins of the RFC,”
Mississippi Valley Historical Review
(December, 1959): 461ff.

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297

was lent to banks and railroads, and about 60 percent to banks.

The Republican claim that the RFC loans were not at all political rings pretty hollow in light of the facts. Thus, General Charles Dawes resigned as President of the RFC on June 7. Less than three weeks later, the Chicago bank which he headed, the Central Republic Bank and Trust Company, received an RFC loan of $90

million even though the bank’s total deposits were only $95 million. That General Dawes resigned and then promptly asked for and received a huge loan for his own bank, certainly appears to be mulcting of the taxpayers by political collusion.15 In addition, the RFC granted a $14 million loan to the Union Trust Company of Cleveland; chairman of the board of this bank was none other than Joseph R. Nutt, treasurer of the Republican National Committee.

The successor to Dawes as head of the RFC was the Hon. Atlee Pomerene, whose great contribution to economic wisdom was his pronouncement that he would like to compel all merchants to increase their purchases by 33 percent. There was the road to recovery! Under Pomerene’s aegis, the FRC promptly authorized a $12.3 million loan to the Guardian Trust Company, of Cleveland, of which Pomerene was a director. Another loan of $7.4 million was made to the Baltimore Trust Company, the vice-chairman of which was the influential Republican Senator Phillips L. Goldsborough. A loan of $13 million was granted to the Union Guardian Trust Company of Detroit, a director of which was the Secretary of Commerce, Roy D. Chapin.

Some $264 million were loaned to railroads during the five months of secrecy. The theory was that railroad securities must be protected, since many were held by savings banks and insurance companies, alleged agents of the small investor. Of the $187 million of loans that have been traced, $37 million were for the purpose of making improvements, and $150 million to repay debts.

One of the first loans, for example, was a $5.75 million grant to the 15See John T. Flynn, “Inside the RFC,”
Harper’s Magazine
166 (1933): 161–69. The Hoover group maintains, however, that General Dawes didn’t want the RFC loan, which was rather insisted upon by Democratic bankers in Chicago, and by the Democratic members of the Board of the RFC.

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Missouri Pacific to repay its debt to J.P. Morgan and Company. A total of $11 million was loaned to the Van Sweringen railroads (including the Missouri Pacific) to repay bank loans. $8 million were loaned to the Baltimore and Ohio to repay a debt to Kuhn, Loeb and Company. All in all, $44 million were granted to the railroads by the RFC in order to repay bank loans. One of the main enthusiasts for this policy was Eugene Meyer, on the grounds of

“promoting recovery,” and, frankly, “putting more money into the banks.” But this “promotion of recovery” really meant that the taxpayers were expropriated, and their money transferred by coercion to a few banks, notably J.P. Morgan and Company, and Kuhn, Loeb and Company. The extent of Meyer’s humanitarianism in this affair may be gauged from the fact that his brother-in-law, George Blumenthal, was a member of J.P. Morgan and Company, and that Meyer had also served as a liaison officer between the Morgan firm and the French government. In the case of the Missouri Pacific, the RFC granted the loan despite an adverse warning by a minority of the Interstate Commerce Commission, and, as soon as the line had repaid its debt to Morgan, the Missouri Pacific was gently allowed to go into bankruptcy.16

John T. Flynn, in a caustic article on the RFC, pointed out correctly that such loans could only prolong the depression: Prices must come down to bring goods closer to the size of the available income . . . income itself must be freed for purchasing by the extinguishment of excessive debts.

. . . Any attempt to hold up prices or to save the weaker debtors necessarily prolongs the depression.

Flynn also firmly pointed out that the best way to relieve the railroads, shaky and hobbled by debt, was to go into the “inevitable curative process” of receivership:

The quicker the correction comes, the quicker the regeneration of the road will come. . . . Instead of permitting the correction of the fatal flaw [the heavy bond 16The Missouri Pacific had apparently falsified its balance sheet prior to asking for the RFC loan, to claim more cash on hand than it really had. Ferdinand Lundberg,
America’s Sixty Families
(New York: Citadel Press, 1946), p. 233.

The Hoover New Deal of 1932

299

load], the RFC has actually added to the bond load [of the railroads].17

Despite the speedy enactment of the RFC, Hoover complained that the Democratic Congress had delayed its passage by six weeks, allowing securities to be depressed for this length of time below their “true worth”—whatever that may be. Hoover’s chief com-plaint was that Congress did not permit the RFC to lend directly to industry, to agriculture, or to government for public works.

Congress, in short, did not permit the RFC to loan widely and recklessly enough.

At last, however, Hoover had his way, and Congress agreed to transform the RFC from a generally
defensive
agency aiding banks and railroads in debt, to a bold “positive” institution, making capital loans for new construction. This amendment, of July 21—the Emergency Relief and Construction Act of 1932—increased the RFC’s authorized total capital from $2 billion to $3.8 billion, and permitted loans to states or cities for relief and work relief, for self-liquidating construction projects, and for financing sales of agricultural surpluses abroad, orderly marketing in agriculture, and agricultural credit corporations.18 In a retrospective slap at General Dawes, loans were now forbidden to any bank of which a director or officer was a member of the RFC board. In a later amendment, the RFC was ordered to allocate $25 million of its funds to the Treasury to buy the stock of the 12 newly created Federal Home Loan Banks.

Over the entire year 1932, the RFC extended credits totaling $2.3 billion, and advanced an actual $1.6 billion in cash. Of the year’s advances, 52 percent were loaned to banks, 17 percent to 17Flynn,
Inside the RFC.
Another consequence of RFC loans to railroads was an approach toward direct socialization from the creditor interest of the RFC in bankrupt roads, and the consequent placing of government directors on the reorganized railroads. Dewing maintains that “the government through the power of its loans was in a position to dominate the policy of the reorganized road.” Arthur Stone Dewing,
The Financial Policy of Corporations
(5th ed., New York: Ronald Press, 1953), vol. 2, p. 1263.

18J. Franklin Ebersole, “One Year of the Reconstruction Finance Corporation,”
Quarterly Journal of Economics
(May, 1933): 464–87.

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railroads (of which over half went to repay debts to banks), and 9

percent to agriculture. In the agricultural field, the RFC established regional agricultural credit corporations, and advanced them $1.4 million, which authorizing credits of $55 million by the end of the year. The RFC was particularly active in cotton loans.

And although the American Engineering Council hopefully suggested a shelf of self-liquidating public works projects totaling $1

billion (mainly water-supply and irrigation systems), the RFC only authorized $147 million, and advanced $16 million, for such projects during 1932.

GOVERNMENTAL RELIEF

If Hoover eagerly embraced the statism of the RFC, he gave ground but grudgingly on one issue where he had championed the voluntary approach: direct relief. Governor Franklin D. Roosevelt of New York led the way for state relief programs in the winter of 1931–1932, and he induced New York to establish the first state relief authority: the Temporary Emergency Relief Administration, equipped with $25 million.19 Other states followed this lead, and Senators Costigan and LaFollette introduced a bill for a $500 million federal relief program.20 The bill was defeated, but, with depression deepening and a Presidential election approaching, the administration all but surrendered, passing the Emergency Relief and Construction Act of July, 1932—the nation’s first Federal relief legislation.21 The bill did not go nearly as far as the agitators 19See Edith Abbott,
Public Assistance
(Chicago: University of Chicago Press, 1940).

20Costigan and LaFollette obtained the material for their bill from the newly formed Social Work Conference on Federal Action on Unemployment, headed by Linton B. Swift of the Family Welfare Association. The new organization sym-bolized the recent shift among professional social workers in favor of federal relief. The May, 1932 meeting of the National Conference of Social Work reversed the 1931 opposition to federal relief. Irving Bernstein,
The Lean Years: A
History of the American Worker, 1920–1933
(Boston: Houghton Mifflin, 1960), pp. 462ff.

21Particularly influential in inducing Hoover’s surrender was a plea for federal relief, at the beginning of June, by leading industrialists of Chicago. Having been refused further relief funds by the Illinois legislature, these Chicagoans
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301

desired, extending loans for state relief rather than direct grants to states, but this was a trivial difference. The loans to the states were to be made by the RFC at 3 percent on the basis of “need” as requested by the respective governors. The RFC was authorized to lend up to $300 million for this purpose. Grants were quickly made to Alabama, Georgia, Illinois, Montana, North Dakota, Ohio, Utah, Louisiana, and Oregon. The RFC hired a staff of social workers, headed by Fred Croxton, to administer the program.

The states, too, expanded their relief programs. While total state expenditures for emergency relief was $547 thousand in 1930-1931, they totaled $57 million in 1931–1932, and $90 million in fiscal year 1933. New York, New Jersey, and Pennsylvania led in relief expenditures, Pennsylvania financing much of its aid by a newly-imposed sales tax. All in all, total public relief in 120 of the nation’s leading urban areas amounted to $33 million in 1929, $173 million in 1931, and $308 million in 1932.22

THE INFLATION PROGRAM

One thing Hoover was not reticent about: launching a huge inflationist program. First, the administration cleared the path for the program by passing the Glass–Steagall Act in February, which (a) greatly broadened the assets eligible for rediscounts with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial paper.23

turned to the federal government. They included the chief executives of Armour, Wilson, Cudahy, International Harvester, Santa Fe Railroad, Marshall Field, Colgate–Palmolive–Peet, Inland Steel, Bendix, U.S. Gypsum, A.B. Dick, Illinois Bell Telephone, and the First National Bank. Bernstein,
The Lean Years: A History
of the American Worker, 1920–1933,
p. 467.

22See A.E. Geddes,
Trends in Relief Expenditures, 1910–1935
(Washington, D.C.: U.S. Government Printing Office, 1937), p. 31.

23The defenders of the Glass–Steagall Act might protest that the Act fitted the quantitativist policy of considering
total quantity
rather than quality of assets, and therefore that an “Austrian” economist should defend the measure. But the point is that any further permission for government to lend to banks, whether quantitative or qualitative, is an inflationary addition to the quantity of money, and therefore to be criticized by the “Austrian” economist.

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America’s Great Depression

The way was now cleared for a huge program of inflating reserves and engineering cheap money once again. Furthermore, Eugene Meyer, Jr. was now Governor of the Federal Reserve Board, and Ogden Mills had replaced the more conservative Andrew Mellon as Secretary of the Treasury. At the end of February, 1932, total bank reserves had fallen to $1.85 billion. At that point, the FRS